Australia’s lazy investment strategy is dead (part 2)

This article is a follow-up to "Australia’s lazy investment strategy is finally dead", in particular the comments section, asking for more information and context on Structured Investments, and to clarify the comparisons I made, which were fair.

If the answer to a broken investment playbook is simply “buy a more complicated product”, investors should be sceptical. I would be too. Complexity, by itself, is not a virtue. Often it is just a very expensive way of hiding a very ordinary risk.

But structure is different.

That is the part I probably should have spent more time on in the first article. When I said Australia’s lazy investment strategy is dead, I was not arguing that investors should abandon bank shares, ETFs, property, hybrids, private credit or cash and all rush into structured investments. The point was simpler than that. The old habit of buying the familiar thing, holding it forever, and assuming the tax system, interest rate cycle and market structure will keep rewarding you is becoming less reliable. 

The new environment rewards investors who understand not just what they own, but how the return is created, how it is taxed, what can go wrong, and where the risk actually sits.

The majority of the comments were based in curiosity, seeking an explanation of the products we use with our clients. So, I’ll do my best to give an explanation, not a sales pitch.

What is a structured investment?

A structured investment is a pre-agreed investment contract designed around a specific outcome.

That sounds dry, so let’s put it in normal language. Buying an ETF is like buying broad market exposure and accepting the market’s journey. If the market rises, you rise. If the market falls, you fall. Simple. Useful. Cheap. No argument from me.

A structured investment is different. It says something more like: if this basket of shares stays above a certain level, you receive this coupon. If the market is above this level at maturity, your capital is returned. If the market falls through this level and is still there at maturity, this is what happens. If the index rises, you participate in the upside according to these rules. If it does not, your loss is limited to the amount you put at risk.

In other words, you are not just buying an asset. You are agreeing to a set of rules. That does not remove risk. It changes the shape of the risk.

Defined outcome does not mean guaranteed outcome

One phrase that gets used a lot in this part of the market is “defined outcome”. It is a useful phrase, but only if we are honest about what it means.

A defined outcome does not mean a guaranteed profit. It means the rules are known before the investor enters the investment. You know the reference assets. You know the term. You know the coupon. You know the barrier. You know the maturity date. You know what has to happen for capital to be returned. You know what happens if the bad scenario arrives.

That is very different from owning a share portfolio and simply hoping the next bear market is kind.

Hope is not a structure.

But again, there is a trade-off. With a structured investment, the investor may be accepting issuer risk, reduced liquidity, a capped or conditional return, barrier risk, or a specific outcome at maturity that would not occur if they simply owned the underlying shares outright.

So the right question is not: “Is this simple or complex?”

The right question is: “What risk am I accepting, and am I being paid properly for it?”

in the comments, Dave Kelly asked about “an ETF like Betashares Australian Major Bank Subordinated Debt ETF BANK which seems similar.” Good instinct, but the similarity is the reference stocks, everything else is different. Bank Hybrids or a basket of them like ASX: BHYB are also regularly confused) 

Here’s how the main income instruments compare on the dimensions that actually matter:

Fixed Coupon Notes (FCNs)

Fixed Coupon Notes (FCNs), such as those offering a 10% p.a. to 13% p.a. yield over 2-3 years with a "40% downside buffer" or a "barrier at 60% of the initial entry level" aren't a uniquely Australian innovation, Major Banks issue them globally. They blend zero-coupon bonds with derivatives to deliver high fixed interest payments and significant capital protection — principal is fully preserved unless the underlying asset falls more than 60% at maturity. Coupons are paid unconditionally, making them attractive for enhanced income with controlled risk. 

Now, Fixed Coupon Notes in plain English

At MPC Markets, one of the recurring examples we have discussed is an ASX bank FCN. The structure is linked to a basket of major Australian banks. It pays a fixed coupon, typically monthly, and has a defined term. In the current ASX Banks FCN materials, the strategy has been shown with an indicative coupon range around 9.5% to 11.0% per annum, depending on market pricing and final terms.

That headline yield is what gets people’s attention. But it is not the most important part.

The important part is the trade-off. The note has a downside barrier set at 60% of the initial strike price, meaning the reference asset would need to fall more than 40% before capital is at risk. If the reference assets remain above the barrier at maturity, the investor receives the coupons and capital is returned. If one of the reference assets is below the barrier at maturity, the investor may receive the worst-performing share, or cash equivalent, at the reduced value. That is where the risk sits, so the honest explanation is not: “You earn 10% with protection.” The honest explanation is: “You receive a fixed coupon, subject to issuer credit risk, and your capital outcome depends on whether the reference basket breaches the relevant barrier conditions at maturity.” Less sexy. Much more useful.

The mechanics, step by step

Step one. You invest $100,000 in an FCN linked to a basket of three or four ASX bank stocks. The coupon rate — let’s say 10% p.a. — is locked in at that moment. The term is 2 years.

Step two. Every month, you receive your coupon payment in cash. On $100,000 at 10%, that’s roughly $833 per month, paid directly to your bank account. This payment happens regardless of what the bank share prices are doing. Market up 15%, you get your coupon. Market down 15%, you get your coupon. The coupon is structural, it’s part of the contract, not a discretionary decision by a board of directors.

Step three. At maturity, there’s a simple test. Are all the bank shares in the basket still above 60% of where they started? If yes, you get your full $100,000 back plus you’ve collected all 24 months of coupons. Total return: $120,000 on $100,000 invested.

Step four — the one nobody wants to talk about. If at maturity, one or more of the bank stocks has fallen below that 60% barrier level, you don’t get your full capital back. Instead, you receive shares (or cash equivalent) at the barrier value of the worst-performing stock. You still keep every coupon you received. But your capital is impaired.

What can go wrong

Barrier breach. If ASX: CBA  started at $156 and fell more than 40% to below $93.60 by the maturity date, that’s a knock-in event. You’d receive shares at that depressed price. You’d keep all your coupons, partially offsetting the loss, but your capital is impaired. 

The Big 4 banks have CET1 capital ratios of 11.7% to 12.4%, well above APRA’s “unquestionably strong” benchmark. Since the GFC, none has come remotely close to a 40% drawdown. But “hasn’t happened” is not the same as “can’t happen.”

For a detailed explanation, click here for scenario examples 

Diversification changes the maths. A single FCN is binary risk — either the barrier holds or it doesn’t. Spreading capital across six or more notes turns individual binary risk into a portfolio. Even in a scenario where one note out of six suffers a 45% barrier breach, the coupon income from the other five more than covers the capital loss. Our modelling shows a net yield of approximately 9.4% p.a. even with a 16.67% failure rate.

In the past we have used ASX names from nearly all the sectors, not just banks, ASX: BHP, ASX: FMG, ASX: CSL, ASX: NST ASX: GMG to name a few. This is where we have historically achieved around the 12.7% mark on average*

US stocks can also be used, with our last FCN basket being NASDAQ: AMZN , NASDAQ: META , NASDAQ: GOOGL, NASDAQ: MSFT that achieved 13.9%pa*

(*past performance is not an indicator of future performance)

Other key factors to note are: 

• Liquidity. FCNs have daily liquidity available, you can exit before maturity. But if the reference stocks are below your entry price, there may be an early exit penalty. This is not the same as selling an ETF at market price.
• Counterparty risk. These investments are contracts with an issuing financial institution. If that institution were to default, your capital is at risk regardless of how the reference stocks perform. To manage this, we access the market through an independent intermediary (StroPro, Australia's Structured Investment Specialist), giving us the ability to select from a panel of 12 global investment banks, all of which are systemically important financial institutions subject to stringent regulatory oversight. Notes are held in custody with Clearstream, one of the world's largest settlement and custody firms with over €20 trillion in assets under custody. For income-focused structures where capital preservation is paramount, we exclusively use AA-rated institutions."
• No franking credits. FCN income is taxed as interest income at your marginal rate. For pension-phase investors, this is a genuine disadvantage. For high-marginal-rate investors, the higher gross yield more than compensates.
• You don’t own the shares. You have no voting rights, no participation in capital growth above your entry level, and no ownership stake. You have a contract that references the share price. These are fundamentally different economic exposures.
• SMSF 

Franking credits are valuable (but not equally valuable to everyone)

This is where the tax discussion gets interesting. A pension-phase SMSF, a low-income investor, a high marginal-rate taxpayer, a family trust and a foreign investor can all look at the same bank dividend and end up with very different after-tax outcomes.

In one of our reference comparisons, we looked at a hypothetical $100,000 portfolio split equally across the Big Four banks from May 2016 to May 2026 against an 11% Fixed Coupon Note over the same period. The result changed materially depending on the investor type.

For zero-tax investors and pension-phase super, franking credits were extremely valuable, banks won by about $7,000. For acumulation phase super at 15%, the comparison was near break-even. For investors at the 32.5% marginal rate and above, the FCN pulled ahead, and at the top marginal rate of 47% the gap was approximately $25,000 in favour of the FCN over 10 years.

There is no universal after-tax winner. There is only the right structure for the right investor, held in the right entity, for the right objective.

Yes, that sentence sounds like something an accountant would say just before ruining your afternoon. But it is true.

Why the new tax rules matter

FCN income is taxed as interest income. It always has been. The 50% CGT discount that just got replaced with CPI indexation? Irrelevant to FCN income. Your coupon was never a capital gain. It was never eligible for the discount. So the budget changed nothing for this income stream.

Meanwhile, if you’re holding a BANK ETF or individual bank shares, the budget changed a lot. Any capital gain realised after 1 July 2027 on assets acquired after that date will no longer receive a flat 50% discount. Instead, you’ll get CPI indexation of the cost base plus a 30% discount on the real gain.

The Murchisons accounting firm put out a detailed interpretive briefing on the budget. The direction is obvious: after-tax outcomes are becoming more dependent on ownership structure. The same investment can look very different depending on whether it is held personally, in a company, in a discretionary trust, in a fixed trust, in an SMSF, or in pension phase. That is why product comparisons that ignore tax structure are now half-comparisons. Maybe less than half.

Not all structured investments are income products.

At the growth end of the spectrum, enhanced growth notes use options to capture upside from an index while defining the amount of capital placed at risk. The most recent S&P 500-linked “Buy the Dip” strategy gave investors 6.35x leveraged exposure to the S&P500 volatility adjusted index. Due to our in-house view that the market is too high and we see a better entry point in the next 6 months, we included a feature called a lookback entry point”” which marks the entry point to the lowest weekly close in the next 6 months (hence “buy the dip), this is an example of the customisable nature of Structured Investments, which enables investors to set out their investment strategy with rules, in advance, and stick to their plan. The strategy only requires 15.75% of the capital to gain the notional exposure. Its important to point out, this is 100% of invested capital, or 15.75% of the exposure you are getting, so you gain capital efficiency if you invest with the notional exposure in mind, not just dump all your capital in and leverage to the hilt. Because it uses options to achieve this, there are No margin calls. No monthly repayments and a fixed downside. One CGT event at maturity rather than annual distribution events.

How do I participate in upside without committing the same amount of capital I would need to own the full exposure directly? That’s the question these solve.

This is not the same as buying a leveraged ETF. A leveraged ETF resets daily, which means decay compounds in volatile markets. An Enhanced Growth Note has a defined term and a defined reference point. The payoff is path-independent at maturity.

The capital efficiency angle is why we often combine Enhanced Growth Notes with FCNs, the “freed up” capital can go into back into income Investments, and you’re effectively running a growth-and-income strategy from a smaller capital base. This is the “modern 60/40” thinking: a safety net, an income engine, and a growth engine. Structured investments sit in the income and growth engines. They are not the whole portfolio. They are tools inside the portfolio.

Who should not use structured investments

This section should probably appear in every article on the topic. Structured investments may not suit investors who need simple daily exchange liquidity, do not understand issuer risk, cannot tolerate a defined barrier event, rely heavily on franking credits, want unlimited shareholder upside, or are not eligible under wholesale, sophisticated or professional investor rules. Here is a general checklist of things you should consider. 

What our clients like about the investments

I’ve focused much of this article on risks and worst-case scenarios deliberately. But on the flip side of the coin, I’d like to highlight what happens when the product works as designed. We started designing these for clients over 2 years ago, and since then, they have become our most popular investments. The feedback may surprise you: 

1. The top feedback isn’t yield or leverage, it’s clarity. Before investing a dollar, clients know the exact coupon rate, term, barrier, maturity conditions, and auto-call triggers. The payoff is largely defined upfront. This contrasts sharply with owning bank shares and worrying for years about dividend cuts, pay out sustainability, or surprise capital raises. With an FCN, the rules are transparent from day one. That predictability carries real value beyond yield.
2. Second, it’s low maintenance. No earnings calls, broker upgrades, or ex-dividend dates to track. The coupon arrives, the barrier is checked at maturity, and clients get on with life. For busy investors, this freedom is highly valued.
3. Most importantly, structured products improve portfolio construction. They don’t replace stocks, they replace the wrong stocks. Many Australian investors hold bank and resource shares purely for income and franking credits, despite limited conviction in the companies or their strategies. This is a compromise that exposes them to full downside risk for income they don’t truly believe in.

With FCNs and index-based structures (like Enhanced Growth or broad ETFs) handling the income and core market exposure, clients free up capital. They then hold fewer individual stocks and then end up with only the high-conviction ones they’ve researched deeply and are willing to own through volatility.

The outcome is a cleaner portfolio, of genuine high conviction, sitting on top of a reliable, defined-income and defined-growth foundation.
Less “diversification for its own sake,” more deliberate, high-quality allocation.

The Bottom Line

The death of the lazy strategy does not mean investors need complexity for complexity’s sake. It means investors need to be more deliberate.

Bank shares still matter. ETFs still matter. Hybrids, private credit, property, cash and bonds all still have a role depending on the investor. Structured investments are not here to replace the entire toolkit, but they can give investors something traditional products often do not: a defined set of rules before the capital goes in.

That is valuable, especially in a market where tax rules are changing, hybrids are being phased out, property incentives are shifting, and many investors are still relying on habits built for a different era.

The first question is no longer: “What has the highest yield and franking credits?”
The better question is: What outcome am I trying to design, what risk am I accepting, and what structure should I hold it in?

That is where the real conversation starts. The response to the last piece tells me there’s appetite for this conversation, and the questions in the comments were better than most of the research notes sitting in my inbox. Keep them coming.

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Source links

• Some of the Structured Investments information sourced from StroPro
• ASX Banks Fixed Coupon Note product material: MPC Markets Regular ASX Banks FCN
• Murchisons Budget 2026 summary: Murchisons is a top100 Accounting firms in Australia
• APRA — phase-out of bank Additional Tier 1 capital instruments: apra.gov.au