RBC Wealth Management has suggested a range of investment options for clients seeking to earn returns in a world where ultra-low interest rates and inflation pressures have crushed returns on cash, highlighting how high net worth clients can hunt for yield in an unfriendly market environment.

The Canadian wealth management house cites examples of yield-enhancing products such as dual currency deposits, range deposits, reverse convertible notes and collared floating rate notes.

“Like it or not, we live in a low interest rate world. This is bad news for investors who have traditionally relied on the income generated by their cash deposits. This is doubly so right now given the stubbornly high inflation that currently besets the UK economy,” George King, head of portfolio strategy, said in a Tactical Insight note from RBC.

He later told WealthBriefing that the yield-enhancing vehicles were meant to kick off ideas about how clients can generate income; different products will appeal to different clients depending on their circumstances. "The point of this document is very much an idea-starter," he said.

UK consumer price inflation rose by 4.0 per cent, year-on-year, in January, while retail price inflation – which takes account of mortgage interest – was 5.1 per cent.

Explaining its ideas, RBC defined the products mentioned in its ideas:

-- Dual currency deposits. DCDs are mainly short-term, non-capital protected vehicles which create a yield when investors sell a call option against their original currency deposit, earning a premium. An investor sets a conversion rate between two currencies, such as dollar/euro, at the start of the DCD’s life as the income level to be received. At maturity, say after a month, there are two possible outcomes: first, if the exchange rate did not pass through a pre-agreed conversion rate, the investor gets back the original deposit plus an enhanced yield. Or, secondly, if the forex rate does breach the pre-agreed conversion level, the investor converts to the alternative currency at a pre-agreed "strike", receiving their enhanced coupon in the original currency. DCDs are designed for investors who are comfortable taking currency risks.

-- Range deposits. This is a capital-protected, yield enhancement strategy, in which investors earn yield if a specified currency pair – such as the dollar against the euro – holds within a set range during the investment’s life (such as 1 and 12 months). The obvious risk here is if the currency pair moves out of its pre-defined range.

-- Reverse convertible notes. RCNs have embedded put options on an equity or group of stocks, creating income in the form of a coupon. The put option has a strike price at which the investor may be obliged to buy underlying shares at the end of the investment period. (Put options give their buyer the option to sell at a certain level). RBC suggests investors should choose shares where prices are expected to be flat or move in a range. With RCNs, the investor’s capital is at risk if option barriers are broken.

-- Collared floating rate notes. FRNs are debt instruments that pay coupons linked to short-term interest rates, such as the Libor. If money market rates rise, coupon rates also do so. A collared structure gives investors an income boost but limits the yield to a pre-determined level if short-term rates rise sharply.