Davy: equity risk premium drives structured product allocation

Equity-linked structured products remain at the core of client demand at Davy, as investors continue to seek differentiated sources of return while managing risk within diversified portfolios, according to Mark Caffrey (pictured), director, structured solutions at Davy.

Client demand is primarily driven by the ability of structured products to provide access to differentiated and clearly defined sources of return - Mark Caffrey

Speaking to SRP, Caffrey said capturing the equity risk premium remains a key driver behind the firm’s structured product design, with benchmark equity indices continuing to dominate underlying selection due to their transparency, liquidity and familiarity.

“Client demand is primarily driven by the ability of structured products to provide access to differentiated and clearly defined sources of return within diversified portfolios,” Caffrey said.

“For this allocation, we typically work to specific target return objectives for given risk levels, and capturing the equity risk premium remains central to achieving those outcomes [...] as a result, equities naturally feature prominently in the design of our preferred solutions.”

While index-linked structures remain the dominant choice, Davy also sees demand for index baskets and share baskets in specific portfolio construction and risk management scenarios.

Share baskets can allow investors to transition existing direct equity exposures into structured formats, but Caffrey noted that they introduce additional considerations around liquidity and position sizing depending on the payoff profile.

“As a result, while they remain a valuable tool in specific cases, they feature less prominently in our overall issuance,” he said.

Income objectives

Although equity-linked products dominate issuance, Davy continues to see interest from certain client segments for fixed income-linked structures, particularly where portfolios require income generation.

Where rate exposure is used, it is typically positioned as part of a broader portfolio objective rather than as a standalone tactical trade - Mark Caffrey

Caffrey said structures combining fixed income exposure with equity-linked digital or contingent payoffs at maturity can provide an attractive balance between income generation and upside participation.

“We continue to see meaningful engagement from a segment of our client base for whom fixed income linked structures play an important role, particularly where there is an ongoing income requirement within the portfolio,” he said.

However, demand for structures designed purely to express a directional view on interest rates remains limited.

“Where rate exposure is used, it is typically positioned as part of a broader portfolio objective rather than as a standalone tactical trade,” Caffrey added.

FX for diversification

Direct demand for foreign exchange-linked structured products remains relatively limited among Davy clients, although FX strategies can play a role within discretionary portfolios.

Caffrey said structured solutions can provide controlled exposure to currency pairs while offering defined downside protection and asymmetric return profiles.

“In these cases, we value the asymmetric payoff profiles that structured solutions can offer, alongside the ability to explicitly define and floor downside risk,” he said.

FX-linked strategies can also provide diversification benefits, particularly where certain currency pairs demonstrate defensive characteristics or lower correlation with equity markets during periods of stress.

Gold remains first choice

Commodities and credit remain less frequently used as structured product underlyings at Davy, although Caffrey highlighted continued client interest in gold as a portfolio diversifier.

“Client engagement with commodities tends to be driven more by diversification objectives than by a desire to express short-term directional views through structured products,” he said.

Gold, in particular, continues to be valued for its defensive characteristics and ability to provide diversification during periods of market uncertainty.

“As a result, clients are generally more inclined to hold commodities as part of a strategic allocation rather than using commodity-linked structured products to access features such as convenience yield or leveraged directional exposure.”

Digital assets opportunity

Looking ahead, Davy remains cautious on the role of digital assets within client portfolios, although Caffrey acknowledged the potential role structured products could play as institutional interest in the asset class develops.

“For now, we remain conservative on the potential role for digital assets in investors’ portfolios, even in a structured format,” he said.

However, he expects client interest in cryptocurrencies and other digital assets to continue increasing over time.

In this environment, structured products could provide investors with a more controlled way to access the asset class by offering defined risk parameters and protection mechanisms.

“Structured products could play a particularly compelling role, offering a way to access the asset class, or even just its volatility, within a defined risk framework,” Caffrey said.

Such structures could help address investor concerns around drawdowns, market timing and volatility while maintaining exposure to an evolving asset class that continues to attract institutional attention.

For Davy, the future of structured products remains centred on delivering clearly defined outcomes, with equity risk premium capture continuing to drive demand while new asset classes gradually expand the opportunity set.

This is an abstract of the SRP Asset Class Report 2026 which is available for download here. 

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