The 10% drop in the S&P 500 index was bad news for most investors, but for those trading derivatives and structured products in the first week of February, it spelt opportunity.
Private banks encouraged investors to take advantage of the volatility by selling put options or buying autocallable fixed coupon notes, and issuers saw more demand for these products.
‘There were still clients who were wanting to enter the market with these kind of products, because when volatility levels are high, selling a put can give you better conditions such as a higher coupon or a lower strike or barrier,’ said Anup Gupta, head of Asia Pacific sales at Vontobel Financial Products.
Gupta said yield-enhancement products, which accounted for a majority of the structured product revenue at private banks last year, will remain popular into 2018.
In fact, he noted, the large Swiss players in Asia sold minimum redemption fund-linked notes worth between $1 billion and $2 billion last year. Structured products as a whole accounted for nearly 15% of private banking revenue on average in 2017.
Hungry for yield
Julius Baer’s Asia head of structured products advisory, Roger Meier, highlighted demand for structured products from clients in 2017, adding that low volatility was leading clients away from single underlying equity-linked notes to multi underlying fixed coupon notes to enhance yield.
The bank also had a greater variety in payoffs. ‘In 2008 clients mainly traded accumulators/ decumulators, fixed coupon notes, equity-linked notes and dual currency investments,’ Meier said. ‘These days we see additional payoffs traded like bonus enhanced notes, floored booster notes, Phoenix notes and fund-linked minimum redemption notes.’
Fund-linked structured products also had a good year within private banks, with Credit Suisse Private Banking, Hang Seng and DBS some names that offered these products to clients in Asia. ‘The reason for that was that they were in the scope of a principal-protected note with a two- or three-year tenor and on that, the clients were able to enhance their yields by getting more loan to value from their distributors,’ Gupta explained.
Unsurprisingly, Pimco GIS Income and the Jupiter Dynamic Bond fund were the most popular underlying funds.
The Pimco Income fund was a huge success in 2017 as investors looked for additional sources of income, garnering $46.2 billion from investors globally through various avenues last year, according to Citywire Discovery data.
‘Derivatives on funds will further evolve in 2018,’ predicted Julius Baer’s Meier.
Actively managed certificates
One class of structured products that is gaining prominence in the private wealth community in Asia is actively managed certificates (AMCs). Taking a feather from Switzerland’s cap, external asset managers and family offices in Asia that want to implement their own investment strategies through managed accounts are now using AMCs.
These products are based on funds that are ‘bespoke investment strategies’ or separately managed accounts and have a derivative-like wrapper. They have a shorter time to market and are cheaper to produce.
‘In Asia, it has been more bespoke in nature and as a result ticket sizes have been smaller and less scalable,’ said Andrew Au, CEO at wealth tech firm AGDelta.
Au wants to make the market more scalable through a new digital platform that links private banks to fund managers and issuers. ‘AMCs were previously only available to large institutional investors but technology has changed the playing field and they are now available for private and wealth clients.’
According to Au, as with any new product, private banks can expect regulations to develop for AMCs that relate to investment suitability, given that they are unlisted, overthe-counter offerings, as well as a greater need for product due diligence.
Indeed, the regulation of structured products as a whole has been changing the industry since 2008. ‘Black box’ strategies do not sell anymore because clients demand transparency, and standardised products are more popular among distributors, such as private banks, to avoid the due diligence process.
The EU’s MiFID II regulation will further upset the status quo as it brings with it growing scrutiny of fees and disclosure, best execution and investment suitability, Gupta said. This year, the Hong Kong Monetary Authority released enhanced disclosure rules for distributors such as private banks, for any monetary benefits received when selling structured products that are not regulated by the Securities and Futures Ordinance.
These unlisted, private placement products make up a majority of the market in Asia. However, Meier was confident that regulations will not hurt numbers. ‘We have seen plenty of new regulations in the past years and it has not hurt demand. I therefore do not see a major impact on demand,’ he said.
This article appeared in the March issue of the Citywire Private Wealth magazine.