Not a standalone investment product, but a flexible solution for the knowledgeable investor to use when seeking the diversification uplift which can be derived from accessing esoteric asset classes such as FX, volatility and hedge funds. This is was what senior industry professionals believed the structured product universe should view as its remit going into 2009, delegates discovered at an event organised by the Financial Times last month.
Product manufacturers and private bank salesforces were mostly in agreement that a fresh start is required after a torrid last few months which had become almost unbearable following the collapse of major structured product underwriter and counterparty Lehman Brothers. Complex payoffs and wrappers, just because manufacturers have the technology and ability to construct them, should be put to one side as the marketplace goes back to its roots, delegates heard.
However, as James Bevan, chief investment officer at CCLA Investment Management, acknowledges, structured solutions retain the capacity to meet the needs of an embattled investor base during this unsettled period. “We are looking at back to basics in terms of product design. However, the industry shouldn’t shrink from the reality of having increased complexity, rising governance and compliance to deal with,” he says. “The significant demands of the customer necessarily lend themselves to wanting structured solutions to these complexities”.
According to Mr Bevan, though there is limited scope for the industry to be more inventive than it has been to-date, “there remains an ever expanding set of imaginative people with deep skill prepared to deliver structured solutions”.
Timothy Hailes, speaking as chairman of the Joint Associations Committee (JAC) on retail structured products, likewise suggests that the “perfect storm” of recent months shouldn’t detract from the plusses that lie behind the utilisation of structured solutions. “They can provide risk diversification, flatten volatility, and enhance investment portfolios. It is the endless combination of such characteristics which makes structured products so versatile,” he adds.
Mr Hailes claims that structured products have in many respects been the victim of mistaken identity and that it is down to the industry to get the correct message across. He explains: “Structured investment products are not the same as off-balance sheet mortgage-backed securities or structured investment vehicles (SIVs), but have been lumped into the same structured credit basket. The issues that have affected retail structured products have not arisen from the structuring or engineering but rather from the fact they are subject to the same influences as any other products.”
Innovation on hold
But there remains much work to do within the industry to get to this point of clarity, for both the retail market and institutional space. For now, when the providers look at themselves some find a market “polarised” and “in shock”, selling sometimes to “ill informed investors” and in some cases offering structured products where the total expense ratios “are absurd”.
From a private banking perspective, the default and eventual downfall of Lehmans has radically changed the activity of structured products to the extent that the concept of ‘innovation’, for the time-being, should be left in the laboratory.
Lynn Skelly, global head of products, ING Private Banking, says a number of private banking clients, though not totally shy of going with the structureds option, are keeping a close watch on the underlying credit risks of the counterparty issuer nonetheless.
“Having got lolled into a false sense of comfort, clients are still looking for some derivatives exposure but examining far more the wrapper and the cash piece, and the credit risk you may have on that cash piece. For the most part the big derivatives houses have responded quite well and offering better-rated issuers and lots of options, but we still have further to go,” says Mr Skelly.
Peter Ham, head of transaction products at UBS Wealth Management, calls for next-stage products to arrive minus the bells and whistles which have accompanied the more advanced structured solutions in previous years. “I get nervous when innovation is mentioned and I’m not a fan,” says the private banker. “It was popular in the 1990s and 2000s but innovation is not what clients are looking for now. They are seeking straight-forward payoffs instead,” he adds.
Mr Ham, occupying the space between investment bank think-tanks and the family offices and high net worth individuals, believes that what currently works for wealth managers are ideas “tuned into our clients”.
The delivery mechanism used by private banks to shift structured products has also come under scrutiny as clients seek clarification that their investments are not being exposed to failing counterparties. “I run an open architecture platform on the private banking side and the good news about the current crisis is that it has validated this method of selling. Clients are trying to anticipate the next Lehmans of this world and grappling with how to engage with issuer risk,” explains Mr Ham.
