Structured products stage a comeback

Not everyone is so upbeat, but private bankers agree equity products which provide a partial hedge against a market crash have become popular, because most agree that stock markets are currently delicately balanced.
Private bankers say marketing conditions are good because investors view equities as cheap but lack the confidence to buy more following a dull performance of their portfolios over the last year.

They are also concerned by problems in the eurozone, triggered by the Irish bailout. But they draw encouragement from the way stocks have continued to grind higher following renewed US quantitative easing.
Fears of inflation are undermining bond sales and, according to SG, there is even evidence of individual stocks performing in line with fundamental prospects, as opposed to the market's ebb and flow.

Mark Dickson, operations director at Blue Sky Asset Management, a structured products adviser, says investors are increasingly adding structured products to their equity portfolios.

Structured products were knocked for six when Lehman went bust, undermining their performance guaranties. But the bank sector recovery, outside Ireland, and the rise in stocks to levels last seen a fortnight before Lehman's collapse have restored faith in them.

Nicolas Cagi-Nicolau, SG's head of structured products solutions, says his bank has sold structured products worth €8bn, against €6.4bn last year. SG has not sold as much as €8bn since 2007, prior to Jérôme Kerviel's unauthorised trades which cost it €4.9bn.
David Poole (pictured), managing director at Citi Private Bank, said: "We are seeing strong interest in products with downside protection for people who want to preserve their wealth and take a measured risk. They are typically prepared to take a one to three-year view."
Mark Rushton, director of BNP Paribas Wealth Management, is not so upbeat. He pointed out that products offering a hard guarantee to investors did not provide attractive terms at present. He said: "With little in the way of interest rates to use and volatility still buoyant, traditional fully capital-protected structures offer little value."
He said sales of structured products in the UK were relatively restrained. But he agreed there was an international appetite for certain products. He said: "Those which offer more limited, or soft, protection can offer satisfactory potential returns."
Bankers' products offering complete capital protection – or hard guarantees – are out of favour because the yield on cash is insufficient to buy enough put and call options to generate a satisfactory return. A fall in stock market volatility, prior to Ireland's formal bailout and North Korea's attacks, has also diminished returns from baskets of puts and calls.
Blue Sky's Dickson said investors could get a better hard return by leaving deposits with a bank rated below AA: "But someone wanting a hard guarantee would not tend to be interested in this."
SG's Cagi-Nicolau added that investors in hard guaranteed structured products would also be at risk if interest rates went up. But he is upbeat on client interest centred on those offering a softer, partial guarantee, known as barrier, or auto-callable products.
There are many varieties. They typically guarantee the capital invested as long as the value of its investments does not halve in value.
Annual coupons are also paid, assuming the investments do not fall by more than a set amount, although investors sacrifice stock market gains beyond the coupon rate.
One typical product in the UK is the six-year Morgan Stanley FTSE100 defensive bonus note, which offers a 6.25% coupon, as long as markets do not tank by more than 65% by maturity, plus a capital guarantee which stays intact, as long as the index does not halve over the six years.
In equities, SG has been structuring products around indices for some time. However, Cagi-Nicolau said SG had found evidence to suggest that stocks are starting to perform independently of indices, rather then seeing a correlation in performance.
He said: "This trend started to appear in September, and we see no evidence of it breaking down. We are now exploring ways of putting together baskets of stocks to create a new variety of product."
He confirmed structured products investing in emerging market currencies had been popular, along with one based on the price of gold. He stressed that SG had set out to achieve transparency and structure which would not leave clients marooned in particular products.
However, there is no shortage of advisers warning investors to look at the small print before they sign up.
Yogesh Dewan, a former Goldman Sachs private banker, set up boutique Hassium Asset Management to advise clients on the best way to approach such investments.
Dewan said: "Investors would be wise to question the motives behind being sold a structured product."
He added: "The client supposedly gets exposure to equity (or other financial) markets without risking their capital. In return, the bank gets the upfront fee, often up to 3%, and in some cases an additional annual management fee.
"Unfortunately for the client, due to the low cash yields, current participation levels are low and performance caps can prevent an investor from accessing significant upside potential. The downside is protected but only if there is no knock-out, the product is held to maturity and the issuer remains in business."
Dewan said: "Banks need to be more transparent about the excessive costs associated with structured products as well as the broader risks."