An impressive 45% of all structured products distributed in Europe in 2016 recorded an annualized return above 2%, despite the difficult market conditions, according to the SRP European Performance & Market Presentations panel disscussion at the 14th SRP Annual European Structured Products & Derivatives Conference on February 2 in London.
However, suffering largely from the current interest rate environment, the 1.3% average return from structured products in Europe in 2016 marked a decrease compared with the 3.1% recorded in 2015.
"With interest rates at 4-5% there is no special reason to break your mind thinking about different ways to get performance," said Juan Ramon Dominguez Recio (pictured), head of equity structured products sales Europe, BBVA. "With the current interest rates, managers need to make a special effort in order to add yield to clients' portfolios. And this is where structured products fit as an asset class within portfolios as they provide not only capital protection but also some yield enhancement."
Based on their average, 50% of the structure products maturing in 2016, notably capital protected products, leverage, yield enhancement, autocallable products, returned between 0% and 4.4%. Only 23% of the products returned a negative performance, according to SRP data.
"[At Garantum] we can identify ourselves with these numbers in terms of products that registered a loss or gave money back, said Mikael Axelsson, CEO, Garantum Fondkommission AB. "On the other hand, we recorded an annual average of 7.6%, on the positive return side".
The obvious and probably the most important reason for the decrease in the average return in Sweden resides in the majority of autocallable products failing to trigger the knock out threshold due to the low performance of the Swedish stock market at the beginning of 2016, according to Axelsson. That was in contrast with 2015 which was a very good year in terms of both volumes and performances, he said.
The correlation with the underlying market is crucial element of the performance of autocallable products, agreed panelists. This correlation makes it impossible to assert that a product which returned positive performance under certain market conditions will repeat this performance under a different market environment, meaning that a badly performing product is not necessarily a product that is bad by design, according to the panelists.
Rather than looking into annualised returns, what we offer to our clients is basically some exposure to the market in a transparent environment, said Dirk Hess, director, co-head Emea warrants sales & distribution, equities, Citigroup Global. "What really matters for our distribution partners is to have a clear view on what they are going to sell to the client. When self-decided investors, as well as our professional clients looking for yield enhancement, decide to use structured products instead of the underlying itself, the exposure they have is highly correlated with the underlying," said Hess.
The UK market where the vast majority of products are autocallables, was clearly the best performing market in Europe with an average annualised return of 7.19%, followed by The Netherlands (4.86%), France (4.02%), Belgium (3.74%) and Slovakia (3.71%), according to SRP data. Autocallable products represent a very strong part of the products commercialized in Germany as well, according to Hess. "This type of products use to return quite well over the last years but once the market becomes bumpy you see that products that returned really good yields a year before could not repeat [that performance] in 2016," said Hess.
The autocallable option is also the most popular payoff profile in the Spanish private placement market, the retail market being absolutely focused on capital protected products, according to Dominguez. "The selection of the underlyings and the rationale behind that selection can support the regular autocallable payoff," he said. "The biggest trend on the Spanish market in 2016 was the incorporation of new underlyings in the product catalogue for retail networks and especially in the fund wrapper which gained in popularity last year, according to Dominguez. The combination of equity-linked with fixed income underlyings and even with inflation was pointed out by Dominguez as a possible lead for innovation.
KBC became the best distributor by performance across Europe for 2016, followed by Societe Generale, BNP Paribas, Santander and UniCredit, according to SRP data. SEB was the issuer with products boasting highest average annualized return during the last year, followed by Credit Agricole.
Two out of the best performing products in 2016 were issued by Swedish companies and featured the worst-of-option payoff, including 1201 Autocall Guldbolag, an autocallable worst-of product by Strukturinvest. The product was linked to mining companies and returned 142% after two years of investment hitting its knock-out threshold at the second time of asking.
"It's more or less market standard in the Nordics to go for worst-of-option payoffs," said Axelsson. "We have been fortunate so far with very few products redeeming below the [protection] barrier. Already used to a high coupon level it is pretty difficult to get clients to accept something lower. In a sense, we are stuck in a corner because people are just used to a certain optics of the product and we will have to continue to go with the worst-of structures, although trying to keep them at the minimum."
The adoption of a holistic approach towards portfolio construction and the ability to offer a strong and transparent service to clients were highlighted by panelists as sine qua non factors for coming up with attractive solutions and adding a differentiating factor with competitors. "The biggest trend is perhaps not linked to the products at all but more around the service provided." said Axelsson. "The way we report around the product and show how a specific product fits into the whole helps us demonstrate how it adds value to portfolios and makes them more robust. This is definitely adding something extra that clients can't get from traditional investment types."
The importance to keep clients aware about products' performances has always been privileged at BBVA, according to Dominguez. "We absolutely monitor the valuation of any product, and we offer possibilities for early cancelation and substitution by other products or restructuring products with insufficient performance," he said.
The ability to offer a huge package of information to clients, including real time pricing of products and liquidities, as well as the ability to trade structured products on the secondary market, is what gives a competitive edge to providers in Germany, according to Hess. "If we look at the issuers' landscape, our products are quite similar so this is the service we provide which makes the difference," said Hess. "Furthermore, we see that every issuer wants to have the best information portal, and runs a lot of webinars, seminars, meetings, etc.
Staying away from complexity was also cited as another key factor for successful retail distribution in most European countries. "We want to be extremely transparent towards clients," said Hess. "Most clients, as well as independent investment advisers, asset managers and professional clients, look for easy to understand structures, such as discount certificates, autocallable express [certificates] and bonus certificates. Staying close to the regulator additionally enables us to maintain transparent and organized activities to prove that the industry does everything to structure products in clients' interest." he said.
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