The average annual performance in the Americas in the last year was 5.93%, with dual currency among the best and reverse convertibles among the worst performing products, according to an SRP study discussed during the Americas Performances & Market Presentations panel at SRP's 6th Annual Americas Wealth Management & Derivatives Conference 2017 in Boston on June 16.
In terms of methodology, the study looked at more than 7,000 products from 43 different distributors in Brazil, Canada, Mexico and the US that matured or expired between March 1, 2016 and February 28, 2017, according to Tiago Fernandes (pictured), global head of data at SRP. "The best performance was 165.8% per annum, and the worst performance was -87% per annum," said Fernandes, who noted that Mexico was the most successful country with a big average performance.
"We have to divide the Mexican market into two principal markets for structured products: FX and equity," said Manuel Meza Piza, managing director, global structured solutions at BBVA Bancomer. "The FX market in Mexico gives investors the opportunity to make bets in the very short term, often for seven- or 14-days, and that's why the performances has been so good."
In 2016, there were two main events in Mexico, according to Meza Piza. "The first was the start of the US Federal Reserve interest rate hike; and then Banco Mexico also started to increase rates," said Meza Piza. "To give you an idea, the rates in the last 1.5-year in Mexico have gone from a reference rate of 3.50 to seven. That gives a lot of movement in the interest rate market and this was reflected in FX. We have been moving in a 25% range in FX, coming from 17 to 22 right after the US elections and now we are back to low 18."
Fernandes admitted the 6% average performance included Latam, where interest rates are completely different from the US and Canada and, according to Luciano Diaferia Angelo, head of derivatives & structured products at Itau Unibanco, the market place and economy in Brazil especially is completely different. "We have double digit interest rates, so we have a lot of cash to buy the options for structured products," said Diaferia Angelo. "On the other side, investors in Brazil are not willing to take a lot of risk: I would say 95 to 96% of the market is capital protected products." The Brazilian market is very concentrated on local indices and, due to political uncertainties and the fact that the economy is not doing very well, investors are buying structured products linked to inflation indexes or interest indexes, according to Diaferia Angelo.
Eighty percent of the products that matured in Canada were guaranteed investment certificates (GICs) or principal protected notes (PPNs) and the average return was around 3.6%, according to Sebastien Vallee, director at Desjardins. "There are two explanations for the consistent performance," said Vallee. "First, we only issue relatively simple capital protected products; most of them call-spreads. Second, if we look at the interest rate environment three to five years ago, when those products were issued, the government bond rates were about 1 to 2.5%, so nowhere near as high as the rates in Brazil."
The three most successful products in the Americas, from BBVA and Monex, respectively, were dual currency products, with a term of just one week and issued in Mexico, according to Fernandes.
"FX notes are instruments which are used all the time in Mexico," said Meza Piza. "Everybody is following them, everybody understands them, and everybody wants to bet on them."
Last year, with the expectations of the movement of FX, there was a very active market in dual currency deposits, which, according to Meza Piza, is basically "what the reverse convertible is for the equity guys". "Having these movements, coming from a 25% range and moving quite fast, these products were very successful," said Meza Piza. "We are still issuing a lot of these products and next year, when we have elections in Mexico, which always bring volatility in the FX market, we expect to see even more."
According to Diaferia Angelo, FX notes, which are also available in the Brazilian market, performed well in 2015, when investors tried to bet on the depreciation of the real versus the US dollar; however, as the real appreciated in 2016, they did not get any returns. "The same products that had the best performance in 2015 gave their worst performance in 2016," said Diaferia Angelo. "Exactly the same notes, a call-spread, betting against the real."
The three worst performing products in the Americas, each issued in the US, were reverse convertibles with an embedded put linked to Valeant Pharmaceuticals International stock. The pharmaceutical company had some very bad press during 2015-16 in terms of various claims around price fixing and price hikes, which caused the stock to dramatically fall, according to Tim Mortimer, managing director at FVC.
"All these products were issued by a well-known US issuer," said Mortimer, who noted that this particular issuer and several other issuers in the US regularly issue reverse convertibles and capital-at-risk autocalls linked to single stocks. "When you have a wide issuance programme covering large number of stocks, it's hard to do any kind of stock-picking; they are simple making them available," said Mortimer. "The strike level of the stock was pretty much at an all-time high for this product, so it had a long way to fall. The implied volatility levels of the stock were at an all-time high as well."
The estimated initial value on the SEC filing of the worst performer - a VRX Phoenix Note which offered to pay a coupon of 13.3% per annum - was 96.5%, according to Mortimer. "That is 3.5% applied fees, which is a lot for a one-year product, but, in order to hedge a one-year autocall with a part dependency linked to a single stock, you are going to expect the bank to have to price in the trading risk," he said. "You could have invested in just the stock at virtually zero cost, or you could have had a simpler structure, but, in order to get that 13.3% at a 75% barrier, which in most cases is a pretty reasonable barrier, it is going to cost a fair bit upfront."
Click the link to view the SRP Americas performance and market presentation.
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