Credit Suisse has partnered with FTSE Russell to develop a new range of smart beta investment products specific to the UK market. The new range will feature the FTSE Dividend Select index, which tracks the top UK high-dividend-yielding companies in the UK.

The partnership expands the bank's collaboration with independent index providers as it develops different aspects of its structured products offering, according to Kerim Haddad (pictured), head of equity derivatives structuring, distribution, at Credit Suisse in London.

"When it comes to smart beta and custom indices in the UK, the market is not as broadly developed as in the rest of Europe, with a strong investor bias to vanilla FTSE 100 investments; hence we saw an opportunity to address this lack of choice for the savvy investor in the market," said Haddad.

The FTSE UK Dividend Yield Select index is an alternative to the FTSE 100 as it lends itself quite well to structured products such as trigger redeemable with a more attractive payoff, according to Gary Geiler, vice president sales for the UK, at Credit Suisse.

"Investors in the UK tend to concentrate their risks on few indices compared to other markets in continental Europe," said Geiler. "Acknowledging the strong home bias, we thought it made sense to help design an index which is derived from the FTSE 100 in a way that still resonate with the domestic audience."

The new index marries an equity universe that investors like, with a proven technical innovation in the index construction, said Geiler. Credit Suisse is seeking to increase the offering of custom and systematic strategies "because we think this will add value to our clients in the UK market beyond the FTSE 100", according to Haddad.

"We focus our efforts on providing research ideas and designing underlyings that can add diversification to our structured products offering, while still maintaining the overarching objective of improving investor outcomes," said Haddad, adding that smart beta has been a focus for Credit Suisse over the last three years "because of its value as a structuring theme across equities".

The Swiss bank's approach is to bring innovation but with appropriate "prudence and caution", according to Geiler.

"Credit Suisse is now fully equipped to develop factor investing strategies for our clients, but we also believe in product governance so we address carefully suitability and added value when it comes to retail clients," said Haddad.

The FTSE UK Dividend Yield Select index provides a relevant example of how to combine high upside and high dividend filtering. A high dividend feature can benefit the end client not only by increasing the potential payout but the sustainable dividend shares also provide a source of quality to the elected basket, especially in the current environment of economic recovery, according to Haddad.

"We don't believe a one-size-fits-all approach can be applied to everywhere, nor to every investor profile," said Geiler. "Our objective is to provide investment solutions which are clear and fair to clients, enabling them to select the risks and potential returns they want to have. Clearly, the indexation to FTSE UK Dividend Yield Select can indeed generate higher returns compare to a traditional index without the additional complications of worst of payoffs."

The new index will add value to yield type of products such as autocalls and reverse convertibles, as the main drivers of these particular structures are indeed liquidity, dividends and volatility of the underlying, said Haddad.

Beyond smart beta
Alongside smart beta and custom strategies, decrement indices have seen a significant uptake over the last couple of years especially in the French market but others markets such as the UK seem to oppose a resistance to this technique, according to Haddad.

"French investors understood that it is in their benefit to reinvest the actual dividends and decrement synthetically a fixed one, as long as this doesn't impact the investment outcome too adversely," said Haddad, adding that the French distribution market is driven by autocalls, which are by construction non-decrease products. "That explains to a certain extend why manufacturers tend to adapt the equal-weighting and dividend forfeiture mechanisms."

The Swiss bank also has plans to expand its alternative wrapper business, such as collateralised structured fund as well as different other issuer risk mitigating solutions. "We indeed see an increasing demand from discretionary portfolio managers and private banks in the UK for such products," said Haddad. "We are working on a number of initiatives and developments globally, but also at the same time we try harnessing our risk in the books - dividend risk, vol risk - through asset managers and hedge funds. Obviously the aim here is to be able to propose a broader and more diversified offering to retail clients."

The appeal of these distribution outlets is that they have very restrictive rules when trading on behalf of their clients, according to Geiler. "The structured Ucits as a wrapper enables the clients to exercise their investment objectives in the most retail friendly wrapper possible, marrying the great advantages of structured payoffs, with the Ucits gold standard of investor protections," said Geiler. "Clients usually look at funds for their retirement portfolio but we think systematic and algorithmic funds using structured products will also gain traction among retail investors."

The FTSE Dividend Select index is similar to the Eurostoxx Select Dividend 30 Index but with a UK specific exposure. The Eurostoxx Select Dividend 30 Index is the most featured dividend underlying appearing in over 1,600 structured products sold across markets. The index has been used only one time in the UK market when Societe Generale issued the High Dividend Target in 2005. There are more than 20 dividend-based indices featured in structured products across jurisdictions.

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