Buy side view - Fusion Asset Management: the flow market is attracting new players

SRP spoke to Kirill Ilinski (pictured) managing partner at Fusion Asset Management, about the company’s move to focus on structured products and how these products can add value to an investment portfolio.

Why are structured products increasing their profile in the discretionary space?

They have a place to bridge behavioural gap and there is an economic necessity for structured products. If you are long term, return is six percent the behavioural gap is two percent - meaning investors will forfeit two percent return due to their behavioural/irrational behaviour. Therefore, if you are charging me six percent to enter a product, it makes no sense but if you charge me two percent or lower to enter I am not going to be worst off.

The fees investors are paying for the traditional service are too high and the returns do not justify such fees. The only way to create sustainable business for both investors and product providers is to decrease the fees. However, to lower fees you need to have large and consistent flow.

The traditional big-ticket reverse enquiry model is dying out and has been dying for the last 10 years

We have seen the race to the bottom in the low cost ETF space, sometimes to low digits in bps. This comes at expense of hidden and un-controllable risks, for example when the fees decreased by lending the assets. With structured products, you can control that risk. However, fees still need to come down to make it economically beneficial for clients – hence the distribution model needs to be changed.

Is the big-ticket reverse-enquiry distribution model losing traction?

The traditional big-ticket reverse enquiry model is dying out and has been dying for the last 10 years. The flow side of the market however is the one moving the market forward and attracting new players like us. In the current environment, you need of expertise to decode where and where not to invest.

The second aspect is that discretionary asset managers and pro-active private banks are a natural destination for these products. They are not pure transactional, where the operating model is simple – sell for longer, book fees upfront and do not disturb, they are pro-actively managing assets. For them it is important to show the value added, maintain the dialogue with investors, and increase clients’ loyalty (which will result in additional inflows of assets). They need support in terms of sales coverage, digital and marketing tools – these are all what Wealthinity is aiming to provide.

The old model will be phased out eventually. You cannot have high fees just because you still need to cover (still raising) overheads. Or you can focus on small tickets based on a flow business with low fees.

For us this model makes sense because you also have to take into account the low interest rates environment. When interest rates were at 5% there was room to charge higher fees but not in the current context. Yields are zero or negative so you have to align the fee structure to that environment and this applies to sell side as well as the buy side. Product manufacturers cannot charge percentage points any more for a placement fee.

What is the appeal of the flow model for Fusion AM?

We have seen how the regulatory environment has forced changes upon the market. The main pressure comes from the market itself. However, the flow model can also be challenging and has forced a number of player migrating away from the UK market.

If you move to the flow model you have a completely different set up. You cannot put everybody in the same product and not talk to him or her for five years any more as you used to do with the old model.  

The idea that single long-term autocallable with memory effects is a static position for the end retail client and does not require active management in reality is deeply flawed

Under the new flow operating and sales model, you cannot put all your clients into a single idea or concentrate all the paper in one issuer so the only way to do it is by having a portfolio approach. This needs a different set up, infrastructure, adviser education. Under this model, you can also do multi-asset and you have a lot more flexibility around allocation and market direction. In addition, you actually be more tactical and manage the portfolio actively using passive instruments. So, if the market goes up and you client can cash in on an Autocall triggering the early redemption you will have a happy client. If the market goes down and is close to breach, a down side defensive barrier you can exit the product and buy another one. 

The idea that single long-term autocallable with memory effects is a static position for the end retail client and does not require active management in reality is deeply flawed: if the product is sold as a protected, balanced investment, after touching the knock-in barrier the product becomes pure equity and is not suitable for the client anymore. As advisors are obliged to assess the suitability annually, they will have to deal with the issue, unwinding and fixing losses. Advisor is typically not equipped to properly deal with the issue and only discretionary managers are in a position to manage the situation.

What is your take on thematic investments? How can structured products provide efficient access to thematic investments?

You cannot put your money on a thematic investment or a single idea in a five-year product, so, potentially, for five years. If you are playing a trend surely you want to bet in the short term not are stuck in a five year product that may actually the objective of capitalising on a trend or theme. However, most thematic investments through structured products can only be issued long-term, because of the low rates.

Nowadays, there is no premium so there’s no point on tweaking products just to make them look good as we have seen over the last few years with baskets, worst off, delayed triggers, Phoenix, first three years protection, etc. This approach does not make sense with a long-term horizon. With a short-term horizon, you have to take some downside risk and then you have to face a different problem – typical for linear products portfolios – diversification, managing drawdowns, 10%-drop reporting etc.

The market event of 2008 put significant pressure to the industry because products went down by 50%, which means you cannot sit on these products anymore. As an adviser, the most efficient way to offer these products is through a portfolio approach. This requires a completely different setup, different infrastructure, and different education for advisers. However, it opens opportunities as with a portfolio approach, you can then have a multi asset set up.

Is capital protection relevant to your clients?

Capital protection remains a unique selling point for structured products. That is the beauty of these instruments. Because if you have number of products you have number of ideas, that is the natural element of diversification across ideas, assets and so on. Your level of capital protection can be embedded in the structure of each product but also you benefit from the portfolio diversification.

How did the Wealthinity come about? What is the aim of the platform?

We wanted to have a digital place where asset manager or a banker can have full suite to service clients - different currencies, different time horizons, levels of capital protection, different level of active management etc. We also want to produce a couple of curated choice portfolios every month. We are here to offer a portfolio based on the client’s idea, with a small ticket size, flow, making 1-2% share with the client. We will add mutual funds to Wealthinity by year-end, and next quarter we are adding a structured product.

With Wealthinity, we are making first step towards building a digital investment bank – focusing on lower end institutional clients, servicing with digital tools and offering low cost service due to our ability to consolidate flow in curated choice products. We do not aim to structure products or provide single-product ideas – this is not scalable as a business for our target customer base. Instead, we provide ideas on the portfolio and client proposition using existing products from many product providers, and help asset managers and bankers to offer and run their services efficiently and profitably.