Alfa Capital, one of the biggest asset management companies in Russia, offers a wide range of products including classic mutual funds, different actively managed strategies, real estate funds, as well as structured products.
SRP spoke to Danila Panin (pictured), director, product development, about the firm’s activities in the domestic structured products market and the challenges to grow the Russian market.
Alfa Capital was created at the beginning of the 1990s and started trading structured products in 2010. After a decade of activity, the assets under management (AUM) of these products represent around 20% of the firm’s assets, and have become a pivotal component of the business, according to Panin. However, the market has seen a decline in trading volumes due to market volatility and a challenging pricing environment over the last couple of years.
“This is true not only for us but for other firms in Russia that use structured products,” says Panin. "The volatility we saw in 2018 pushed our clients to more conservative products, like corporate bond.
“Last year was not the easiest year for the asset management industry in Russia which had to face the market volatility in 2018 which caused risk aversion among clients. We saw declining interest rates which also hit cash deposits and fixed income in all currencies.”
What is the appeal of structured products for your clients?
Danila Panin: I believe the most popular products for our clients and for clients in general are yield enhancement structures. Our client base is categorised in two big groups.
On the one hand, we have ultra high net worth individuals (HNWIs) who prefer to invest into hard currencies such as USD, CHF and EUR. It is very difficult to create capital-protected products with those currencies, especially in euro due to the near-zero interest rates environment. These clients are used to trade corporate bonds, and it is much easier for such type of investor to understand autocallables, reverse convertibles in comparison with participation products with capital protection. We offer predetermined coupons, fixed or conditional which is in line with what they get from corporate Eurobonds and corporate debt. Most of the outstanding volume in this segment is for non-capital protected products.
The most popular products among Russian investors are fixed income products, mainly emerging markets and high yield corporate bonds, denominated in hard currencies
On the other hand, our retail clients invest in ruble-denominated products. In this currency, we can create capital protected structures, although it is becoming harder and harder to create them, due to declining interest rate.
What products are in demand?
Danila Panin: The most popular products among Russian investors are fixed income products, mainly emerging markets and high yield corporate bonds, denominated in hard currencies. We also see good demand for structured products as yield enhancers.
US and European blue chips like Apple, Amazon and Google remain in focus. Before 2014, one of the most popular equity linked notes was linked to some Russian American and global depositary receipts (ADRs/GDRs) which are listed on the LSE\NYSE. This trend was exacerbated in 2014 as the political upheaval affected Russian stocks heavily. After that, all companies here in Russia started to pitch non-Russian underlyings.
This is our main focus, but we also trade sometimes different fund-linked strategies, with different alternative payouts, commodities as well as FX. We have also done credit-linked notes but they’re no longer driving demand. With CLNs our clients don’t see much difference in comparison with bonds although you have better bid-offer spread and liquidity. We have also looked into credit indices like the iTraxx but we decided not to go this route.
What are the challenges to make these products mainstream?
Danila Panin: We need to educate clients, show them new products and how to use them in their portfolios to achieve their goals. In Russia, the most popular investment product is the bank deposit. I would say this is true for all emerging markets. Therefore, we need to show investors how they can invest their money in a more efficient way as these products can offer some of the security of a deposit but a higher potential return.
How does your offer differentiate form that of your competitors?
Danila Panin: Our main value is to provide the best pricing for our clients and to create the best and most optimal structure for our clients. In terms of underlyings we have our own unique expertise around underlyings selection. If we speak about equity-linked autocallables, we have significant experience in these products too. Our strongest capabilities are new underlying selections, and new product development. A number of features created by Alfa Capital have become a kind of a standard for the Russian structured products market such as using short-geared puts instead of the European Down and In Put. (EDIP).
How would you describe the competitive landscape in Russia? How can you help to grow the market?
Danila Panin: There aren’t many structured products players in Russia - perhaps 10 outfits compete in this market. We think that is more than enough to have a healthy market considering that investment products - structured products especially, are not so popular in Russia. Most Russian private clients' money is still sitting in deposits.
If we speak about structured products, the most important thing that we can do is to continue developing fairly priced and balanced products that satisfy client needs and deliver value. Somehow, these products have to prove their worth to end investors.
Do you work with any specific issuers? Where do you see growth?
Danila Panin: We have got all issuers in our scope, and we try to trade with them on a best execution policy basis. We see huge trend for cash deposit rates declining and it should be correlated with an increase in structured products volume.
Not only with structured products volume but also around investment funds or cash equities, or cash bonds. There is also a huge opportunity to move clients from cash deposits to investment products, not just structured products. If this happens then we could see a huge increase in the use of structured products.
Where do you think Alfa Capital is in the structured products moment? How do you envisage the market evolving?
Danila Panin: We are one of the leading companies in asset management in Russia and in structured products as well. We see ourselves as an industry leader, which provides innovation and the best solutions to our clients.
We expect increasing competition among market participants, as well as digitalization & on-line business becoming more and more important. We are looking at new products and services and have increased our investment in IT infrastructure and automation.