Slowly but surely structured products continue to expand their footprint across markets and regions with a number of new advisors becoming advocates of these products as an alternative to existing investments and a way to get higher yields while protecting capital.
Peruvian wealth management specialist fintech financial advisor Zest Capital sold US$60.75m worth of structured products in 2019 including knockout, credit-linked notes and capital-protected structures. SRP spoke to the firm’s managing director Arthur Silva (pictured) about the Peruvian structured products market and its plans to position structured products as an alternative to fixed income products in its clients’ portfolios.
A Peruvian advisor with a Brazilian touch
A Brazilian born from Sao Paulo, Silva is the chief executive and founder of Zest Capital - currently responsible for the company’s business strategy and execution.
Silva started his professional career in 2006 working for UPS, the US multinational package delivery and supply chain management company. After four years, he changed the tune and moved to the Caribbean island of St Vincent to work for an NGO.
“After one year I came back to Brazil and started working in the fintech environment - specifically with digital brokerage and wealth management start-ups,” he says, adding, “after six years I was leading business development teams in different countries (Brazil, Uruguay, Cyprus and Peru). So, I decided to launch my own wealth-tech focused on democratising private banking services to affluent investors, using a hybrid approach in terms of financial advisory and digital experience.”
Silva is not new to the capital markets as he has been working actively with derivatives since 2011, but it was in 2015 that he “identified a great opportunity to start structured products offering in Peru”.
Products like autocalls, CLNs and digital options have been sold on a regular basis during the last 12 months as an alternative to the low interest rates environment
By studying a strong reduction on minimum requirements for product issuance and by leveraging the structured products ‘boom’ taking place in the Brazilian market, “Zest started to put its business plan in action," says Silva.
At this moment Zest Capital is a leading structured products provider in Peru in terms of number of products sold with the top four domestic banks taking the lion’s share of the Peruvian structured products market in terms of sales volumes.
“[We are] extremally focused on financial education – we have a commitment with the formal creation of financial advisors in Peru,” says Silva, adding that Zest is offering three main product lines to diversify investors risk via multiple instruments, “aligned to our asset allocation suitability policies”.
“So far, [we’re] limited to private offering, [and] we work with external financial advisors that vary from local tier 2 banks to IFAs. Products like autocalls, CLNs and digital options have been sold on a regular basis during the last 12 months as an alternative to the low interest rates environment.”
Most of the products sold by Zest had 95-100% capital protection and were hedged by Société Générale, BNP Paribas and Commerzbank. The underlyings of the products sold by the firm include baskets of equity stocks but also equity and emerging markets bonds exchange traded funds (ETF) such as the iShares JPMorgan USD Emerging Markets Bond ETF and several credit indices such as the Markit iTraxx Series 29 High Yield, and Markit iTraxx Series 30 Investment Grade.
Exponential growth
The firm offers strong diversification with accessible minimum tickets and through a new performance fee methodology, monetises its structured products activity in the “same way as our investors," according to Silva.
“By establishing this alignment of interests, we are able to treat our clients as partners by sharing profits,” he says.
The firm started as a three partner venture in 2016 and today has 17 employees servicing more than a 100 external financial advisors.
The Peruvian wealth management market is going through a period of exponential growth “on its own scale”, according to Silva.
The country needs to reduce bureaucracy related to securitization of assets so that structured products can be offered via local compensation houses as a financial asset
The domestic mutual funds industry has grown by almost 300% during the last 10 years in terms of AUM, while public offering vehicles increased by more than 300% during the last five years.
From a private banking perspective, the main players are now “increasing their range to cover affluent investors, which presents the higher growth potential for the coming years”.
Although current market conditions pose “a challenge to any region," the market in Peru offers new opportunities as there is “an evolution in terms of investors sophistication”.
The country’s regulator has also been pro market over the last few years, optimizing minimum requirements for public offering funds, creating external manager figure among mutual fund industry, introducing tax efficiency policies on global asset classes, and upgrading agreements with the Mila market (Chile, Colombia and Mexico) on a mutual fund basis, among other things, according to Silva.
The only hurdle to develop that market is that under current rules in Peru, structured products are offered via investment funds.
“The country needs to reduce bureaucracy related to securitisation of assets so that structured products can be offered via local compensation houses as a financial asset,” concludes Silva. “By registering products locally clients will be able to purchase the asset class without [having to face] management or performance fee costs.”