Leonteq: Israeli investors want tech exposure, fund-linked structures with downside protection

The Israeli market for structured products has long been the domain of local providers. The vast majority of structures on offer are deposits marketed to retail investors, often via large campaigns, by the local banks.

However, that’s not to say that foreign issuers are not active in Israel. One such provider, Leonteq, which already has a large footprint in Europe, has been targeting qualified Israeli investors since 2011.

Israel is very tech-savvy and we saw high demand for the investment ideas we generated around cyber security and artificial intelligence

SRP spoke to Nathanael Gabay (pictured), managing director, co-head Benelux & Israel at Leonteq, who told SRP how the company continues to make inroads in the country.

“Israeli investors like to invest in flow products, just like in Europe,” said Gabay, adding that for this product type especially, he found that investors in Israel had a preference for high tech underlyings.

“With the largest number of startups per capita in the world, Israel is very tech-savvy and we saw high demand for the investment ideas we generated around cyber security and artificial intelligence,” he said.

Israeli clients of Leonteq using the company’s digital marketplace LynQs have access to a large universe of structured products and they benefit from lifecycle management modules as well as investment ideas.

“They can accumulate the products they trade with Leonteq or any third party provider in their personal account and are able to monitor all events during the product lifecycle such as barrier events, autocall events etc.,” Gabay said.

Fund derivatives solutions

Flow certificates aside, there has also been good demand from Israeli investors for fund derivative solutions that provide an alternative to direct fund investments and Leonteq’s fund derivatives desk is working closely with a wide range of fund management companies to deliver innovative solutions and competitive pricing.

“Because of our structured products expertise, we are able to offer clients downside protection, potential for higher returns or more investment flexibility when investing in mutual funds," he said. “For instance, an investor holding a Ucits fund was able to almost double his exposure on the upside by selling part of his position in the fund and simultaneously buying a call warrant on this same fund."

Leonteq's fund derivatives desk has also helped clients who needed liquidity but did not want to lose their upside exposure on a Ucits fund.

“By selling his position and buying a call warrant on the fund he was able to extract cash while maintaining the upside exposure to the fund. There are many opportunities as mutual funds are very popular in Israel,” said Gabay.

Investors in Israel have a strong interest in capital protection linked to mutual funds

Over the last two years, Leonteq has also seen growing interest for actively managed certificates (AMCs) that allow index sponsors to trade also structured products in the certificate, according to the rule book previously designed.

“It is an efficient way to reduce transaction costs, provide the asset managers with more flexibility and help them achieve their portfolio objectives,” said Gabay.

Although Leonteq’s products are not listed on the Tel Aviv Stock Exchange, they can be listed on European stock exchanges upon request.

Capital protection & QIS

Despite their interest in flow products, Israeli investors are keen on capital protection too, especially on thematic underlyings.

“Investors in Israel have a strong interest in capital protection linked to mutual funds,” said Gabay.

Due to its partnership with Blackrock, Leonteq is able to offer up to 100% capital-protected products with upside participation on Blackrock funds.

“It was an opportunity for investors to switch some of their direct positions with full downside risk to capital-protected solutions: thanks to our capabilities, this portfolio optimisation – switching direct holdings of Ucits funds to a capital protected certificate on the same fund – can be structured on many funds as long as they have a critical assets under managements and a daily liquidity," said Gabay. “We receive many requests of Israeli clients to analyse their portfolio and structure capital protected certificates on the funds they currently hold."

Quantitative investment strategies (QIS), which are rule-based and designed to bridge the gap between discretionary actively managed strategies and passive, market-tracking strategies, are also popular among Israeli investors.

“For instance, the Leonteq Biotech Funds 12% RC Index was very well perceived. Israeli investors appreciated the fact that the basket is based on two mutual funds specialised in bio-technology investments,” said Gabay. “This enabled our clients to participate in a small sub-sector of the equity market with growth potential.”

By adding capital protection to such products, Leonteq can offer Israeli Investors the perfect match between the exposure they seek to new technology and the downside protection they seek, Gabay concluded.

The SRP Israel database counts 59 live products from four different distributors: Bank Leumi, Discount Bank, Excellence and First International. The products are linked to equities (32), interest rates (16) and FX (11).