Andrew Wolfson, the former head of cross-asset structuring at FirstRand Group’s RMB Global Markets in Cape Town, who moved in mid-May to Ashburton Investments, another subsidiary of the South African group, as a multi-asset solutions strategist, spoke to SRP about the challenges structured products face to become a mainstream investment solution in the domestic retail market.
What would be your first assessment of the South African Market?
It is very difficult for capital-protected structured products to gain traction among people who are investing in traditional asset management investments or alternative management solutions. Everyone is searching for yield and exposure to equities but I do not see any concerns around down-side risk or some sort of protection to generate the return. In a structured products context this suggests that maybe we will see people starting to consider being more comfortable doing capital at risk structures with some form of contingency to generate yield.
What other USP can providers stress to move the market forward?
When multi asset funds are delivering 13% or 14% pa it’s difficult to invest with someone who tries to provide you with capital protection. From a South African perspective the opportunities do exist, the wrapper and the providers offering choices but you are still dealing with financial advisers. For every person that comes and says here there is a structured product you see 20 people who say you should go and invest in an asset manager type solution. In our own group we have been looking at external financial advisers structures, what we call a ‘portfolio solution’, where the client has exposure to a portfolio of assets with some level of protection overly built on an annual basis. We find more and more people offering protection of 5%, 10%, 80% or 90% on the down side and structured products can also offer this. Protection is always going to play an important role in investors’ portfolios, and that’s the area where structured products can add value.
What providers have to do in order to sell structured products and challenge the asset management space?
Structured deposits are pretty simple as they’re based on a standard call on equity assets, and can be used to get people interested. You have to ask investors to give up the fixed return you receive from the bank and you can get a higher return or not. We have seen that in the offshore space there has always been a gap for structured products and some of the providers in South Africa have been slow at the time of going to the offshore market and see how to design products. It takes lots of work and time trying to educate people in the sense that you cannot get capital protection when rates are 1% or 2% because there is no potential for upside. There’s been a lot of bad press too and that is also difficult to counter. It is not true that if you cannot explain the terms of a structured product in one page then it is too complex. Even people managing multi-asset funds forget that explaining what do they do and how do they determinate allocation, how do they decide to be overweight or underweight, how is the protection set, etc. you will probably have 20 or 30 pages.
Do you think there is a lack of education and a need to clarify that complexity does not equate to riskiness as some regulators have suggested?
I think there is a need for a structured products association in South Africa to make sure people understand what is going on. After spending 10 years in the domestic market fully focused on structured products I still feel amused when people even at Ashburton say that structured products are too complicated and that they don’t serve a good purpose. We have seen people that were against structured products embracing them after the crisis, but that has not changed the perception. More needs to be done.
Will the market be fragmented between people investing through IFAs and those educated enough to act as self-directed investors (Barclays listed products)?
There is a range of structured products you can find there but if you look at the volume sold it is quite limited. If you take an audience of people who is ready to tap into that kind of distribution you will probably find that the amount of people out of the financial adviser space who is going to use those solutions is low. We will get there though. Let’s take what regulation is doing with hedge funds. Let’s create a framework that allows people to access this kind of alternative sources of return from hedge funds but aimed at promoting the use of commodities, different financial assets, limited amount of gearing, etc. Regulators are saying let’s have a risk-in regulatory framework, but the bottom-line is that providers cannot offer to retail investors what they would offer to a qualified investor. You are limited in terms of what you can do in the retail market.
Does that explain why some providers don’t change their offerings and you can only see innovation in the private banking space?
What you can see in the private banking space is different. When a client is looking for a portfolio solution they can offer anything. We need to replicate some of those structures, do optimisation on portfolios, going beyond the constraints of structuring on the Top 40 and start doing different things to change the distribution or reduce risk. Things that can benefit the client. Some people in the market are doing the same structure since 2004 (if ain’t broken don’t fix it), but it is about time we start doing something different for the end client like choosing offshore shares, etc. You can think of structured products as if you were a fund manager.
Would a fund of structured products get any traction in South Africa and/or help to show how flexible structured products are?
Some people issue structured products in a fund but is basically a structured product using a fund wrapper, but you can also do funds of structured products and use the secondary market to give them extra value. Fund managers are using any tactic to try to generate a return; banks are more likely to sell you something that fits them or their books rather than something that is the right thing to be doing. Banks can look for something that offers a client the highest level of participation possible but the client can look for something different seeking quality rather than quantity. A client can prefer five well-known shares in a Himalaya structure than 200% participation on a foreign share who he does not know about. So, in the same way as you employ an investment manager to do your asset allocation or stock selection, why not hire structurers/traders (in a Fund) to determine which structured products, at which times, should be used to achieve given objectives?
What are your plans for the future? How is regulation going to affect the development of the South African market?
Our aim when doing structured products is avoiding to over engineer things. In the current environment we have to look at how to generate yield in a more conservative way. I think regulation is less of an issue today. Back in 2006 - 2007, regulation affecting the fees for financial advisers and the kind of licence they need to sell structured products impacted the market and we saw a drop in the structured products sales because part of the advisory community could not make use of them. My general view is that there are some people light on documentation and standardisation of documentation. People say you cannot explain in one page something that is considered too complex and I think that is not true because I don’t even know how many pages you would need to explain the risk of a subordinated bond, even in an institutional context.