Structured products are gaining popularity in South Africa, in simple form and often with capital protection. SRP spoke to Brett Duncan (pictured), head of retail equities at Standard Bank in South Africa on his view of the industry, ahead of the upcoming inaugural Africa Structured Products and Alternative Investments conference.
What are the scope and goals of Standard Bank's structured products?
We aim to provide our clients with attractive exposure to major equity indices, such as the Top 40 Index, while maintaining some form of capital protection. Our clients are typically high net worth (HNW) investors that want to put an amount away for 3-5 years, and they really like the concept of principal protection. These products are the mainstay of what we do.
We typically offer simple structures, featuring 100% protection plus some equity upside to our retail clients, whereas institutional clients purchase mostly bespoke products with little or no principal protection.
We keep our product range quite vanilla and straightforward and, while we don't want to be everything to everyone, we are actively exploring ways to expand our market towards the mainstream. There's a bit of an educational gap, with structured products still perceived as a niche tool for HNW investors, but this misconception will not last.
What are the preferences of your clients?
We've had a very range-bound market for some three years now, and, as a result, accumulators and other products that perform well in a flat environment have become very popular. Our clients have stuck to products they are comfortable with, like digitals, and the rollover of products has become commonplace.
Globally, we're stuck in a low interest rate environment, and everyone is hunting for yield. In South Africa, with the benchmark interest rate at 7%, many people are comfortably sitting on cash, particularly in light of uncertainties in commodities.
However, with the introduction of tax-free savings accounts last year, a new force of market disruption in the investment scene came along. These accounts allow investors to invest up to ZAR30,000 (US$2,178) per year, up to a total of ZAR500,000, with all returns enjoying full tax exemption. However, the eligible investments currently are only exchange-traded funds and unit trusts.
How would structured products sit in tax-free accounts?
Structured products will be a very suitable addition to tax-free accounts, as we can offer investors attractive upside with full capital protection, and it is expected that the regulator may consider adding structured products to the mix in the future.
We see a hell of a lot of interest in tax-free accounts, and it has been by far the fastest growing area in terms of the number of new accounts. It has been a great retail initiative and, at some point, structured products will hopefully be allowed, which will bring in mainstream retail to the market. The regulator is in no rush to move, though, and I'm not expecting anything in the short term, but this will eventually be a huge boost for us, and a great opportunity for investors.
Do you buy structured products?
Yes, and, like many of our clients, I am fond of digitals, because they fill a niche that the majority of mainstream equity portfolios lack. Not a lot of investments perform in a flat market. Obviously, I don't think an investor should have all his cash in structured products, but the structures can offer some interesting payoffs, where normally you would get none, and this makes them a valuable tool. I also have a holding in a couple of ETFs - I love smart beta, I think it's great! And I think the smart beta scene in South Africa will inevitably grow - it's just a question of education and patience.
The first SRP Africa Structured Products & Alternative Investments conference 2016 will be held at the Hyatt Regency Hotel in Johannesburg between 16-18 November 2016. See link for details.
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