Glacier, a fully owned subsidiary of South African financial services group Sanlam, made its debut on the SRP South Africa database in May when it issued the Glacier Capital Enhancer, a five-year capital protected growth product linked to the performance of a weighted basket comprising two European indices - Eurostoxx 50 (70% weight) and FTSE 100 (30% weight). At maturity, if both indices are greater or equal to their initial level, the product offers a return of 178% of the initial investment amount. If the performance of the indices is higher than 78%, there is an uncapped upside return which equals 178% of the investment amount plus additional 100% participation in the return above 78%.
"We've seen structured products over the last couple of years taking a more prominent role in client portfolios, particularly with the continued volatility and low performance across most asset classes,'' said Cornel Basson (pictured), product manager Glacier Life Investments at Glacier, adding that structured products allow investors to diversify their portfolio in more than one way, according to Basson. "Depending on the investment it is linked to, it can provide access to different markets, regions and industries," said Basson adding that on an asset class level and considering the profile of returns it offers, structured products could be seen to sit outside of the efficient frontier typical risk/return framework, "behaving differently to other traditional investment options."
Allocating a portion of a portfolio to this alternative 'asset class' can introduce diversity and stability to the overall return profile of a portfolio, according to Basson. "Structured products can also improve the tax liability of a portfolio as returns are often classified as capitals gains - which attract a much lower tax liability compared to dividends or interest earned," Basson said.
In July and August Glacier issued two similar Capital Enhancer products with participation of 175% for positive performance under 75% and participation of 175% plus additional 100% participation in the return above 75%, respectively, and the issuance of these retail structured products aligns with Glacier by Sanlam's intention to increase the use of such products in its client portfolios, according to Basson.
''Given the current uncertainty within equity markets, there is a growing market opportunity for investment options with full capital protection with participation in high-return growth assets," Basson said.
"To address this need, Glacier has made available a structured investment option providing full capital guarantee with geared participation in a range of indices. The solution is tax-efficient within a sinking fund life wrapper, easy to understand and marketable.''
The choice of the two equity indices increases the diversification of the investment in a wide range of stocks. Historical data from the last five years shows that Eurostoxx 50 and FTSE 100 have a relatively stable performance with a relatively high correlation coefficient of 0.688.
''We decided that to make use only of well-known global country or regional indices to start off with - this would allow a broader range of South African investors to understand what they are investing in," said Basson.
The outlook for European equity returns remains positive on the back of improving economic conditions, higher global growth, a stabilising political environment and improvements in company earnings, according to Basson. "The FTSE 100 remains robust and well diversified in the face of ongoing uncertainty regarding the hung parliament and Brexit negotiations going forward.''
Related stories:
Societe Generale hops on the EUR/USD wave
Exane teams up with Irish firm for first public offer
UniCredit makes a splash with new water play