In the second of a two-part interview, Roland Rousseau and Andrew Wolfson (pictured) from Rand Merchant Bank explain the benefit of a single voice to influence regulation and educate investors, the role of click and trade platforms and open architecture, and what assets are driving activity.
The South African market has had "very little need for a formal structured products association, as there hasn't been a regulator forcing us to change", according to Wolfson. "A dedicated structured products trade body would make a lot of sense, as a way for the industry to make a concerted effort to educate clients and to compete in a fund-focused market," said Wolfson. "Banks and insurance companies are coming together to develop a framework for the structured products to create a level playing field in asset management."
There is an interest in developing a framework for structured products that would provide a level playing field, according to Wolfson. "Opening up the market to more banks and insurance companies will allow the structured products industry to grow further," he said.
According to Rousseau, development is being held back by restrictions in the use of derivatives. "Regulators only allow for certain wrappers to use derivatives in a liberal way," said Rousseau. "For instance, ETFs currently cannot use derivatives. The wrapper is the problem, but, once a new framework is in place, the market will expand as banks will be able to leverage their manufacturing and distribution capabilities."
In terms of asset classes, the preference is for global exposure, with new structures being used to address issues around currency. "Most of the demand is focused on global exposure through S&P 500, MSCI World-linked products," said Wolfson. "These have been around for some time, but clients are also seeking exposure to structures that allow currency hedging, which can only be done OTC."
Smart beta and risk-based strategies are providing "a very efficient way to provide that global exposure beyond the usual market cap weighted indices", according to Wolfson. "Multi-factor strategies, overlaying risk control, are in focus and will drive some activity in the short term," said Wolfson. "Low volatility and minimum variance have proven to improve the payoff of products; coupled with products with protection techniques could be one of the ways forward."
Because of the limitation around listed products in fund format, product manufacturers "have been building risk-controlled strategies to meet clients' needs that don't require derivatives", according to Rousseau. "Providers have been forced to seek alternatives, including dynamic strategies, such as CPPI and Tipps that help address the limitations around derivatives usage," said Rousseau. "However, we have to apply caution as investors question the scalability of these strategies on the basis that it is not possible, for example, to deliver consistent outperformance with a value or momentum index."
The main attraction of smart beta or factor index strategies is not performance, but the ability to control risk more directly "which turns them into risk-based strategies", according to Rousseau. "This approach will be a great opportunity for us to develop the structured products market as these strategies can be used to provide balance to portfolios with products with targeted exposure to different assets," said Rousseau.
The market could also benefit from technology that would help standardise products and make their distribution more efficient. "Multi-issuer platforms are an interesting way to standardise and streamline distribution and will have a role to play in the South Africa market," said Wolfson. "Until recently, there was only one exchange; we now have four exchanges competing to increase their market share and differentiate their offering. Although it is early days, we think some of these exchanges will positon themselves as multi-issuing platforms as opposed to IPO platforms, which could also change the structured products landscape," says Wolfson.
According to Rousseau, there has been a lack of traction for structured products as traditional investment platforms (the linked investment service providers) have not been willing to list structured products alongside mutual funds. "While some more progressive LISPs do allow structured products on their platform, this is not the norm, and comes down to platform provider's willingness to take price feeds on products as with funds," said Rousseau, adding that in the UK there are many platforms that (as long as they can receive a daily price feed) are willing to have the product on their platform. "Many simple platform administrators, however, don't want to offer structured products in the same way as they do funds."
In part, this is more to do with products having events and a maturity that need to be managed, according to Rousseau. "It does hold back some of the innovations we see in other markets since many investors are reluctant to invest in products that cannot be reported alongside all his other investments," says Rousseau.
However, there are initiatives providing new opportunities and allowing structured products to be seen alongside other investments. "iTransact was one of the first platforms oriented around bank products designed to administrate around different wrappers, and we do see other outfits taking a similar approach," said Wolfson. "The administration element is appealing to the end investor, but we need the regulatory framework to facilitate the issuance of such products."
The 2nd Annual Africa Structured Products & Alternative Investments conference will take place at The Maslow in Johannesburg on 1-3 November. For details, click on this link.
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