The age of optically-appealing products is gone, Absa

Over the last 12 months the retail structured products market in South Africa has seen a number of new entrants as demand from investors for risk focused solutions increases. SRP spoke to Ryan Sydow (pictured), head of distribution, structured and risk solutions at Absa Corporate and Investment Bank, about how the market can build upon the arrival of new life companies with tied distribution and as well as a number of stockbroking and wealth advisory conglomerates while local banks bolster their capabilities and look to enter the market.

“The market seems to be one gear up, and benefitting from a number of factors including improved understanding from the educational initiatives undertaken in previous years and increased market presence because of new players,” said Sydow. “Stockbroking and fund platforms are adopting or considering the adoption of structured products as they move towards a more multi-asset set up and they capitalise on new technology to carry different issuance vehicles.”

“This improves access to these products”, whereas before there were only available through the more bespoke independent platforms, according to Sydow.

The general sensitivity to risk “no doubt” heightened by the political risk in South Africa and impact on local markets has meant investors are looking for defined downside risk product, drawdown cognisant (risk smart) indices and, everyone’s favourite, the search for yield in offshore developed markets, according to Sydow.

“The age of optically-appealing products only is gone, investors and advisers are much savvier than to get drawn in solely by these marketing ploys,” said Sydow. “As has been the theme locally and globally for many years now, we need to continue promoting structured products through market education.”

In addition, technology will start to be a big driver and differentiator to ensure barriers to entry are lowered and a wide range of investors and market participants can access these solutions, according to Sydow. The maturing of the South Africa market is being built on the existence of a number of players with a track record which are “helping to expand the market," said Sydow. “The market is also benefitting as familiarity increases and products mature delivering (in the main) for investors. If people have good experiences with these products, they will come back and use them in their portfolios and it’s, therefore, paramount that providers structure the payoffs to do just that, stack the odds in the client's favour.

“We see structured products simply as a delivery mechanism that aids in us on the broader risk solutions mandates that we seek,” said Sydow. “For this reason, ETFs under Absa/NewFunds are also managed from within the same team. That is to say, we are wrapper agnostic and, as a bank, can dish up solutions in a much broader range of vehicles than any other market participant.

“We are also the only issuer of ETPs in the domestic market that has developed its own proprietary index solutions as opposed to only using off the shelf indices from the large index providers,” he said.

Regulatory restrictions on the use of derivatives has dragged on the structured products market and limited investor choice, according to Sydow. “Exchange controls continue to complicate matters given they have to be listed on the Johannesburg Stock Exchange (JSE) should they reference offshore indices – which in our opinion is where most of the demand is,” said Sydow. “Structured notes are not allowed in tax-free saving accounts given the presence of a derivative, and this is despite their obvious long-term savings appeal. In addition, synthetic or swap-based ETFs are not allowed, despite the obvious cost savings and efficiencies for investors.”

Furthermore, the choice of investment wrapper is posing challenges because not all independent financial advisors are licensed to use listed notes, “which are seen in same light at stocks and shares and, as such, the distribution of notes in unwrapped format is to a very limited universe”, according to Sydow.

“[However], the emergence of the endowment wrapper is opening up new opportunities to provide structured solutions to retail investors but, in the same breath, limits trades (in the main) to five-year tenors,” said Sydow. “The use of this wrapper has increased and Absa is certainly a beneficiary using them to increase its distribution footprint. This wrapper also make sense from an investment perspective in the cases where the life company has an assessed loss and is able to shield investors from tax payable on returns (highest rate of personal income tax in SA is 45%), given these would be offset by the life company using it’s losses to pay tax.”

The SRP Africa Structured Products & Alternative Investments Conference will take place on November 1-3, 2017 in The Maslow, Johannesburg. Click the link to register.

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