In the second part of an interview in the run up to SRP Africa Structured Products & Alternative Investments Conference, Ryan Sydow (pictured), head of distribution, structured and risk solutions at Absa Capital, explains why a structured products association would help galvanise the industry, how technology can help speed up market and product development.
As opposed to the UK or other European markets, where associations were launched to counter bad and negative press, in South Africa there is no such problem because of a combination of good performance and responsible product design and sales practices, according to Sydow. "Self-regulation is an interesting way to develop the market, but, as an industry, all the players want to be in the front foot and be proactive as opposed to being reactive," says Sydow. "It's purely down to an issue of finding time to constitute the body, which is a terrible excuse I know but a true one nonetheless."
The general trend to use technology across the board "whether you are an insurance company a stock broker or a wealth conglomerate" prevails, according to Sydow. "We have seen significant improvements brought by technology across various market participants and in no small measure the launch of two new stock exchanges in South Africa is testament to that," says Sydow. "This is a very interesting development for the structured products market because exchanges are active supporters of what could be termed alternative investment products and not looking to compete with the JSE in large cap traditional-listed equities." These new exchanges can help develop the alternatives segment "once the plug into all the distribution channels is complete," he says.
Since Absa separated from Barclays, the focus has been on building up the infrastructure technology to leverage the distribution, according to Sydow. "It's fair to say that we are in favour of looking at a multi-issuer technology solutions, but are not naive enough to expect a fully stitched-up end-to-end solution for clients to be cheap or easy to implement, given the intricacies of this market," says Sydow.
Absa continues to bank on its 'two-in-one' range which provides a 50/50 split between a fixed-income and market-linked account. For this range, the bank is using an index designed in conjunction with Commerzbank and which is shortlisted for the upcoming SRP awards. "The general premise of the index is along risk premia allocation lines with a target volatility (15%) overlay," says Sydow. "In the long run this kind of products will deliver value to investors, and help to sell the risk story within the index design or as a payoff feature. Products linked to pure market-weighted indices will continue to have a role, but smart beta strategies are also well placed to provide an attractive proposition to retail investors. We will not give up on beta, but we are certainly putting more emphasis on risk smart indices."
The partnership with Commerzbank is but one manifestation of collaboration between "our very strong quant and index team and those of an independent partner, according to Sydow. "Another example is the collaboration with the University of the Witwatersrand that has given rise to three new South African risk premia indices (in ETF format for now) on which we hope to start being able to price options," says sydow.
Sydow remains positive about the future, as "the market still provides enough room for issuers to differentiate their offering without having to compete yet on headline rate “as we have seen in other markets where the duplication of products is a fact of life given how interest rates have dictated that they all inhabit a certain corner of the market”, and it will also benefit from an expansion of the payoff profiles available. "Risk control strategies will continue to go down well because of the ability to shift from risky to non-risky assets: whether that will be Tipps, PPP, target vol, CPPI or any other form remains to be seen," says Sydow.
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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