In the second part of this interview, Fortem Capital founding partner Ryan Rogowski discusses the use of funds as a defensive vehicle to manage risk but also to take advantage of opportunistic trades. He also touches upon what products will deliver value in the current environment and how the firm plans to leverage on its business model to grow its business

What products are you considering in the current environment?

We are looking at more defensive options and alternative options. We work very closely with our partner banks because they have great ideas. It can be a simple tweak on a traditional structure, looking for example at equally weighted FTSE instead of market-cap weighted FTSE. Reminding our customers that the top 10 companies in the FTSE 100 make up roughly 40% of the index. Who wouldn’t at least consider the equally weighted index?

Then you have the fixed dividend indices, or decrement indices, which are becoming very popular. If you think about the banks, there are systematic reasons why future implied dividends become depressed: it’s because of the hedging from the structured products banks and dealers. That provides two opportunities, one is that investors can opportunistically buy future implied dividends at a nice discount to the current levels. But this depression also artificially inflates the equity forward. It makes the banks’ models think that the future price return index is going to be higher than it should be, because the further the dividends go down, the more the forwards go up. By using these fixed dividend indices, by neutralising that pricing factor, we can provide more efficient pricing for customers.

Can you use funds as defensive vehicles?

Yes, but that of course depends very much on the fund and the overall needs of the client. If you are thinking about the traditional discretionary asset manager, especially in the new regulatory environment, they will spend the time assessing the needs of their clients, they will understand the risk profile, and then they will construct a portfolio. You may have everything from a conservative risk profile, to a balanced or an aggressive risk profile and have a range of funds with differing risk profiles can assist the managers in the construction of their portfolios.

Can funds be used for opportunistic trades?

Yes, but it depends very much on the fund and the mandate. If you take our fund, we have a minimum of 80% invested in core defined return investments. We have a second investment bucket that can invest up to 20% in what we call ‘diversifiers’ and within that sub-bucket we have an opportunistic capability. So yes, we can do opportunistic trades.

We have seen a trend on the notes side recently for clients looking for supertrackers. Basically, growth products providing uncapped and geared upside. Clients are looking to take advantage of the recent market pull back along with the correspondingly high initial deltas that a highly geared product can offer. A structured product that has 400%-500% participation at maturity will have a very high initial delta. If a portfolio manager is looking to take a bit of risk off the table, if you have an initial 200% delta, you only need half the investment to get a full equity exposure. Keeping in mind of course that this is a structured product and therefore the investor both takes on credit risk and forgoes dividends. Our investors understand those risks and are in a position to take a view.

What other products do you think will deliver value to investors this year?

There are other solutions from other asset classes that we are currently working on. A lot of people are talking about steepeners, playing the difference between the long and short end of the US rates curve. There are many reasons why that trade could work. It hasn’t necessarily delivered so far but by actually investigating the potential drivers, not only the payoffs, we can more successfully match up solutions with the needs of the client. Short-term rates in the US tend to be anchored to the Fed and if market expectations start to change (ie the market thinks that the Fed is going to start to cut) the two-year rates tend to fall. You do not necessarily need 10-year rates to rise in order to see a steepening of the rates curve, your steepener can just as easily be driven by a fall in shorter term rates.

Bottom line, for traditional holders of equities a steepener could act as a great portfolio hedge which the market is not currently pricing it in.

How do you differentiate from your competitors?

We work in a proper partnership with our panel of banks. From a commercial perspective, we can provide significant flow to our tightly managed panel of banks and in turn receive better pricing, better service and better ideas. A proper partnership with an elite panel of banks is how we differ from our competitors.

In terms of experience and training, we are much more solution focused than others in our space. We are not here to sell an autocall everyday. If we spend time truly listening to our clients better than others, we can understand what our clients are doing and work to more efficiently match their needs with what can be done in the derivatives and structured space.

We spend a tremendous amount of time working with investors to better understand pricing and the value of a strong credit. Saying ‘look, a high coupon is one thing, but is that the best price, is that the best value for money?’. We do a lot of work in educating our clients that sometimes the best price is not the best credit adjusted price.

What are your plans for expansion, coverage, markets, team?

We are in expansion mode across all businesses. On the fund side we have just brought on board a tier 1 fund manager named Toby Hayes who is a specialist, not only in derivatives, but also in risk-premia and factor investing. On the product side, if you look at the volumes, autocalls make up a large proportion of trades.  The investor base is used to these types of payoffs and they are used to their profile at maturity.

Generically most of the discretionary managers are happy with capital-at-risk, typically via European knock-in puts and a reasonably defensive barrier, normally around the 60-65% range. Most structures have that. One because managers are happy with capital-at-risk and two because it allows the banks to deliver the products via a tax-efficient wrapper.

The plan at Fortem is to continue to expand our fund offering and build up our sales coverage.