In the second of a two part interview, Eric Bensoussan, head of European equity derivatives structuring at Deutsche Bank, talks about why Ucits funds are taking centre stage as well as the current investment themes in the structured products market and why risk premia remains in focus.
Funds are becoming more important within the overall offering because the commoditisation of structured products is making it more difficult to get exposure to some assets and the fund wrapper provides an efficient vehicle to offer a wide range of exposures in a unified Ucits framework.
“Funds can be an interesting way of offering market exposure via structured products,” says Bensoussan. “We have seen it in the UK recently where a number of players have revived the fund wrapper in the structured products market. Developments in the UK around the fund wrapper are linked to the impact of the RDR and the alignment of interest it provides to all parties involved: issuers, distributors and end investors.”
The German bank is of the view that the fund wrapper is “an interesting way to offer alternative ideas and be innovative”. The fund wrapper is more flexible than notes and bonds, and it can also provide the same exposure to markets.
“The only hurdles are the time to market but also the size of a fund to be viable,” which is why when trying a new concept or strategy, the first choice for manufacturers is the note “because it is the fastest way to deliver strategies to the market quickly”.
“[However,] the fund is also a very interesting vehicle to deliver strategies or assets on which you have a strong conviction,” says Bensoussan. “We have seen significant inflows into multi-asset funds in the wealth management space over the last few years. These funds are sold on the basis that they offer protection through their bond exposure but concerns around the protection capacity of bonds in the current low interest rate environment remains.”
The bottom line is that investors are looking into diversification from equities but it is not clear that bonds can provide the necessary cushion in case of an equities selloff.
This search for diversification is good for structured products as they can offer protection in other ways.
“That is why we have seen manufacturers looking into new ideas around risk/volatility control as a way to provide diversification and other sources of protection and risk management,” says Bensoussan.
Investment themes
Risk premia and smart beta strategies have been around for 10 years or so now, and the German bank has pioneered this market and have a comprehensive offering aimed at institutional investors.
“What we’re trying to do now is to leverage that know-how and deliver this to retail investors,” says Bensoussan. “These products can add value in the current environment where outright beta exposure brings high level of uncertainty (valuations in equities, rates levels in fixed income).”
According to the Deutsche executive, exchange-traded funds (ETFs) can capture significant amounts of beta from the market while fund managers can generate some alpha, but with risk premia strategies “we just go one step beyond by replacing the manager’s bias and improving the overall visibility of what clients are exposed to, and you can see potentially where the alpha captured by the fund manager comes from, which is a very interesting proposition for end investors”.
“Smart beta strategies also provide transparent, rules-based strategies that manages risk in a systematic way and offers a cheaper investment option and therefore more upside to the end client,” says Bensoussan.
Cryptos
Crypto assets have become one of the main investment themes this year with institutional investors and hedge funds driving some activity. However, for these assets to become really mainstream, there needs to be a solid regulatory framework, according to Bensoussan.
“We have seen recently a number of savvy investors seeking exposure to bitcoin and other crypto currencies but for retail investors to really embrace this kind of product we need to have access to accurate pricing and a transparent market,” he says, adding “the technological concept behind these cryptocurrencies is very interesting but there are a number of grey areas that need to be clarified.
“You can’t really push this kind of product into the retail market without having a transparent price for each currency and a regulatory framework,” says Bensoussan. “This is a major issue at the moment as everything is being done on a silo basis and there is no global framework to refer to. We have seen a similar process with structured products. Now that we have a global regulatory framework, the structured products market is growing and established itself as any other investment product.”
ESG
Sustainable investing as a concept has also been around for over 10 years now with Deutsche Bank also at the forefront of development following the launch of a low carbon index in collaboration with S&P as well as a Croci carbon index in 2007, but nowadays, this is a theme driving activity across the board and across jurisdictions, which is getting traction among institutional and retail investors alike.
“ESG has also proven to be an attractive driver of activity as we move towards a green economy,” says Bensoussan. “Demand from institutional investors has forced the market to react and most product manufacturers now have an ESG range on offer.”
According to Bensoussan, the market only needs a handful of players and investors to make a theme attractive, and ESG is also an investment concept that is getting increased popularity with many institutional and retail investors.
“The challenge is to provide quality performance alongside ESG exposure,” he says. “Investors do not want to compromise performance and this can be a constraint. The philanthropic element is very important for investors in these products but [they] want to generate returns. These products need to deliver performance or they will not become mainstream.”
The market is now at a stage where ESG products are showing that they can deliver yield and sit alongside other products in a portfolio, which wasn’t that clear a few years ago.
“More and more, ESG products compare at par with non-ESG products,” says Bensoussan. “One of the appealing elements for structured products as a delivery mechanism for this kind of exposure is that they can deploy sustainable assets alongside other strategies and underlyings such as smart beta.”
Alpha-dig
To capitalise on the increasing demand for ESG products the German bank is leveraging the data available out there today to “build very interesting products”.
Deutsche Bank’s Alpha-dig has helped the bank to build a very strong offering based on exhaustive data and news around the world, says Bensoussan.
“This tool also allows us to look at different sets of data and filter it according to our clients’ needs almost in real time,” he says, pointing that Alpha-dig shows how the different players are moving to capitalise on the increased demand for ESG and sustainable investments and use data in a more efficient way to deliver topical products that address specific needs from investors.
“This we can apply not only to ESG but also to other themes such as artificial intelligence,” concludes Bensoussan. “Alpha dig helps extract value from the information and data already available but not easily extracted by human beings.”