BMO: Complexity increases, durations lengthen, as low rates push risk appetite
Q&A with Laurence Kaplan, head of US investor solutions at BMO Capital Markets.
The head of US investor solutions at Canadian BMO Capital Markets, Laurence Kaplan, spoke to SRP about the current state of the US structured product market, the bank’s current priorities and how providers and investors are reacting to the low interest rate environment and current pricing challenges.
How would you describe the current state of the US structured product market and how do you see it evolving?
We perceive the US structured products market to be as robust as it has ever been. The US stock market’s historic growth is still enticing investors who are seeking returns, but the government’s fiscal crisis is also giving US investors pause for concern. This dichotomy has given rise to a US investor base that needs to allocate risk, but also needs to implement that allocation on a controlled and managed basis. Structured products stand among the leading solutions for this need. In this respect, we don’t expect our role, as structured products strategists, to change. We will always listen to our clients’ investment wants and find the most simple and transparent ways to fulfil them.
In light of the current pricing environment, do you foresee more innovation or complexity around payoff-types or should we expect innovation /complexity around the underlying instead? What is the focus of your firm in terms of innovation?
The low interest rate environment is a challenge for both structured products investors and issuers. The lower that interest rates decline in absolute terms, and the tighter that credit spreads become, the more we will need to think creatively to respond to our clients’ needs. BMO’s focus always has been, and will continue to be, bringing solutions to our clients that are responsive and that minimise, to our best ability, the complexities. We do not expect to see a meaningful shift in the underlying asset classes as a result of the ultra-low interest rate environment.
How is the low interest rate environment impacting structured product issuance? How do you offer value – by offering a trade-off on capital protection or by using cheaper (more volatile, single shares, prop indice) assets/options to structure, or a combination of both?
US interest rates have been in slow decline since 2007. We have observed in the US structured products market, in response to this decline, that there has been a gradual shift towards greater complexity and longer duration. Longer duration, reduced capital protection, and/or increased complexity may be determined, through the investor dialogue process, to be the right solution. If so, then we believe that it is our role to educate investors and their advisers, and to complement that education with robust, clear disclosure. Complexity, duration, and these other tools are not per se negative; indeed, many may argue that in this environment they are a necessity. But we also believe that client value is created not just by delivering a solution, but also by undertaking efforts to elucidate the benefits, risks, advantages and shortcomings inherent in that solution.
Are US investors prepared to take more risk in exchange for higher yields?
If the US structured products market is any indication, as evidenced by the issuance league tables, then, yes, there is a segment of the US investing public that is struggling for yield and that has expressed an interest in taking more risk to achieve greater yield potential. These investors have looked to structured products to help fill the void. We believe that investors are considering structured products along with other, traditional sources of enhanced yield, including high-yield bond funds and ETFs.
What is the secret of the success of your business? Is there a differentiating factor in your offerings?
BMO’s approach has always been to put the client first. We initially constructed, and over the years made adjustments to, our structured products offering platform to be as helpful and relevant to our clients as possible. Feedback from our clients has been as important as our own innovation. We believe that our secret has been the discipline to listen and the conviction to be nimble and adapt. Our secret is in our customer service.
How do you feel about the current state of the domestic structured products market and what is your outlook for the coming years?
We continue to be very sanguine about our segment of the US retail investing marketplace. Structured products are not meant to replace traditional cash investments like stocks, bonds, ETFs and mutual funds. Structured products are meant to complement and supplement those investments, and to help investors and their advisers implement risk management strategies, when the traditional selection of investments lacks depth. In this respect, no matter the challenges that the global markets may bring us in the coming years, at BMO we will be business as usual: listening to our clients and adapting to the changes.