Rising equity markets made 2017 an amazing year for maturing structured products and contributed to the excellent performance across the market, according to the SRP European Performance & Market Presentations panel speaking at the 15th Annual Europe Structured Products & Derivatives conference at Etc.venues, County Hall, London on February 9.

The 25,698 tranche products from Europe analysed, worth over US$130bn and maturing between October 2016 and September 2017, returned an average of 3.75% (weighted by volume), three times the 1.22% recorded in the previous year.

Last year was phenomenal, according to Ian Lowes, managing director at Lowes Financial Management. "Only five of the 658 products we marketed to retail investors ultimately matured with a loss; the rest matured with a gain," said Lowes.

Knockout structures pulled performances upwards, providing for the early redemption of products launched during both 2015 and 2016. "The market has been very favourable to autocallables and we have seen several series of products that triggered the autocall threshold last year," said Joost Burgerhout (pictured), managing director, head of private banks sales at Commerzbank.

According to Mikael Axelsson, chief executive officer at Garantum, investors in Sweden, Norway and Finland also favour autocallables as they are used to and understanding them well. "That won't change in 2018; the trend is here," said Axelsson.

Besides autocallables, Garantum has also marketed credit-linked notes, which have also produced good returns, as well as some capital protected products, "which gave amazing returns given the risk level", according to Axelsson. "Garantum has a history of reverse convertibles going sour in the past which people still remember," he said. "We have been fortunate enough with autocallables so far."

An impressive 60% of all structured products distributed in Europe over the same period recorded an annualised return above 2%: on average, 70.5% of the maturing structured products, notably capital protected, leveraged, yield enhancement and autocallable products, returned between 0% and 8%. Less than 5% of the products returned a negative performance, according to SRP data.

The highest average of 8.91% made Meteor Asset Management the best performing distributor across Europe for the period, followed by Garantum, Commerzbank, Investec and Exceed Capital, according to SRP data. BNP Paribas was the issuer boasting the highest average annualised return, followed by Morgan Stanley and Commerz.

"Over the last couple of years, more and more clients have been asking about 'bullet' rather than accumulated coupons," said Burgerhout.  "A coupon paid at the first observation date is clearly something that several private bank investors have been interested in. During 2017, we issued €600m-€700m, of which 85% were called thanks to extremely positive equities markets."

Two worst-off Commerz autocalls became the best performing products last year, according to SRP database. "Both are a classic sort of autocalls, where the first observation takes place after a couple of weeks with a 'bullet' coupon," said Burgerhout. The first product paid a coupon of 6% when knocking out after only two weeks. For comparison, it would have resulted in a very impressive return of 357% per annum. The second example is a similar structure, listed in Italy, which paid a coupon of 10% when called at the first observation date, after one month.

"Clearly, these are not products that are suitable for every audience," said Burgerhout. "We have tended to issue those only on request as private placements: 85% of these structures that we have issued in the last 12 months have been called - the majority within the first two months. Obviously, there is a very big downside risk in the worst performing underlying. [Hence], the barriers tend to be anywhere between 70% and 80%, depending on the issued structure. Besides, it is very important that clients are comfortable with the stocks they choose, and [in the worst case scenario] willing to take the physical delivery of the worse performing stock," said Burgerhout.

Panelists attributed the 'hunt for yield' as the main attraction of worst-ofs. "Some clients are not very comfortable with the worst-of equity risk that a lot of Swedish autocallable products feature. They would rather buy CDX or iTraxx Crossover indices with a decent coupon," said Axelsson.

According to Burgerhout, "on index side, we see a bit of both". "On the equities side, we see a lot of worst-ofs," he said. "Especially in private placements, the majority of products are tailor made, clearly stock picks. And, hence, clients have a clear opinion or conviction to go for a certain set of stocks. It is a slightly different market from the public space, where people tend to go for more conservative payoffs," he said.

"It is always going to be a function of the risk versus the coupon," according to Lowes. "Investors accept that they can compare a single and a dual index, and single out the differences," he said. "[On the other hand], the products that go wrong in retail ultimately give rise to a lot of heavy austerity in dual-index or multiple-stock contracts."

"The one thing that the market continues to do is to surprise us, and we can't predict where it is going," said Lowes. "Having a dual index contract with the level of correlation we have seen in the past, should be ok, but are all bets not off? With Brexit and Trump, we took a move away from any dual index contracts post referendum. We stood by that."

The market correction at the beginning of February has returned volatility to the market, allowing the launch of products with better conditions and higher returns, according to the industry. "This year is going to be phenomenal for structured products," said Lowes. It has been very difficult to structure autocall contracts that looked competitive enough, but they still have been very popular, particularly with the step-down call. This volatility spike is going to provide a great opportunity," said Lowes.

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