Dresdner Kleinwort Wasserstein (DrKW), the investment bank of Dresdner AG, was one of the first banks to bring together debt and equity product areas under a single reporting line back in 2002.
Three years on it has built on that integration to become the latest bank to establish a retail-focused global structured products platform.DrKW’s global Retail Solutions Group was formally created in early August this year under the leadership of Alberto Garcia-Elias to offer private banks and other retail distributors an integrated cross asset-class structured products platform. “The market as a whole is growing, as opposed to corporate risk management or institutional structured sales, where the growth is less obvious,” explains Garcia-Elias.
The DrKW Defined Funds platform, which followed that launch, has a unit trust-type focus, and has so far issued three equity-linked Ucits sub-funds, one-year European and Japan Enhanced Index Funds and the sterling-denominated US Accelerator Fund. Two more products, linked to commodities and hedge funds, will soon follow in non-Ucits wrappers.
The platform consists of both Ucits funds, the Gresham Defined Funds, and non-Ucits (Nurs) funds, the Fenchurch Defined Funds. Both are UK-domiciled and FSA-regulated Oeics.
This regulatory detail is important. Garcia-Elias believes structured products will emerge from their niche status in the UK now they can be developed within a regulated onshore environment. It adds another layer of comfort, he says.
Garcia-Elias has a broader focus than the UK market, however. His post, which he took up two months ago after 11 years at JP Morgan, was designed to create ownership and focus for an erstwhile scattered retail structured products business.
Garcia-Elias describes this existing business as ‘meaningful’, but until he arrived there were no retail structured products teams outside Germany, where the bank had built a business in the certificates market. Retail-business clients elsewhere were serviced by the teams that were covering institutional investors.
Since retail investors have developed into a distinct client base, the bank is creating a service to match: “We are giving the business a new focus and aligning the infrastructure,” says Garcia-Elias.
The integration of underlying asset classes within a broader derivatives business is, if not necessary, an advantage at least, when it comes to creating a global structured retail products business. With equity and fixed income-based products forming the bulk of issuance, Garcia-Elias says the structured products unit has been placed inside the broader global derivatives group where the majority of products are.
Garcia-Elias believes DrKW is one of the few banks serving the retail structured products market that has a truly integrated platform. The dominant model, he says, is to align retail structured products initiatives with single product areas, even where banks talk of offering a ‘one stop shop’.
Garcia-Elias reports to Matteo Mazzocchi, head of DrKW’s global derivatives business, which incorporates structuring and complex derivatives trading across equity, credit and interest-rate businesses. DrKW still keeps its FX and commodities businesses separate from the global derivatives platform, and the Retail Solutions Group works closely with the commodities and FX desks to create products.
In some ways, DrKW has gone further than Deutsche Bank by integrating the sales team selling across asset classes into its retail structured business. As well as reporting to Mazzocchi, Garcia-Elias also answers to global head of sales and marketing and capital markets co-head Tarek Mahmoud.
“The clear advantage of having a team solely dedicated to covering retail clients is the specialist focus on client needs and how to get the business done,” says Elias. “Clients need good service and consistency of service. A group of people can do that across asset classes and understand and support client needs,” he says. “And you can leverage the client relationship… you’re not calling three different people to get something done.”
Like other banks in this space, DrKW’s watchwords are support and service, with an emphasis on hi-tech delivery and secondary market liquidity, and in DrKW’s case, on specialised retail documentation.
Headline task number one is developing a first-class infrastructure. This creates two key challenges: a technical infrastructure capable of providing secondary market liquidity in retail sizes, and a legal infrastructure capable of supporting public offerings, Ucits and so on. DrKW, like all investment banks, is set up for institutional transactions, but since it is also part of a wider retail organisation, new asset classes can be integrated into an existing infrastructure.
Garcia-Elias is not giving much away in terms either of regional plans or external distribution relationships, which he says the group is still assessing. The products launched so far were created in conjunction with asset managers Kleinwort Benson, whose distribution also seems likely to be a major focus of the Defined Funds platform, at least for the time being. Another distribution focus is likely to be Dresdner’s retail network.
The team has 45 members so far, fifteen to twenty of which are in structuring and trading, with the rest playing sales roles. Though there is no target head count, the aim is to have structuring expertise for all the major regions – the major European centres and south-east Asia ex Japan. There are also plans to increase the head count on the sales side.
Regionally, Europe remains the largest market. South East Asia is definitely growing, as are Japan and the US to a lesser extent. All these markets, however, are becoming more competitive, says Garcia-Elias.
This brings the logic full circle: recognising a growth market is not enough; to excel in this space you have to stand out by organising yourself specifically for the retail market, leveraging off a broader platform to create individual country strategies, even where regulations allow the passporting of products. “The relevant payoffs and economics of a product change a lot from one country to another, as well as the wrappers of choice” says Garcia-Elias.
A commitment to the UK market is clear from the creation of locally-regulated Ucits and Nurs products, and from Garcia-Elias’s pronouncement that the market has intrinsically more room for growth than other European centres.
Yes, the UK market is challenging from a regulatory perspective, and stymied by memories of precipice bond mis-sales and fragmentation of wrappers, but it will ultimately develop and become a significant part of the European market, he believes. “At the moment everybody is looking at each other, the banks, the distributors, the regulator, and there is no consensus on the way forward,” says Garcia-Elias. “People need to talk more to each other, and the FSA needs to become comfortable that structured products are not inherently problematic.”
Garcia-Elias also expects much of this future business to be done in a fund format, since they bring regulatory comfort and transparency, and he expects Ucits to become a key wrapper. “It’s early days,” he says, acknowledging that there are still issues such as permissible underlyings to be agreed upon, “but at least there is a solid backbone of rules telling you what to do in 95% of cases. It’s a good start.”
