In part two of an interview, Wiveka Burvall, head of structured products, and Erik Svensson (pictured), a structurer at Skandia Investment Management talk to SRP about why the Swedish investor has a preference for credit-linked notes (CLNs), the impact this year's volatility in the financial markets has had on issuance and sales volumes in Sweden and their view on the recent decision of the government to reverse the proposed ban on commissions for financial products.
CLNs are a popular feature of the Swedish market, much more so than in other European markets such as Italy, France, Belgium, The Netherlands and the UK, where these products are few and far between, and, according to Svensson, this could be due to the fact that providers in Sweden have been able to distribute slightly more complex products. "You could argue that a CLN is a more complex product than, for example, a basic non-capital protected equity-linked note, as it requires a certain familiarity with concepts such as credit events and recovery rates, rather than 'just' being dependent on 'observable' stock prices or index levels at predetermined dates in the future," said Svensson.
This does not mean that a credit-linked product is necessarily very risky compared to other structured products, such as autocallables, according to Svensson. "However, the appetite and possibility to distribute that kind of product has probably been bigger in some of the Nordic countries than other European countries," he said. "Also, traditionally, Swedish investors have proven to be quite open-minded when it comes to new markets and, or payoffs - this might be part of the explanation."
Burvall agrees: "The appetite for products not linked to the equity markets is much higher at the moment," she said. "One product that is currently open for subscription, Räntebevis Europa 200 Bolag, is quite a low risk product that attracts investors which are perhaps not really interested in equities but more into fixed-income funds or interest rates."
Both issuance and sales volumes of structured products are down in Sweden compared to last year, and the volatility in the financial markets has certainly played a part, according to Burvall. "People in general are a little bit more scared to invest," she said. "[The volatility] is very likely an important factor and the sluggish equity market performance also decreases roll-over opportunities - fewer products are being auto-called and there are fewer opportunities to lock-in mark-to-market gains," she said. However, structured products are not the only investment product suffering from the volatile start of the year, claims Burvall. "If you look at figures from the Swedish Investment Fund Association (Fondbolagens förening), net savings for equity mutual funds are down €2bn this quarter."
Over the past few years, proactive initiatives within Structured Products in Sweden (SPIS), the Swedish trade association of which Skandia is a member, have been very beneficial for increasing transparency and making structured products more client friendly, according to Burvall. "We are regularly in dialog with the Swedish FSA and the Ministry of Finance," she said. "We have developed common standards for language used in marketing materials, including statement of fees, the SPIS risk indicator and the annual review of distributors form."
In May, the Swedish government decided not to introduce a general ban on commissions for financial products despite the tightening of the consumer protection guidelines for intermediaries in an effort to limit conflicts of interest and improve financial advice among retail investors, a move which is seen as very positive by Burvall. "Yes, we think it's good," she said. "Now the details have emerged, we know a lot more than a couple of weeks ago, and we hope this will calm the market a bit, because many insurance companies, savings companies, retail banks have been so unsure and did not know what kind of business model they should focus on," said Burvall. "It will be very good for competition in the Swedish market and it will also benefit the investor, as we are still able to use external distributors and not only the distribution networks of the big banks."
For the immediate future, Skandia wants to continue as it does now, which is, "educate clients, focus on doing products adapted to the current market environment, with a sensible balance between possible return and risk, and we also hope to do more via the internet and on digital platforms."
Skandia has launched 38 structured products in Sweden this year to date. The products, which are linked to either credit or equities, are issued via SEB (23), Societe Generale (five), Handelsbanken, RBC and UBS (one each).
Home bias Swedish investor more apparent in volatile markets, Skandia
Sweden Market Review - May 2016
Commissions are in the best interests of the investor and EC laws need clarification, Finansinspektionen
Product snapshot: Skandia credit linked certificate targets Markit duo
Structured products responsible for 16% of total revenue, Mangold