Active management certificates from Credit Suisse issued from early this year were the pick of private banking products offered in Asia-Pacific, according to a panel speaking at the SRP Asia-Pacific Structured Products & Derivatives Conference at The Renaissance Harbour View Hotel in Hong Kong on September 19. The structured products are based on a fixed-maturity bond portfolio and provide a quarterly payout of around 3% with sales volumes at around US$2bn. The initial maturity was short, between two-and-a-half to three years, although a tenor near five years was required in the latest issuance, which took place in the first week of September.
"We have seen a move away from pure equity-linked notes on the flow side, which happened a couple years back, with people moving into fixed-income coupon notes, giving them more yield because they are taking on additional risk, with two or three underlyings," said Roger Meier, head of structured products advisory, Asia at Julius Baer. "Lately, we have seen people going into a lot longer dated structures again, not so much in Southeast Asia, but we do see it a little bit in North Asia and the Middle East region, people going into four- to five-year worst-of structures, Phoenix type of notes, where your coupon is not guaranteed and needs to be above a certain level."
Volumes have certainly been lower since the beginning of the year and there has been less traction from traditional equity-linked products. "We have seen a trend to move away from equities to other asset classes, such as commodities and interest rates, especially constant maturity swap trades," said Antoine de Charnacé (pictured), head of structured solutions at DBS Private Bank. "We have seen investors moving away from cash bonds to take more risk and consider structured solutions as a fairly good alternative."
While traditional yield plays are getting more difficult to create, ultra-high net worth investors, with their big investment amounts and their own team to do due diligence, and their own strategy value, have looked at any asset class, according to Bart Wong, head of strategic advisory and private assets group, Greater China at Credit Suisse Private Banking Asia-Pacific. "More and more, they are looking into the alternatives, which can include private assets," said Wong. "The structural feature does not necessarily drive the deal."
Among those products that have seen success are credit-linked notes (CLNs). "They have to be classified as risky, but whether they are the most risky depends on the regime and the regulator you are talking to," said Wong. "It is a complicated product, but that does not mean it should not be sold to private investors, because the definition of professional investor depends on the regime, and there are 10 jurisdictions in Asia. You can use the same arguments against CLNs with other products, such as equity-linked notes."
When asked, around half the audience at the conference put their hands up when asked whether or not they believe a CLN is complex.
The main educational need lied in defining a credit event, and it is essential that when a private investor is buying a CLN that he understands the basics of the Isda framework. "Education plays a big part," said Wong. "If credit-linked is complicated, what about equity-linked? What about FX-linked? Is it too complicated? It is more that it is complicated, and what we need to do to make sure investors know what they are walking into and that we can prove it with an audit trail."
Furthermore, some CLNs look very good, depending on the issuer you use. "If the funding of an issuer is very rich, then you will get very good funding," said De Charnacé. "On top of this, there is liquidity: I can only go back to the issuer, so it cannot be treated as a bond."
While the effect of Brexit on private banking investors in Asia-Pacific was limited to non-existent, the run-up to the June 23 vote and the aftermath did affect investor behaviour. "A whole flurry of activity followed, with investors still seeing the UK as a very good investment, especially now the pound is cheaper than before," said Wong.
The main happening after the referendum was a weaker pound, which has created a buying opportunity. "It is not even clear if Brexit is going to happen! People were holding back with their investments, but it only took a few days before business was back to normal," said De Charnacé. "Flows have been steady since April, after a terrible first three months."
There has also been a muted response in the region to the advent of risk premia. "Risk premia is a lot of hype and noise, but not a lot of action," said Meier. "Trades are few and far between. They are not the simplest trades, you need to have a specific understanding of the underlying, and the expected return. We probably need to spend a bit more time making it as popular as the other asset classes."
While the volume and flows in risk premia are not there, "we see some demand for very specific, market neutral trades playing one sector against another," said De Charnacé. "Recently, we have seen some traction in selling the Hong Kong property sector - not the physical - against financial stocks in Hong Kong, which is rational, as these property stocks rose quite a lot on the run-up to Brexit; and we are expecting the financial names to benefit from the Shenzhen Stock Connect.
"The interest we have seen in risk premia is more from the portfolio management side," said De Charnacé. "Our discretionary guys have some risk premia in their mandates, but it is too complex for private banking guys to understand. It is a difficult sell, but it works as an overlay for portfolio management. If the markets are down heavily, you would be able to tell if it delivers."
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