Six: structured products have delivered as a risk mitigation tool

Structured products remain an invaluable supplement to retail investors’ portfolios at a time when getting decent risk-adjusted returns through traditional financial instruments such as fixed income and equities has become a struggle, according to Andre Buck (pictured), global head sales securities and exchanges at Six.

Speaking on an expert panel at the recent SRP Europe conference in London, Buck acknowledged that structured products had enjoyed a positive performance in 2018 despite wild market movements and geopolitical instability compared to many active asset management products, which have notably struggled to produce returns.

Buck pointed at the recent Structured Product Performance Review released by Lowes Financial Management, which unveiled that not one single capital-at-risk structured product maturing in 2018 produced a loss, with gains averaging around 6.33% in aggregate.

"Structured products performed well last year and investors are certainly satisfied with their returns,” said Buck. “However, other investment vehicles such as exchange-traded funds and passive tracker funds have produced much better performance than structured products over the past decade."

As a result, retail capital inflows into cost efficient ETFs and passives have far outweighed what structured products have accumulated recently, according to Buck.

ETFs globally now manage around US$4.8 trillion, having benefited from the 10-year long equity bull run, said Buck, adding that while ETFs have numerous cost, return, liquidity and transparency benefits for clients, structured products can help investors achieve better diversification, as they are not simply following a benchmark. SRP data shows that the overall outstanding volume invested in structured products stands at US$2.05 trillion across over seven million products.

According to Buck while traditional financial instruments and asset classes should still form the bulk of investors’ portfolios, structured products are a useful overlay to have as a risk mitigation tool, especially in falling market conditions.

Buck also noted that criticism about structured products being unduly opaque and excessively complex is also receding, a development which may result in more advisers recommending the asset class to their underlying clients.

Headways

"The industry has advanced tremendously, and investors are now able to get more pricing information about structured products through platforms and exchanges, which enables best execution," said Buck.

Structured products have also been on the receiving end of increased regulatory oversight over the last few years. Tighter product governance rules introduced under the wide-reaching Markets in financial instruments directive 2 (Mifid 2) now requires intermediaries to validate whether certain asset classes are suitable for their clients’ risk profiles, said Buck.

However, Buck warned that any future regulation of structured products needed to be carefully thought through and sensible for the industry to continue to flourish, and questioned that structured products would benefit from additional regulation, mirroring Ucits or AIFMD (Alternative Investment Fund Managers Directive), both of which helped create fund management brands in their own right, leading to increased flows.

Six reported today that new listings for ETFs, bonds and structured products increased, with the ETF segment setting a new record with 1,450 listed products (+274 new ETFs).

On the structured products segment the exchange saw an increase of 10% in structured products listing to over 39,500 but the trading volume decreased slightly, according to Buck.

However, Six’s listing functionality and infrastructure for structured product data Connexor registered a growth of 40% on structured products activity – over 1.1 million products were disseminated throughout the platform including listed but also OTC trades.

“We continue to work very closely with issuers to improve the offering,” said Buck, adding that the exchange has just launched a new payoff classification to accommodate leverage products with knockout payoff profiles. “This means that if a product knocks out within 11 days of trading the issuer receives an additional listing with no extra cost. We hope this will encourage issuers to list products with tighter strikes and widening the offering for investors seeking this kind of products.”

SRP data shows that the outstanding sales volume linked to structured products in the Swiss market stands at US$51 billion across more than one million products including non-retail and flow products. In 2018, more than 200,000 products were sold in Switzerland worth US$22.9 billion.