SRP America 2020: strategies for Latin American markets

Panellists at the Strategies for developing a secondary Latam structured products market panel discussion at the virtual SRP Americas 2020 Conference on 15 September, discussed their goals and challenges in some of the region’s upcoming markets.

The biggest challenge in Brazil was training the financial advisers - Maite Kattar, XP Investimentos

As one of the most active players in Latin America, Brazil has embraced a rising structured products market since late 2015 when the country’s regulatory authority began to allow distributors to join issuers to sell structured products, according to Maite Kattar (pictured), head of COE and structured products, XP Investimentos (XP).

Kattar was behind the firm’s launch of its structured products business and its first COE (certificado de operacoes estruturadas) in Brazil sold in early 2016 – the firm launched in 2019 its own retail distribution network in the form of a a multi-purpose bank, and carry out commercial banking and investment activities.

“The biggest challenge in Brazil was training the financial advisers and the end clients to understand structured products,” she said. “Brazilians are used to high interest rates like 10% or 12% and preferred very short-term investments with daily liquidity, so the establishment of a secondary market for COEs was a real issue.”

To overcome this hurdle XP “invested heavily” in producing and providing marketing and training materials including videos.

Kattar estimates that domestic assets currently make up over 95% of Brazilian’s portfolios and believes structured products can increase the use of international assets. 

“COE would be a perfect vehicle for that,” she said. “When everything went wrong in Brazil, structures notes performed pretty well. That’s because most of them were linked to international markets.”  

This is helping to promote the value of structured products as initially another big challenge the market faced was the performance and the image of the product. Although in its infancy, the Brazilian market has suffered already from negative consumer press.

In 2017, XP began to distribute COEs linked to mutual funds such as the Pimco Global Income. Subsequently, the poor performance of global fixed income in 2018 put this products in an awkward position, which invited criticism and skepticism about COEs from the media and other market comentators citing the lack of regulation and fee-driven sales models, Kattar recalled.

“The ‘attack’ mainly resulted from the lack of knowledge the commentators and the public have about COEs,” said Kattar. “To counter that perception, we began to release the product costs. Every marketing material from XP now contains the cost of the product like the maximum fee that can be charged.”

Kattar concluded that the scope for growth is wide as the country’s structured products market size remains “still pretty small - around R$21 billion ($4 billion) - we have half of the market share in terms of distribution”.   

Asset allocation

Compared with its giant neighbor, Peru has a significantly smaller structured products market, and “not yet properly regulated”, according to Steve Ocampo (right), chief investment officer at Zest Capital.

Although the market is currently dominated by private banks Ocampo is optimistic as there is room for other players to enter the market and push it forward – Zest Capital began to distribute structured products in 2015.

“We’ve been looking very closely at the Brazilian market,” he said. “If we work on something similar to what has been done in Brazil, we can achieve that kind of growth.”

Ocampo also noted the need to create national guidelines on structured products, a regulatory framework. “Since we don't have a regulatory scheme, you have to have your own auto-regulation, and be in compliance with general standards, specifically global standards,” he said.

Structured products trades in Peru are largely done by family offices or private banks as an alternative to new investment funds. “We saw a growth of new asset under management (AUM) at $100m going into structured products last year,” said Ocampo.

“That was very nice to see. Because the only structured product for public offering you saw three or four years would be a 90% or 95% capital guarantee with some optionality on SPDR S&P 500 ETF Trust,” he added.

Zest Capital has been working on diversifying its structured products offerings, with a focus but not limiting itself to capital guarantee. Ocampo also noted that new players entering the market will help develop and grow the structured markets in Peru, which is dominated by several large banks as they can capitalize on “their wider range of investment options”.

“We are growing our business and leasing new offices,” said Ocampo. “We will put more emphasis on financial (asset) allocation than structured products on their own – we believe people will be more willing to diversify their portfolios using structured products.”

Peruvian investors allocates on average 80% of their assets on time deposit with the rest going to  mutual funds or real estate investments.

Automation

The need for technology to run an efficient structured products business is also opening opportunities for other players such as fintech or platform providers.

Cincinnati-based Luma Financial Technologies is seeking to expand into Latin America “by working closely with financial advisors in the region to integrate structured solutions into portfolios to meet the needs of their clients,” according to Fernando Concha (right), the firm’s key account manager for Latin America.

“In US, everyone's pretty much embracing a technological solution from private banks to advisors – they’re leaving their old legacy systems behind and adopting one of the platforms in the market to generate efficiency,” said Concha, who joined Luma recently.

Concha pointed out at some differences between the US and Latin America markets, namely the type of investors using structured products and the knowledge and understanding of these products. However, this has actually provided an opportunity to deliver different solutions to meet the needs of each market.

“For a country that have a decent structured products penetration, we’re targeting needs around operational efficiency,” said Concha. “When a market is not familiar with structured products, we help educate, create demand and provide new solutions.” 

Luma is also seeking to capitalize on the fact that technology is agnostic when it comes to the categorization of the end investor.

“In Latin America, the concentration is mainly on the HNWIs whereas Mexico and Brazil have a bit more retail market,” Concha said. “Automation will drive more businesses. We believe the cost of active book management and better analytics will increase the wallet share between five to 10% of the platform.”