CACIB: 2020 has put structured products in a good light

In the second part of the interview, Gael Riboulet, global head of structuring and sales, and Jean-Victor Demaison (pictured), head of Emea ex-FraBeLux sales for equity investment solutions, at Crédit Agricole Corporate And Investment Banking (CACIB) talk about the underlyings and products that will help the bank grow its footprint and market share.

The European structured products market has seen a significant influx of indices addressing the dividend risk. Taking into account the dividend crisis triggered by last year’s market volatility, do you think this kind of index will continue to increase their weight in the market? 

Gael Riboulet: Decrement indices have been a trend in Europe over the last few years mostly in countries and on underlyings that became one-way markets because everybody is doing the same products and underlyings. With this approach, you end up with long-term dividends that are priced at a level that is way below what they should be.

All markets are different and a product or a wrapper that works and is very popular in one market does not necessarily work in another - Jean-Victor Demaison

This is clearly not for the benefit of the end investor because the dividends are priced at levels that are not fair. Decrement Indices then make sense because the issuer does not have to manage that dividend risk which as we saw in 2020 can be high and pass those savings to the end investor via better terms and a higher potential return.  

After 2020, decrement has become even more relevant and significant in terms of implied vs realised. We don’t do decrement for the sake of using this mechanism but because we believe it is an efficient way to manage this risk and deliver value to the end investor. 

Quantitative investment strategies and ESG are also on everybody’s minds when it comes to new underlying assets in the structured products market. What is your view on these?

Gael Riboulet (below-right): QIS is also helping to bring innovation to the market and value to investors. When you look at the structured products market it has gone through three rounds of innovation: the first one which ended with the global financial crisis was focused on payoff innovation; the second one on underlying innovation (bespoke, thematic, strategic, factor); and the third on the wrapper but with some extra layers such as ESG – so we saw how green bonds opened the door to index-linked structured bonds.

On the ESG side, we are also incorporating new features and expanding our offering – most recently we launched a charitable or positive impact feature so that some of the proceeds go to charities determined by the end investor/the distributor and the issuer. On top of the financial performance of the product, we’re offering clients the chance to participate in, and fund ESG projects. We are putting significant focus on this because clients are also demanding a holistic approach to ESG.

Some markets seem to be embracing new underlyings to address pricing challenges, improve the optics of products and deliver value to investors. Do you think the UK market will open up to these underlyings and move beyond the FTSE100?

Jean-Victor Demaison: There has been a bit more demand for alternatives to traditional indices in the UK since mid-2020. Given the current pricing on price return indices it is natural for the market to look for alternatives such as fixed decrement indices that can offer better terms.

Those indices eliminate the uncertainty related to future dividends which means less risk for banks and therefore less hedging related costs. In other words, products should be better value for money for investors.

It also allows investors to purchase structured products linked to new themes, including ESG. Our offering is structured around Green and ESG benchmarks. Most of them include a fixed decrement mechanism. We also see interest from more institutional clients for other features such as risk control.

In any case, these features (fixed decrement, risk control) are only a means to deliver the right product our clients.

We have seen an increase in the number of funds of structured products in the UK and other markets such as the US, Ireland and the Netherlands. Are you considering this wrapper as you build your offering in Europe?

Jean-Victor Demaison: Each market has its specificities and we see structured products used for different needs across markets. However, all markets are different and a product or a wrapper that works and is very popular in one market does not necessarily work in another.

Up until five years ago, the only wrapper used to deliver structured products in the UK was the plan or note format whereas now we have open-ended funds that invest exclusively in structured products. Those funds have been building performance, track record and have been growing their AUM significantly over the last three years or so, including in 2020. This is the kind of initiative we think will help grow the market, make structured products available to more investors and as a result continue to be an area of growth going forward for the UK industry.

The fund wrapper can add flexibility as you can move beyond a traditional formula-based structured product  - Gael Riboulet

The fund wrapper allowed our clients to grow their client base and target clients that had not bought structured products before. An open-ended strategy in a fund wrapper has different liquidity requirements than a traditional structured product so you are also targeting different types of investors.

The actively managed certificate wrapper for instance has been in the market for many years but with a narrower usage. It does not have the same scalability as the fund wrapper. In other markets it has a more significant presence though not mainstream: usually it is used by our clients to meet specific needs or deliver niche or thematic strategies

Gael Riboulet: The fund wrapper can add flexibility as you can move beyond a traditional formula-based structured product which has usually a one to one relationship with the performance of the underlying. When you have a fund, you can have an active management element which gives the product a different, more adaptative kind of profile.

With fund of structured products, you can combine the alpha provided by structured products with the alpha provided by the asset manager. The back-testing of strategies that would have rolled standard structured products for a long time suggests that they would have outperformed total return indices.

What are the challenges ahead for CACIB and what opportunities are you looking for to expand your market share?

Gael Riboulet: Considering the current environment, we need to focus on working with clients to address their concerns. Risk is a very important component to consider in the current context.

We think the focus will continue to be on underlyings that can provide equity exposure and have risk management and smart beta features that can minimise the impact of volatility or dividends. ESG products fall in that category as well.

The market events of 2020 have put structured products in a good light as they have performed and delivered a performance that investors could not have achieved with traditional asset management products. Investors who understand that structured products are about monetising downside risk did very well in 2020. As a manufacturer our goal is to deliver products that can extract value from the markets regardless of where they are.