Kevin Woodruff, head of Morgan Stanley's recently-formed global financial engineering group, tells Pablo Conde about the challenges and opportunities ahead.
With more than 16 years in equity derivatives under his belt, over 12 of them at Morgan Stanley, Kevin Woodruff did not hesitate even a second in pinpointing the most important event he has ever seen in the structured products markets: "The Lehman Brothers bankruptcy, without a doubt," he says. "That had a bigger impact on the retail structured products business than any other event I can think of over the last ten years. The market has learnt that issuer credit risk must be taken seriously."
Before the Lehman collapse, he continues, "and even pretty far into the subprime crisis, the credit risk of the issuers was a minor consideration for many investors. But this has changed. Now it is a major part of any investment decision, and it has a lot of implications for how business is getting done now and in the future."
Woodruff has a keen eye on how and what business will be done. He was promoted earlier this year to head the global financial engineering group in the bank's institutional equity division, with ultimate responsibility for products, wrappers and clients.
At the time of the Lehman collapse, though, Woodruff was at the epicentre of the crisis, as the North America product head for the equity derivatives business: "We saw a pretty dramatic fall in activity last autumn, and it took a while for business to regain its footing," he says. "But I think the industry has reacted. Different firms have reacted in a number of ways and at different speeds. I think volumes are well on their way back to pre-crisis levels, and I see a lot of upside from here."
Woodruff thinks one reason the market has rebounded is that issuers began to offer products that help minimise the risk of another Lehman-style event in the future: "That's how we've been spending much of our time at Morgan Stanley since last autumn, figuring out the kind of products that people are going to demand from now on."
Morgan Stanley was one of the first providers to address the credit risk issue, he says: "In the UK, as far as I'm aware, we were the first to offer a retail structured product where all aspects were collateralised with a combination of UK gilts and cash, and that has been quite successful in terms of volume and client receptivity." The bank aims to roll out credit-mitigated products in as many countries as possible: in Germany, it has launched a certificate programme backed by European Central Bank-eligible collateral, and in the US it has been selling FDIC-insured CDs.
In fact, Woodruff thinks he is in his new role at an exciting time in the industry, because so many aspects of the business are being reinvented. The industry is looking forward again, he says, to making structured products relevant for as large an audience as possible. However, he stresses that Morgan Stanley's business is focused on quality and clients: "We're not interested in doing a large amount of low value-added business just for the sake of adding to our market share. Our goal is to make sure that when people think of the top-tier global players in structured products we are one of the first firms that come to mind," he says.
In terms of distribution goals, Woodruff says Morgan Stanley will continue to service all sorts of clients globally: financial advisers, retail banks, discretionary managers and institutional accounts. He also points to the strategic initiatives Morgan Stanley has undertaken, including the joint venture in the US with Smith Barney, completed last month, and the association with Mitsubishi UFJ Financial Group (MUFG) in Japan.
"In the US, we will be working with Morgan Stanley Smith Barney's network of 18,000 financial advisers, one of the broadest distribution networks in the world. We have opportunities to do more in Japan too.
In Europe, we have a strong client base, and we believe that our brand carries a lot of weight, especially after everybody had the chance to see us come through the financial crisis in really strong shape."
Woodruff stresses that Morgan Stanley has emerged from the crisis as one of the strongest firms from a capital perspective, and one of the best performers in terms of its share-price appreciation this year. It was also among a group of major US banks that were considered strong enough to repay US governmental Tarp assistance in the first round.
This strength is important for future business flow, he says, as clients are moving business from marginal players to top-tier providers with long track records. "We don't see structured products as an isolated business within Morgan Stanley. We draw on the strength of the whole firm," he says. "Morgan Stanley has world-class equity research and strategy teams, and we offer structured products that express their viewpoints."
The bank is seeing demand for greater simplicity and transparency, with greater emphasis on the underlying and its growth prospects. This too plays to Morgan Stanley's strengths, claims Woodruff. The bank has not taken a multi-asset-class approach, but coordinates closely with other desks and groups. "For example, we have a very unique physical commodity franchise," says Woodruff, "And we have benefited from the experience of our colleagues in fixed income, who have been dealing with credit solutions for many years before it became a big topic in the equity-linked market."