Fiera Capital has resumed its activity in the Canadian structured notes market, known locally as principal protected notes (PPN), with the launch of two notes hedged by CIBC bank. “We want to have a focus on structured products,” says Raj Lala (pictured), head of retail markets at Montreal-based asset management company, who joined Fiera in September 2014 and started rebuilding its structured products capabilities.
The first product (CIBC Fiera Fund Linked Growth Deposit Notes, Series 1), which was linked to an equally weighted basket of funds featuring two of Fiera Capital’s funds (Fiera Capital Equity Growth Fund and Fiera Capital Bond Fund) had to be pulled out following the cut in interest rates in Canada in February, says Lala. The second tranche (CIBC Fiera Fund Linked Growth Deposit Notes, Series 2) changed the weighting of the underlying funds (30% Fiera Capital Equity Growth Fund and 70% Fiera Capital Bond Fund), was open for subscription until September 27 and will strike on March 5.
Fiera, the third-largest publicly-listed asset manager in Canada is building its retail business as an addition to its traditional fund core in the institutional markets, after it acquired Propel Capital in 2014 – a closed-end mutual fund company launched by Lala and Michael Simonetta in 2010 – for $12m in a move to capitalise on the company’s offering and distribution network in the Canadian retail investor market.
“It makes a big difference to be in a company like Fiera, which is extremely large, as banks are very keen to work with us on structured products,” says Lala. “This also allows us to look into a number of options and, instead of having to come up with ideas, most times you can leverage the bank’s knowledge and capabilities in this market.”
Lala has been charged with the task of developing new closed-end fund products and a range of PPNs for the retail market as these are the products best suited for the “conservative” Canadian retail investor, says Lala, who has seen a revival of the PPN market as an alternative to fixed-income products that are not performing, and also plans to add capital-at-risk structures at a later stage.
Fiera’s plan is to roll out structured notes every two to three months with the aim of having four to six PPNs marketed by the end of the year, says Lala. “Structured notes allow you to invest in a long-term view of the market via a buy-and-hold structure, but also to be more opportunistic. They also provide you with the flexibility of using actively managed funds as underlyings of notes. Our focus will not be on static baskets. Banks don’t need that from us as they can do that themselves, but we can offer a basket with the top 10 US large cap stocks and put them into a note. We want to bring products to market that can provide some alpha.”
The challenge with risk tolerance is that the more volatile the strategy, the harder the option is to price, says Lala. “We don’t want to end up with very volatile underlyings that offer good returns but require a long-term investment,” he says. “We want to have a fund based approach in a five-year product.”
Fiera does not have any contact with the end investor and works with broker dealers to bring products to market. “We believe there are huge opportunities in the advisory market,” says Lala. “The market volatility we are experiencing reinforces the appetite and appeal of principal protected notes. The area where we see the potential for growth is around the use of mutual funds as underlying strategies.”
Lala believes principal at risk notes will offer good opportunities but investors need to be aware of the risks. “A five-year accelerator gives you one-to-one exposure to the fall of the underlying, but a 1.5x leverage factor on the upside, and structures with soft-protection, are also selling well in Canada, although these are mostly done by the banks themselves,” he says.
The Canadian structured products market, which was once dominated by constant proportion portfolio insurance (CPPI) products, has changed since the financial crisis, “as investors were hit hard by these products” after being cashed out when the portfolio performance reached the bond floor. “I don’t think there is much appetite for CPPI structures,” says Lala. “Reputational issues are now at the forefront of banks’ agendas and there are concerns about the risks associated with CPPI-based products.”
Fiera is best known for its Canadian portfolio management capabilities, but it also has a global and US equity expertise, says Lala. “We want to leverage our knowledge in the funds market and bring to market strategies that can offer exposure to US, Canadian or global equities,” he says. “However, this is a very dynamic market, and we have to be able to react and fine tune our strategy if market conditions change. The idea is to identify assets that have value to be extracted, but if we don’t feel we have the expertise to manage it then we will go external, and we might partner with global asset managers if that approach suits a particular product.
“We don’t want to operate in a market were investors have closed their wallets,” says Lala. “We need a market where there is capital being deployed and it’s very difficult to achieve success if markets are falling apart… we look at flat markets as the new up.”
The introduction of the Customer Relationship Model 2, which mirrors the UK’s Retail Distribution Review, will also help move the market forward by bringing transparency, says Lala. “Some of the guidelines being considered by the Canadian regulators come from the UK FSA,” he says. “At the end of the day, transparency is good for the market. We want investors to know what they will get and at what price. Wherever you are in the chain (end investor, broker, manufacturer) the interests should be aligned because everybody needs to make money and that sometimes is forgotten. It’s important to provide disclosure, transparency and products that add value to investors. That’s how a market becomes efficient and assets will be channelled to that market.”
Fiera Capital is not new to the structured products market, distributing 19 reverse convertibles issued by Barclays in 2008 and seven notes issued by HSBC, according to SRP.
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