Deutsche bank, the market leader for fund linked structured products in Belgium, has launched Deutsche Bank AG (DE) Europe Reset Performance 2024, a rare equity linked product in the form of an eight-year, fully capital protected structure linked to the Eurostoxx 50 index which will pay at maturity a one-off coupon which is calculated as the sum of the annually withheld performances of the index.
"We have done a lot of products linked to funds in recent years but we always try to include one or two equity linked products in our offering, also for reasons of diversification," said Mehtap Ersahin (pictured), product manager structured products at Deutsche Bank in Brussels. To develop an equity product remains difficult in the current market conditions according to Ersahin. "Not only due to the low rates but also because it is more expensive to structure a product on an equity index in comparison with a flexible fund."
Ersahin admits that investors still prefer to receive annual income, but people are now "slightly but surely" getting aware that the interest rates are very low. "A year ago, if you told the story [about the low rates] clients did not really take that in, but now I think they understand it better because we have reached historical low rates and [clients] have felt this huge drop in their saving accounts," said Ersahin. "Investors are increasingly aware of the fact that if you want to get more from an investment you have to go without (annual) coupons, or otherwise you have to extend the term of the product or opt for non-capital protected structures."
Whereas the majority of distributors in Belgium issue products linked to equity indices, or, in KBC's case equity baskets, Deutsche has mainly focused on fund linked products in recent years. The bank was behind 28 of the 44 fund linked structures marketed in 2015, with the remaining products coming from BPost Bank (10), Belfius (three), Argenta, AXA and VDK Spaarbank (one each). "Because we have distributed such a large number of structured products linked to funds our sales network started asking for an equity product, in order to diversify into other asset classes," said Ersahin. "Fund linked products are obviously still a very important product range but we feel that the demand for equity linked is there too."
According to Ersahin, other distributors in Belgium work with their own in-house indices which "deliver good results" but "are less transparent". "That's why we stick to benchmarks and funds," said Ersahin. "We have an open-architecture of our fund business and what we have seen, especially last year, also from a client's perspective, is that the demand for funds has increased enormously." Mixed funds always work better in terms of product conditions, because the volatility is lower, said Ersahin. "We prefer [mixed funds] also [...] due to the fact that they are being managed in a flexible way and can adapt depending on the market conditions," she said. "That's why we still prefer products linked to funds rather than products linked to indices."
Forty-six percent of all structured products marketed in Belgium last year protected just 90% of the nominal invested, although for Deutsche Bank, this type of structure does not seem to work too well. "We have tried [90% protected products] and from experience we have learned that our clients are really attached to full capital protection," said Ersahin. "I can't speak for the whole business but for us, unfortunately it doesn't seem to work." However, for those clients who are interested and are willing to take the maximum 10% risk, Deutsche does, from time to time, include 90% protected products in its assortment, said Ersahin. "Of course with 90% capital protection you are going to be able to offer much better terms than with 100%. It's one or the other. You either opt for capital protection, in which case the maturity will be longer or you choose for 90% capital protection which will shorten the maturity."
In 2015 almost a third of structured products issued in Belgium was denominated in US dollar, a trend which, due to the fact that US rates are still much higher than EUR rates, could well continue this year, according to Ersahin. "For this reason, it is more interesting to structure a dollar product than a euro product simply because the product conditions are much better," she said. Fixed income in euro are hard to find anywhere because the interest rate is so low, but in dollar these products are still possible, said Ersahin. "In addition, people see the dollar as a core currency [...] they do not shy away from the dollar as opposed to more exotic currencies."
For the New Year Ersahin expects nothing much will change following the sharp decline in the equity markets and the low interest rates. Deutsche Bank will continue to launch structured products linked to funds of which the coupon story will be very much a part, said Ersahin. "We will also carry on with the launch of US dollar structures, because we are still positive on the currency," said Ersahin. "We are also positive on European equities. We may well issue a second product in the reset performance range, or maybe another equity-linked structure."
In 2015 Deutsche Bank distributed 38 structured products in Belgium with a combined sales volume of €426m. The structures, which were issued in collaboration with Deutsche Bank AG (30), BNP Paribas (three), Natixis (two), Citi (one), Credit Suisse (one) and ING (one), were linked to funds (28), equities (four), interest rate (four) and FX rates (two).
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