Following the departure of Adrian Neave, managing director at independent structured products provider Gilliat Financial Solutions, SRP spoke to Steven Graham, deputy managing director, and Andrew Savill, business development director, about what’s next for the firm and where the structured products market is going.
How important is to have the backing of a bank to succeed in your market?
Having the backing of Arbuthnot has been instrumental in the success of our structured products business in the UK and offshore. In the UK, our brand and backing as a ‘true independent’ provides comfort to our clients that we have a long-term outlook marrying with the approach and heritage of the bank. In the offshore market, it’s polarised between two types of firms: intermediary/advisory firms and other firms that can be more ‘aggressive’ in the way they do business. We as part of an FCA-regulated private bank gravitate towards the first type of firm which looks after the higher end of the market who are attracted to our way of doing things.
Is this a natural evolution of the SP market? Are failures in the retail space and reputational risk forcing providers to move towards the high-end side of the market?
Savill: Our business is serving IFAs. We have a handful of institutional clients but our focus continues to be the IFA market away from Bancassurance distribution. Our offshore business is aimed at expats, whether they are working or retired abroad, and that brings an interesting mix to our product offering. If you are, say, an executive working for Shell or BP, and you work overseas you are likely to have a higher tolerance to risk and be looking for bigger potential gains than a client nearing retirement in the UK so our offshore product range can be quite different from our core UK offering because the client’s risk profile is different. However, the key thing for us is that our offshore range has to go through the same approval process, product testing and compliance filters as onshore. It has been a real educational process for us to work with other colleagues at the bank in getting these products to market.
Has the UK market changed in any way? Do you think now people understand that in order to get yield they need to take some risks?
Graham: I think expectations among clients (IFAs) are more in line with reality. Two years ago the same IFAs looked for double-digit income returns with capital protection. But I think that the education about structured products among IFAs has improved thanks to the support the UK SPA has provided. IFAs now understand better how these products are put together, the market challenges and how the pricing for these products works. Regarding risk awareness, I still think there are two distinct camps in the UK: those placing greater emphasis on return of capital rather than return on capital, and those who are in the capital accumulation phase and are interested in products that can offer equity-like returns but with some level of protection.
Then surely, based on the BoE’s predictions, the UK SP market will never move from the FTSE100 /knock out plans set up. Do you agree?
Savill: I am an optimist. The key to all this is pricing, which is influenced by interest rates and the level of volatility, as well as an issuing bank’s funding base. Funding for lending and quantitative easing have pushed down the requirements for, and cost of, funding in the market. Until recently, volatility had been almost pushed out of the market by central banks’ moves to pump in the excess liquidity to fill the credit gap left after the credit crisis and the effect this had on the prevalence of negative shocks to asset prices. We are currently in an environment that sees low vol, interest rates coming back, funding for lending being pulled back a bit and the Fed’s tapering of QE. These elements which were instrumental in making the pricing environment very difficult last year are starting to recede, so I think we will start a path back to normality this year. Interest rates will not go up to 5% but the longer end of the yield curve is going to begin to steepen. I think this year will be an improving year compared with the last three years.
Will the improved performance of the equity markets have a positive effect on the structured products market?
Savill: I don’t think so. For me the most popular form of structured products tend to be used by clients to achieve equity-like returns in flat or sideways markets as a natural hedge to traditional equity positions they have elsewhere in their portfolios. I’m not sure that regaining confidence in the equities markets will benefit structured products. The challenge continues to be for providers to deliver products that enhance risk/reward in client portfolios – which is where I see structured products as best positioned.
Do thematic investments still have any traction?
Graham: In the UK, from a tranche-based product perspective, if the product doesn’t say FTSE it is pretty difficult to bring to market because people do use structured products to hedge their equity portfolios. On the bespoke side of the business we do see some interest for other non-FTSE underlyings and other assets. This makes our job more interesting as we can work with other types of structures and assets. In the retail market it is either FTSE, shares from the FTSE, or other well-known benchmarks such as the S&P500 index. One of the biggest changes we’ve seen over the last three-five years was the introduction of ‘worst-of’ structures linked to baskets of indices featuring the FTSE, the S&P500 and the Eurostoxx50. And even that was a push. It was a difficult transition because it is not only about offering new assets but also about explaining the risks embedded in those structures. The bespoke side of the business is a different game altogether. But for the ISA space we don’t see the current status changing. The introduction of new equity indices has been driven by pricing challenges rather than demand from investors.