What has to happen for structured product sales to bounce back in the UK? Like many providers, Axa Investment Manager’s structured products analyst Severine Blond has considered the question from all angles. In fact, like several of its competitors the firm is undertaking a review of its structured product activity here, to ensure it has its offering on target in a toughening market.A glance at the offering suggests nothing amiss. Four Active Protector funds linked to the FTSE100 offer either 70% or 80% of highest NAV protection, either with or without gap risk insurance. Performance in all cases has been good, the products returning between 8.3% and 12.1% over the last year, depending on the level of protection chosen. “The 70 fund in particular has had fantastic performance,” says Blond. It underperformed the FTSE June to June by less than two percentage points.
Performance has outstripped sales, however, which had totalled £51.6m by the end of June. “It is disappointing to know you have got something good and it not be fully recognised,” says Blond.
This conundrum, combined with a cooling off of the market and the recent introduction of the FSA’s ‘treating customers fairly’ initiative, means the product set warrants investigation.
In fact, Blond hints at a development, but offers few clues as to what she has in mind. It is a reasonable stance, considering the competitive state of the market. “There has been a tightening of the market, and the banks are all over it,” says Blond. “There is a slump, yes. But there are so many providers and issuers that maybe we have reached a competitive peak. The players in the next few years will be the stayers. They will be the ones that have done things properly.”
Blond’s discussions with salesmen has revealed that it is not simply structured products that are suffering in current market conditions, however. “There appears to be no new money anywhere,” she says, “but [existing money is] moving around a lot.”
She envisages that the fall in UK rates, rather than fuelling a spending boom, might this time prompt a shift of money from savings into the market. “This happened in France a few years ago,” she says. “It’s the same pattern. People got to the point where their confidence was coming back.”
However, Blond believes the UK market is inherently more difficult. Its equity culture, or rather its near obsession with the ups and downs of the FTSE100, does not naturally lend itself to structured product investing. In the broader European market, on the other hand, the lack of a historical equity culture makes structured products a more natural step when looking at investment solutions, especially protected ones. “Even in a bull market it is natural to go to structured products,” she says. “It’s why CPPI picked up so fast in continental Europe.”
Blond is part of the structured solutions group that has been offering CPPI products since 1998, a time frame that has encompassed a 50% fall in the stock market. It has been a perfect test-bed for products, and one which has left the group comfortable in its management skills.
The group has a genuine European, even global, remit. It sells across Europe (as far east as Germany) and the Far East and is ‘stepping up to the plate’ to meet new opportunities in the Spanish and Portuguese markets. Members of the group swap ideas regularly and often a fund manager will come up with an idea for a product that can be used in more than one location.
However, it is in Belgium that its structured products have met with the greatest appeal. “We just keep rolling them out, one after another” says Blond. They’re really well received and there is minimum effort involved in promoting our expertise.
The UK investor is a different proposition altogether, having become truly gripped by structured products only during the boom in ‘precipice bonds’ debacle that has caused such ructions since. (Since December 1996, British investors invested almost £10bn in capital-at-risk products, the majority linked to the FTSE100.)
Blond muses on the nature of risk appetite. She considers the precipice bond debacle to have done less damage than is widely perceived, and its effect to be almost over. She also points out that there is something of a contradiction between a supposedly risk-averse investor set and the rise in sales of open-ended funds, which usually have some capital at risk. “Twelve months ago I would have said open-ended funds were for the more adventurous,” she says. “Cautious investors would lock in for five years…. I think people were pessimistic on the market last year. Now that the FTSE has reached 5400 people are being a bit more positive and taking a bit more risk.”
That is not to say investors are playing the markets with wild abandon. Axa’s 80%-protected fund has taken considerably more money than the 70% version: “As a fund manager this is the highest level of protection you can really do and still get decent performance,” says Blond. “From an investor point of view, 70% protection is a potential 30% loss, so 80 is a compromise number that is actually what investors are looking for.” Further analysis of the sales figures reveals another contradiction, however. British investors might be risk averse beyond 20% of capital, but they are not buying gap protection. Sales of the gap-protected version of the 70 fund are a third of the unprotected version, those of the 80 fund, half. Yet the gap protection makes very little difference in performance.
The peculiarity of the British investor does not mean that Axa’s global experience cannot be drawn on when developing the UK offering, though. Last year Axa launched two products of which it is particularly proud. Both are CPPI based – one on an internally developed ETF on European real estate index EPRA, and one on a CDO basket. Both will be offered to UK investors just as soon as Blond and her team detect an appetite.
In fact, Blond appears to consider the development in underlyings a surer bet for the UK market than tinkering with CPPI itself. The expansion of underlying assets will come slowly but surely. High net worth IFAs and private bankers lead the way, saying CPPI is better suited to riskier assets. “Hopefully,” she says, “there are some interesting ones on the way.”
The first step to a broader investment in CPPI in the UK, however, is getting the message out at IFA level. “They seem bemused,” says Blond. “And maybe they should. Maybe we have spent too much time looking under the bonnet.” CPPI is actually quite a simple asset management technique, and a natural fit for a fund manager provider. If you ‘get’ that, the fund manager’s skills come in trying to find the most cost-effective method, she says: “It is easier for us as a fund manager, because we have a wide panel of instruments to ensure the most cost-effective route. Although the human factor is removed from decision taking, we have somebody there doing the daily rebalancing and ensuring the risk controls are still in place. We can also review the model from time to time.”
Axa has also been undertaking research into the place of CPPI in a portfolio – its suitability as a ‘core’ investment in a core/satellite approach to portfolio building. “CPPI protection naturally limits downside risk. If you put a floor on one element of your portfolio you can do something more exotic and take more risk elsewhere,” she says. “You can improve your efficient frontier, getting a higher return for the same level of risk. Alternatively, you can use CPPI to get exposure to a more risky asset.”
Risky assets again. In terms of fixed-term products Axa is taking a pause in the UK market, but has certainly not reached a full stop. “When you look at more exciting products open-ended products are limited,” says Blond. “A closed ended product has more flexibility…”
