In the second part of an interview, Morgan Capital Advisors' (MCA) executive director Mark Tully, talks about the firm’s plans to launch a fund of structured products and explains how these funds can provide higher yields, better entry points to markets, and capitalise on secondary market opportunities.
Many issuers of structured products and buy-side firms have tried to develop funds of structured products but this has never really taken off. What are the reasons for the limited usage of funds to wrap structured products?
We have started talking to family offices to raise some money and manage the portion of their structured products portfolio. We have a managed account for a family office in Geneva, and we are hoping that once we have sufficient capital we can turn it into a UCITS or an alternative investment fund (AIF), and then bring it into the offshore bond platforms. The problem with the fund wrapper is that you need capital and time to bring it to market. Most structured products providers favour the note wrapper because the speed to market and also because you can provide a defined return. If you have a fund of structured notes you cannot get a defined coupon as you get an aggregate of them all. It’s a different proposition that we hope it will resonate with our clients because a fund will in principle provide better returns as you can time the entry point. These are short volatility products and if vol goes up you will get better coupons. Also, if you take into account the current trend in the major markets you can easily get consistent high single digit returns with that kind of strategy. One of the benefits we also see in the fund wrapper is that it can be put in any fund platform in the European market if it’s Ucits whereas notes cannot be distributed in the same way.
What is the average risk profile of an offshore investor?
The investor profile in the offshore segment is that of a retail investor which is seeking a degree of protection and income so we need to keep our products fairly simple and straight forward. Obviously there is room for more bespoke type of structure but the focus is on strategies that people are familiar with.
Is MCA considering structured deposits and passive investments (trackers) for its offering?
Structured deposits are not an option because if a life company buys a deposit it becomes the legal owner and you lose the deposit protection scheme from the FSCS, and effectively becomes a medium term note. The wrapper per se is not a problem, but you lose one its main benefits.
We are not really interested in passive investments but in actively managed fund of notes that can be scalable and can add value by looking for opportunities in the secondary market. We are hoping to go live with this product in early 2016.
Are there any issues around regulation that could impact the build-up of MCA’s structured products business?
I think the regulatory overhaul has been positive for the structured products market and the thematic review showed that banks need to do more around stress testing and product governance. However, I don’t think the structured products market is a growing market. There are a number of jurisdictions such as HK and Singapore where it’s very difficult to do anything –you are required to be approved by the regulator to enter those markets, and they are dominated by a handful of providers. That approach may work for mutual funds but not for structured notes. We don’t see any issues around regulation to build our structured products business.
What geographical markets is MCA targeting?
In the offshore space the main markets are the Middle East, South Africa, and Latin America. We have also looked into the UK but the plan management set up is too challenging.
Are you looking at other ways to wrap your structured products offerings?
We are also looking into the discretionary fund management (DFM) segment and we are looking to hire as this is not an area we have expertise in and to cover this as you need specialised knowledge and the relationships. This is a very competitive segment but we think we can leverage the lines we have with the banks. Alternative investment funds also provide avenues for us because their flexibility compared to Ucits funds which have some limitations such as credit diversification issues, and you need a lot of capital before you get them off the ground. We are researching these wrappers to see which one is the most effective wrapper for us to use to deliver structured products.