Vest Financial Group, the asset management firm that provides options-based investments through structured protective strategies and technology solutions, entered the US market last year and has already made significant inroads including the sale of a majority equity investment to the Chicago Board Options Exchange (CBOE) in January 2016, and the licensing of the exchange’s new range of Buffer Protect Indexes in April. SRP spoke to Steve Neamtz (pictured), senior managing director, about the firms offering, its target market and the challenges ahead.
Neamtz, who was involved in the launch of Vest as a senior advisor to the company, but joined the firm in April in an executive capacity with responsibility for the development and distribution of outcome-based packaged products, has been charged with developing a range of open-end mutual funds, ETPs (either ETNs or ETFs), as well as closed-end funds. “We are building a range of structured outcome products using listed options as our primary asset that will offer investors access to many different strategies,” says Neamtz.
The firm’s focus is to distribute products through the intermediary community, and is already working with several registered investment advisers (RIAs) to deploy some of its strategies in separately managed accounts, effectively acting as a sub-adviser firm to the registered independent advisor (RIA), according to Neamtz.
“In the segment of registered products, we are putting a lot of effort in developing a variety of open-end mutual funds which will comprise offerings that enable investors to get in and out at the prevailing net asset value (NAV),” says Neamtz.
Another type of product Vest will offer is the Unit Investment Trust (UIT), which is a non-managed exchange -traded mutual fund with a defined investment term. Vest has partnered with Elkhorn Securities to file the first SUIT (Structured Unit Investment Trust).
“Unit Investment Trusts (UITs) are currently in registration along with open-end mutual funds,” said Neamtz. “We believe this product lends itself incredibly well to the whole concept of structured notes because of its defined terms (it has a strike and a maturity date) but the difference is that when an investor enters into a registered investment company (RIC) in the form of an UIT, it is protected by the regulatory requirements of the SEC around transparency and disclosure.”
According to Neamtz, UIT have significant potential to resonate among investors in structured products because “you have a regulated investment company that offers daily liquidity (per trust indenture) and NAV which provides investors with the ability to redeem early or remain invested until the end date (something that is more onerous if you have invested in a structured note), and still participate within the parameters of the expected outcome”.
“For instance, a two-year UIT linked to the Russell 2000 with a 10% buffer on the downside and a 25% cap on the upside pretty much replicates the parameters of a structured note,” says Neamtz. “Thus, investors will better know what to expect but with the ability to get out at any time should their view of the market change or they change how they want to redeploy their capital.”
The focus on the UIT wrapper is aimed at addressing some of the pitfalls around structured notes, according to Neamtz. “We believe the UIT product addresses some of the limitations around structured notes such as the lack of liquidity and secondary market, and we see them as a very good complement to structured notes,” says Neamtz. “UITs allow the investor to exit the investment at the NAV on any trading day so they will not be subject to a ‘liquidation discount’ due to less transparent ‘price discovery’.”
The underlying assets within the UIT are exchange-cleared, and exchange-listed options, says Neamtz, adding that UITs “don’t have counterparty risk to a bank, so investors will not depend on an investment bank or third party to satisfy the product obligations at maturity”.
“The liquidity element favours the UIT and also the fact that the investment does not include the hedging of the obligation of the issuer to pay you at maturity via OTC options,” says Neamtz. “At a note level you are exposed to the bank’s credit worthiness but also to the risk of the securities as many are not exchange-cleared.”
According to Neamtz, structured notes, however, have a role to play for investors with a higher risk profile “as they will more likely provide a higher potential return but at a higher risk”.
“That’s why we believe we will be adding value to investors’ portfolios with higher liquidity and transparency,” says Neamtz.
Vest is an investment solutions provider which will focus on products across the separate managed accounts, ETPs and UIT spectrum. “We don’t see ourselves as a competitor in the structured notes market but we believe our offering will resonate with investors in structured notes,” says Neamtz. “The background of the main executives at the firm is in equity derivatives, structured products and distribution. We see defined outcome investments as a great opportunity to bring these strategies to Europe,” he says.
On the challenges to leave its mark in the financial services market and become a key player, Vest will also make a strong case around ‘protection’. “The market is an interesting space and we have seen many times how when things are going well, investors forget about protection,” says Neamtz. “For us, a defensive approach to the market and protection are core strategies, but as we look at the future in the financial markets, we see that fixed income as an asset class is coming under tremendous pressure with investors not being able to get much return as a consequence of the low interest rate environment.”
According to Neamtz, this situation could push investors to chase yield right into the “headwinds of rising interest rates”.
“We feel that using options to monetise volatility in the form of option premium will provide a very appealing alternative solution for investors seeking income because premium income comes without credit or duration risk as opposed to the fixed income market,” says Neamtz. “Vest’s approach is to offer attractive income and providing a stable asset value through our protection methodologies. This will complement our protected equity-linked strategies. We have plans to tap into areas where value can be extracted such as emerging markets equities and sub-sectors of broad indices in the form of ETFs.”
Structured notes have played a very important role in the defined outcome segment as suggested by the amounts invested by institutional and retail investors, but they have also suffered from the lack of liquidity, their exposure to credit risk, and the fact that Lehman Brothers, a previously active issuer of structured notes, defaulted, according to Neamtz.
“However, the market has returned to its current level because investors now look eyes wide open to the issuer of the products,” says Neamtz. “Vest is not going to cannibalise market share from structured notes because we think there is a significant number of investors out there that will complement their structured notes investing with our strategies. Differentiation of defined investments by clients should be a natural diversification of risk. We at Vest are well positioned to assist investors with this opportunity.”
Vest Financial is aiming at launching its first products in early summer of 2016.
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Vest dispatches CBOE’s new ‘Buffer Protect’ Indexes to complement structured note offering
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