Structured products have a part to play

Structured products, often using investment banking instruments such as equity derivatives, are popular among European investors looking for capital protection and safe returns. Yet they have received a bad press at the hands of the managed fund groups whose livelihoods they threaten.

In Germany, the BVI (the association which defends the interests of the country’s fund managers) has commissioned research into whether structured products can actually form part of an actively managed portfolio.

The results are yet to be published, but the BVI hopes they will prove managed funds are far superior. The association is annoyed that structured products receive more favourable tax treatment, that they can be launched in a matter of days, and that their costs are not clearly displayed. German funds have none of these advantages.

When banks such as Deutsche make a major call, that they want to steer private clients into investments associated with the Bric (Brazil, Russia, India, China) countries, sometimes there are not enough funds that can be developed quickly by the bank’s preferred providers.

The same is true with commodities. Although things should be made easier under the Ucits III legislation, there have been few products, except those of the structured variety, which can get private investors into the market.

Credit Suisse’s private banking division says it has no philosophical preference, whether to market structured products or actively managed funds to its wealthy clientele. But in recent years, profits have been driven by the sale of high-fee generating structured products rather than funds, even though an appetite for funds is starting to re-emerge.

In France, it has been difficult to sell anything apart from structured products in recent times. Sensible retail banks, such as Banque Populaire, have designed ranges of products, where structured products are just part of a continuum, running from deposits to mutual funds, and where a guarantee can be combined with a mutual fund.

French investment banks such as Société Générale see the story as a long-term one. And Calyon is now building up its equity derivatives team in order to assault markets at home and abroad.

Those fund groups such as CSAM and UBS GAM, which are attached to private banking distribution channels and investment banks, are working with their sister companies to offer holistic solutions, which can include a combination of funds and structured products.

Is this really a good thing for investors? Some manufacturers, with vested interests, think not. Todd Ruppert, CEO of T. Rowe Price Investment Services argues, in this month’s Big Interview, against some of the distributors who sell often inappropriate structured products. But surely structured products have a role to play, if they can bring new investors into the market?

When they are used innovatively, to combine derivatives with institutional asset plays such as tactical asset allocation and currency management, to produce an equity-like return without the volatility, even their detractors may mellow.