Savour International

The use of structured products in a portfolio context has proved beneficial, even in the challenging stock market environment.

From an investor's perspective, structured products make sense for three reasons: First, they offer access to alternative asset classes and are thus an effective means of diversifying risk. Second, an investor's risk/return requirements can be mirrored exactly using these instruments. Capital protection products are a safer alternative to direct investments during periods of market turmoil. Third, the considerable flexibility of these products means that investors can exploit attractive market opportunities very rapidly in a host of different environments, including flat or falling markets. Naturally, differences exist in terms of product quality, and this can become especially evident in a difficult market climate.

How do you define quality?

Based on our approach, 'quality' means firstly that investors can buy or sell the products at any time - even in turbulent periods - thus giving them the flexibility to switch between investments. For example, we have continuously provided buying and selling rates for our range of products and ensured an adequate supply of liquidity. It is also important to provide investors with additional services relating to the product: structuring it according to attractive terms and conditions is no longer enough. As a result, the placement of products as part of a broader asset allocation approach is increasing. Issuers can generate real added value through a comprehensive advisory offering, where the product is sold within the wider context of the investor's portfolio rather than as an isolated investment. This includes the various after-sales services such as reporting or monitoring.

What do you consider to be the 'right' use of structured products?
Each investment decision is based on a clear view of the market. Products must then be selected in such a way as to reflect each investor's risk appetite and risk ability. Structured products that have an equity as the underlying and that pay a coupon cannot be compared with bonds, for example. Depending on the product or the performance of the underlying, the investor may be exposed to an equity risk.

But it is often difficult to evaluate these risks.

That is correct. Risk transparency needs to be further enhanced through measures such as a risk classification system like the one implemented by Vontobel, amongst others. This type of system helps investors to better assess the risks involved during the term of the instrument.

Structured products are often criticized for being intransparent with regard to costs. What is your view on this?

In the case of products without a fixed maturity, the annual management fees are disclosed in the relevant term sheets. Products that are not subject to these types of fees can be compared if, for example, two certificates offer the same level of capital protection but one pays a higher coupon - making it the more favourably priced product.

Proven strategies and product solutions in the areas of capital protection and return optimization will be most popular because they are not difficult to understand and because issuers can react rapidly to the changing market environment with these offerings. The investment universe will grow. There will be an increasing number of structured products in asset classes such as commodities or real estate, as well as instruments that allow clients to invest in new regions. For example, the certificates market is in the process of discovering the investment potential of Africa. In addition, structured products will address new themes such as inflation.

One of the recognized benefits of structured products is their highly innovative nature. Which products will be sought by investors going forward?
There will be a demand for structured products that are used in the case of special market conditions - such as high levels of volatility - or for participation products. These instruments are subject to more active changes during their term and are automatically adjusted to new market conditions.

What other aspects need to be considered when buying certificates?

A product should ideally be listed on the stock market and a properly functioning secondary market should be in place. This means that the bid/offer spreads, i.e. the differences between the purchase and sale prices, are small. In addition, the issuer should have an excellent reputation and credit rating. Moreover, investors should not hesitate to contact their bank for advice or to call a bank hotline to consult with experts if they have questions of if aspects of a product are unclear.

A wealth of experience in the derivatives business

Georg von Wattenwyl is the Global Head of Financial Products Advisory & Distribution at Bank Vontobel. He joined the bank in 1998 and initially co-managed the development and trading of structured products. Georg von Wattenwyl began his career as a forex trader and fixed income and derivatives specialist at Credit Suisse in 1989.