Story by: Daniel McAllister
FT InvestmentAdviser Magazine
Sales of retail structured products hit a record £9.7bn in 2008 as investors sought to combat low interest rates and stock market volatility, according to Blue Sky Asset Management (BSAM).
The 25 per cent jump in sales was driven by a combination of increased client demand, and a rise in providers and products on the market.
The total number of products issued in 2008 rose by 20 per cent to 985 in 2008.
Chris Taylor, chief executive at BSAM, said investors and wealth managers were increasingly seeking investment options that dealt with the effects of low interest rates and a fluctuating stock market.
He said client demand would continue to drive growth in the market, with retail sales exceeding £10bn for the first time in 2009, despite the tough market conditions.
"A 25 per cent increase in sales, in the current investment climate, proves advisers and investors recognise and value the ability of structured investments to potentially reduce and control exposure to risk, while defining and enhancing future investment returns."
Taylor warned the UK was heading for the exotically titled 'zirp environment', referring to a zero interest rate policy.
He added: "It is abundantly clear wealth managers will need innovative investment products in 2009, if options that can counter non-existent returns on cash and risk/return challenges for traditional equity funds are to be provided to investors, many of whom feel they are now between ‘a rock and a hard place’ in terms of viable and appealing investment options."
Click here for the original article in FT InvestmentAdviser magazine.
SPA-2008
Thursday, January 15, 2009
SPA Letter in Response to Chicago Lawyer Article on Structured Notes
The following is the SPA's response to an article concerning Structured Notes in Chicago Lawyer Magazine. http://www.chicagolawyermagazine.com/2009/01/14/financial-services-sales-of-structured-notes/
Dear James,
Your article is generally well-reasoned, but it is important to point out some significant inaccuracies.
Under federal securities law, if an underwriter has conducted the proper due diligence of an underwriter, it has no strict liability for the material misstatements or omissions in the issuer's prospectus. UBS was as much a victim as its investors -- to suggest that UBS should have "inside information" about Lehman's financials is unsupportable.
You seem to suggest that because UBS sold structured notes mere weeks before Lehman's demise, it should have known about Lehman's financial condition. UBS does not have a legal right to have superior knowledge than the rest of the market simply because it is an underwriter -- to suggest otherwise is to open the door to a form of insider trading.
Moreover, the statement that investors "didn't know" they were purchasing "unsecured debt" of Lehman is, quite frankly, preposterous. The front page of the prospectus makes that abundantly clear, and the federal securities laws do not provide strict liability protections to investors who don't bother to read the prospectus of investments they purchase.
Also, a few words about structured products. If credit risk is now the major concern of purchasers of structured investments, they should also steer clear of corporate bonds, equities, convertibles, preferreds and any other security issued by a corporate entity. From a credit risk perspective, structured products are no worse than any of the other securities. In fact, arguably, the holders of unsecured debt are better off than the holder of equity -- yet we don't hear much about the credit risk of equities vs structured products.
Structured products are exceptionally useful investment vehicles that have tremendous utility in repairing portfolios devastated by conventional investments such as equities and bonds. The constant stereotype about all structured products being "dangerous" or "too complex" has been an intellectually lazy way certain money managers have simply dismissed the entire investment class. This is unfortunate -- structured products are to Europeans what mutual funds are to Americans. The difference is that mutual funds charge an average of 1.37% per year, and structured products are closer to .55% per year.
That said, everyone agrees with the FINRA Notice to Members, and by and large, you'll find that all constituents in the structured products industry devotes enormous effort and resources to best practices in the marketing of these investments. I believe that UBS was as much a victim of Lehman's default as investors, and it will prevail in any class action lawsuit that seeks to impose liability in its role as an underwriter.
Sincerely,
Keith Styrcula
Chairman
Structured Products Association
Dear James,
Your article is generally well-reasoned, but it is important to point out some significant inaccuracies.
Under federal securities law, if an underwriter has conducted the proper due diligence of an underwriter, it has no strict liability for the material misstatements or omissions in the issuer's prospectus. UBS was as much a victim as its investors -- to suggest that UBS should have "inside information" about Lehman's financials is unsupportable.
You seem to suggest that because UBS sold structured notes mere weeks before Lehman's demise, it should have known about Lehman's financial condition. UBS does not have a legal right to have superior knowledge than the rest of the market simply because it is an underwriter -- to suggest otherwise is to open the door to a form of insider trading.
Moreover, the statement that investors "didn't know" they were purchasing "unsecured debt" of Lehman is, quite frankly, preposterous. The front page of the prospectus makes that abundantly clear, and the federal securities laws do not provide strict liability protections to investors who don't bother to read the prospectus of investments they purchase.
Also, a few words about structured products. If credit risk is now the major concern of purchasers of structured investments, they should also steer clear of corporate bonds, equities, convertibles, preferreds and any other security issued by a corporate entity. From a credit risk perspective, structured products are no worse than any of the other securities. In fact, arguably, the holders of unsecured debt are better off than the holder of equity -- yet we don't hear much about the credit risk of equities vs structured products.
Structured products are exceptionally useful investment vehicles that have tremendous utility in repairing portfolios devastated by conventional investments such as equities and bonds. The constant stereotype about all structured products being "dangerous" or "too complex" has been an intellectually lazy way certain money managers have simply dismissed the entire investment class. This is unfortunate -- structured products are to Europeans what mutual funds are to Americans. The difference is that mutual funds charge an average of 1.37% per year, and structured products are closer to .55% per year.
That said, everyone agrees with the FINRA Notice to Members, and by and large, you'll find that all constituents in the structured products industry devotes enormous effort and resources to best practices in the marketing of these investments. I believe that UBS was as much a victim of Lehman's default as investors, and it will prevail in any class action lawsuit that seeks to impose liability in its role as an underwriter.
Sincerely,
Keith Styrcula
Chairman
Structured Products Association
Tuesday, January 13, 2009
UK: Structured products slip in survey ranks
by Nick Rice
FT Investment Adviser Magazine
January 12, 2009
Compared with earlier poll data, fewer advisers now recommend structured products
A Morgan Stanley survey of advisers has indicated just more than half are recommending structured products to their clients, down from more than 90 per cent in a Keydata poll in early August.
However, the Keydata Investment Services research covered only Keydata's current client lists, while the Morgan Stanley survey, which was conducted in December, covered other advisers as well as existing buyers of Morgan Stanley products.
According to the Morgan Stanley poll, 55 per cent of Morgan Stanley's clients were recommending structured products. Sixty-four per cent said they were recommending up to 20 structured products a year.
This compared with the 71 per cent of advisers favouring bonds, 57 per cent mutual funds, 56 per cent cash alternatives and 21 per cent direct equity investment.
More than 90 per cent of advisers in the Keydata poll were maintaining or increasing allocations to cash, 76.1 per cent to fixed income, 42.9 per cent to corporate bonds, 19.1 per cent to UK equities and 16.7 per cent to international equities.
However, 40 per cent of the respondents to the Morgan Stanley poll said they would be more likely to recommend structured products if markets remained volatile. Thirty-eight per cent said volatility would not affect their recommendations.
The Morgan Stanley poll also revealed slightly more advisers were considering emerging market growth products over US equity market recovery products, at 42 per cent compared with 41 per cent, although many UK fund managers have said they favour the US over emerging markets at present.
UK equity market recovery was the most popular category at 58 per cent.
Of the characteristics of a structured product, advisers considered capital protection the most important at 32.2 per cent. Credit rating came in second at 30 per cent, with participation third at 26.2 per cent. Consistency, administration, brand and sales support each received less than 6 per cent of votes.
However, not all providers agreed with this assessment. Laurent Ramsay, chief executive of Pictet Funds, said it was likely money would move out of structured products throughout Europe, partly as their workings were too opaque for investor tastes at present.
FT Investment Adviser Magazine
January 12, 2009
Compared with earlier poll data, fewer advisers now recommend structured products
A Morgan Stanley survey of advisers has indicated just more than half are recommending structured products to their clients, down from more than 90 per cent in a Keydata poll in early August.
However, the Keydata Investment Services research covered only Keydata's current client lists, while the Morgan Stanley survey, which was conducted in December, covered other advisers as well as existing buyers of Morgan Stanley products.
According to the Morgan Stanley poll, 55 per cent of Morgan Stanley's clients were recommending structured products. Sixty-four per cent said they were recommending up to 20 structured products a year.
This compared with the 71 per cent of advisers favouring bonds, 57 per cent mutual funds, 56 per cent cash alternatives and 21 per cent direct equity investment.
More than 90 per cent of advisers in the Keydata poll were maintaining or increasing allocations to cash, 76.1 per cent to fixed income, 42.9 per cent to corporate bonds, 19.1 per cent to UK equities and 16.7 per cent to international equities.
However, 40 per cent of the respondents to the Morgan Stanley poll said they would be more likely to recommend structured products if markets remained volatile. Thirty-eight per cent said volatility would not affect their recommendations.
The Morgan Stanley poll also revealed slightly more advisers were considering emerging market growth products over US equity market recovery products, at 42 per cent compared with 41 per cent, although many UK fund managers have said they favour the US over emerging markets at present.
UK equity market recovery was the most popular category at 58 per cent.
Of the characteristics of a structured product, advisers considered capital protection the most important at 32.2 per cent. Credit rating came in second at 30 per cent, with participation third at 26.2 per cent. Consistency, administration, brand and sales support each received less than 6 per cent of votes.
However, not all providers agreed with this assessment. Laurent Ramsay, chief executive of Pictet Funds, said it was likely money would move out of structured products throughout Europe, partly as their workings were too opaque for investor tastes at present.
Wednesday, January 7, 2009
SP Mag: Indexed annuities face structured product regulation in US
From Structured Products Magazine
Indexed annuities, a form of insurance contract in the US, are to be placed on a regulatory level playing field with structured products following a Securities and Exchange Commission (SEC) ruling on December 17, 2008.
Following the introduction of Rule 151a, which was originally proposed in June 2008, indexed annuities that meet certain conditions will no longer be exempt from securities regulation, as most insurance contracts are. Annuity contracts that meet two specific conditions can now only be sold by broker-dealers registered with the Financial Industry Regulatory Authority, and must be registered with the SEC and sold accompanied by a prospectus, in the same way as structured products. The two conditions refer to the issuer's payouts being referenced to a specific group of securities after a calculation period, and the likelihood of conditional payouts exceeding what the investor is guaranteed to receive under the contract.
The proposed rule came after media coverage earlier this year of several cases in which senior citizens lost large sums of money after allegedly being mis-sold indexed annuity products. The SEC received thousands of letters of comment during the rule's consultation period from the insurance industry, who wanted regulation to remain in the hands of state insurance bodies. One of the SEC's commissioners, Troy Paredes, also voted against the rule, saying he felt it went beyond the reach of the SEC's intended authority.
See Structured Products Magazine's website for a full analysis of the new rule and its impact on the US structured products industry.
Indexed annuities, a form of insurance contract in the US, are to be placed on a regulatory level playing field with structured products following a Securities and Exchange Commission (SEC) ruling on December 17, 2008.
Following the introduction of Rule 151a, which was originally proposed in June 2008, indexed annuities that meet certain conditions will no longer be exempt from securities regulation, as most insurance contracts are. Annuity contracts that meet two specific conditions can now only be sold by broker-dealers registered with the Financial Industry Regulatory Authority, and must be registered with the SEC and sold accompanied by a prospectus, in the same way as structured products. The two conditions refer to the issuer's payouts being referenced to a specific group of securities after a calculation period, and the likelihood of conditional payouts exceeding what the investor is guaranteed to receive under the contract.
The proposed rule came after media coverage earlier this year of several cases in which senior citizens lost large sums of money after allegedly being mis-sold indexed annuity products. The SEC received thousands of letters of comment during the rule's consultation period from the insurance industry, who wanted regulation to remain in the hands of state insurance bodies. One of the SEC's commissioners, Troy Paredes, also voted against the rule, saying he felt it went beyond the reach of the SEC's intended authority.
See Structured Products Magazine's website for a full analysis of the new rule and its impact on the US structured products industry.
Tuesday, January 6, 2009
MTN-I: BoA begins ML assimilation with 1st structured note filings
Special report from mtn-i.com.
mtn-i has identified the first stirrings of structured note activity from Bank of America following shareholder approval of its merger with Merrill Lynch in early December last year.
Bank of America, which took ownership of Merrill's broker dealer and private client network under the terms of the sale, is in the pre-marketing stage with former Merrill Lynch structured note brands Accelerated Return Notes (ARNs) and Strategic Accelerated Redemption Securities (STARS), according to an SEC filing, ARNs give buyers an opportunity to earn a multiple of the upside (or downside) potential of an underlying asset, up to a specific cap, while bearing one-for-one downside (or upside) exposure.
STARS, meanwhile, are auto-callable structures which allow the investor to benefit from a fixed premium through an automatic call, which may be triggered by the price performance of the underlying asset. If note called prior to maturity, the investor will receive par so long as the underlying is at or above a threshold level, while bearing one-for-one downside exposure if asset has declined below the threshold.
Bank of America has yet to specify the underlying asset and payoff rationale in either case. The dealer was unavailable for further comment.
Exclusive access to its 15k retail brokers gave Merrill a significant competitive advantage in the US structured note market. SEC-registered issuance into this captive network accounted for nearly two-thirds of its league-table topping USD33bn sales total for the period 2006-2008.
During the same period Bank of America reported USD8.3bn of structured note sales across all issuers, or a quarter of Merrill's underwriting activity.Furthermore, Merrill Lynch was one of the most active issuers of US structured notes of recent years, raising USD19bn of capital from its brokerage clients since 2006, according to usmtn-i data. In 2008 alone, Merrill issued USD6.5bn across more than 160 deals into its private client network.Some USD5.4bn of equity index linked product accounted for 39% of its 2008 total, with ARNs accounting for the majority of the reported flow, according to mtn-i data. Merrill also applied the ARN rationale to commodity underlyings.
The new filings, which bear both Bank of America and Merrill Lynch corporate logos, provide the firmest evidence yet that the Merrill Lynch retail brokerage will retain its brand identity. The combination of Merrill's and Bank of America's private wealth management operations will yield a 20,000-strong financial advisor sales force with more than USD2.5trn of assets under management, according to official figures, presenting a significant market share opportunity for Bank of America's forthcoming structured product effort.
Access to this largest of distribution channels that Barclays Capital sought to gain in August with an agreement to both issue and underwrite structured product into the ML & Co brokerage. That initiative has since been sidelined by the merger.
Private clients demand diversification
Nordic agency Eksportfinans is the latest third-party borrower to gain access the Merrill Lynch network. SEC-filed documentation reveals that Eksportfinans will issue STARS linked to any one of the major asset classes as well as basket underlyings via Merrill. According to usmtn-i, Eksportfinans has supplied structured US MTNs through at least 14 underwriters on an all-time basis. Most active arrangers include Goldman Sachs, Wachovia and Morgan Stanley.
Access to the Merrill network has helped Nordic rival Swedish Export Credit become the most active foreign (non-broker) issuer in the US structured note market after the dealer last year accounted for more than half the borrower's USD5.2bn structured funding haul.
Log onto www.usmtn-i for full coverage and data search.
mtn-i has identified the first stirrings of structured note activity from Bank of America following shareholder approval of its merger with Merrill Lynch in early December last year.
Bank of America, which took ownership of Merrill's broker dealer and private client network under the terms of the sale, is in the pre-marketing stage with former Merrill Lynch structured note brands Accelerated Return Notes (ARNs) and Strategic Accelerated Redemption Securities (STARS), according to an SEC filing, ARNs give buyers an opportunity to earn a multiple of the upside (or downside) potential of an underlying asset, up to a specific cap, while bearing one-for-one downside (or upside) exposure.
STARS, meanwhile, are auto-callable structures which allow the investor to benefit from a fixed premium through an automatic call, which may be triggered by the price performance of the underlying asset. If note called prior to maturity, the investor will receive par so long as the underlying is at or above a threshold level, while bearing one-for-one downside exposure if asset has declined below the threshold.
Bank of America has yet to specify the underlying asset and payoff rationale in either case. The dealer was unavailable for further comment.
Exclusive access to its 15k retail brokers gave Merrill a significant competitive advantage in the US structured note market. SEC-registered issuance into this captive network accounted for nearly two-thirds of its league-table topping USD33bn sales total for the period 2006-2008.
During the same period Bank of America reported USD8.3bn of structured note sales across all issuers, or a quarter of Merrill's underwriting activity.Furthermore, Merrill Lynch was one of the most active issuers of US structured notes of recent years, raising USD19bn of capital from its brokerage clients since 2006, according to usmtn-i data. In 2008 alone, Merrill issued USD6.5bn across more than 160 deals into its private client network.Some USD5.4bn of equity index linked product accounted for 39% of its 2008 total, with ARNs accounting for the majority of the reported flow, according to mtn-i data. Merrill also applied the ARN rationale to commodity underlyings.
The new filings, which bear both Bank of America and Merrill Lynch corporate logos, provide the firmest evidence yet that the Merrill Lynch retail brokerage will retain its brand identity. The combination of Merrill's and Bank of America's private wealth management operations will yield a 20,000-strong financial advisor sales force with more than USD2.5trn of assets under management, according to official figures, presenting a significant market share opportunity for Bank of America's forthcoming structured product effort.
Access to this largest of distribution channels that Barclays Capital sought to gain in August with an agreement to both issue and underwrite structured product into the ML & Co brokerage. That initiative has since been sidelined by the merger.
Private clients demand diversification
Nordic agency Eksportfinans is the latest third-party borrower to gain access the Merrill Lynch network. SEC-filed documentation reveals that Eksportfinans will issue STARS linked to any one of the major asset classes as well as basket underlyings via Merrill. According to usmtn-i, Eksportfinans has supplied structured US MTNs through at least 14 underwriters on an all-time basis. Most active arrangers include Goldman Sachs, Wachovia and Morgan Stanley.
Access to the Merrill network has helped Nordic rival Swedish Export Credit become the most active foreign (non-broker) issuer in the US structured note market after the dealer last year accounted for more than half the borrower's USD5.2bn structured funding haul.
Log onto www.usmtn-i for full coverage and data search.
Thursday, January 1, 2009
UK Debate: Are structured products the way to play a recovery?
by Oliver Ralph, Investors Chronicle (UK)
There's little consensus about what the stock market will do in 2009. For some, the pre-Christmas rally was a pause for breath in the longer bear trend. For others, we've reached the bottom already. So are structured products, which offer a combination of capital protection and exposure to upwards movements in the stock market, the ideal choice?
YES, says Nick Lee, sales manager, NDFA:
"When is the recovery going to start? Will we see further substantial falls? There’s a good chance but of course I may be wrong. So what can structured products offer that other funds cannot?
Simplicity. They do what they say on the tin. They don’t "aim to" or "target" a return. They offer a clearly defined return with a known level of risk. They are also much cheaper than most funds – typically 6 per cent in total over a 5 year term compared to possibly 5 per cent upfront and 1.5 per cent per year using funds, totalling 12.5 per cent over the same period.
I suspect a number of investment commentators will take issue with me. I’m writing this having read a Sunday paper money section which was dotted with the usual negative comments regarding structured products: "With these products you are limiting your upside and with the market where it is arguably this is the worst time to buy a guarantee". This referred to a product which offered five times the first 20 per cent of any rise in the FTSE capped at 100 per cent growth. I would suggest that any investor would be delighted with a 100 per cent return. It also limited any losses unless the FTSE fell by more than 50 per cent, at which point you are exposed to market risk. Experienced fund managers will charge a lot more than the structured product with full market risk from the outset. How many will outperform the market by five times?
Another ill informed gem: "The main point of the marketing spin on structured products is that you can have the return without the risk". We lay out the potential returns along with the potential risk, yet I am dumbfounded that so called financial advisers take so little time to look at how these work, therefore depriving investors of what are some of the best value opportunities available.
I firmly believe structured products are as good a way to be prepared for a recovery as any other fund."
NO, says Richard Saunders, chief executive, Investment Management Association
"Many structured products offer you a guarantee that you will underperform cash when the markets go down and underperform equities when the market goes up. So, if you think a recovery is coming, why on earth would you want to be in something that is guaranteed to underperform?
Not all structured products fit that description of course. But they all cater to the natural human wish to earn a decent return without running risk. That is certainly something that would be very nice right now, with interest rates plunging towards zero, house prices continuing to fall, and hugely volatile equity markets.
But hard experience shows that reward without risk is a chimera. If you do not want to take risk you should stick to low risk assets, even if the yield is unattractive. And if your time horizons are long enough, you can afford to invest in higher risk assets.
Structured products seek to offer the best of both worlds. A common product is the Guaranteed Equity Bond (GEB), which offers participation in the growth of an index, together with a money-back guarantee. IMA’s analysis of returns on maturing NS&I GEBs suggests that they have in rising markets underperformed index tracking funds by 3-4 per cent a year. This is of course more or less what many people think is the equity risk premium. In other words, over time they seem to be delivering only a risk-free return. But they do not even achieve that when markets decline.
The more sophisticated products, offering a set return provided certain conditions are met, may be attractive to those seeking absolute return. But they are not a way to take advantage of a rising market. And as many investors have discovered to their cost in the wake of the Lehmans failure, they introduce a completely new set of counterparty risks that many did not realise they were running.
I do not know when the bear market will end. But once you’ve called it, an equity fund is surely the logical way to back your judgement."
To access the original article from Investors Chronicle, click here.
There's little consensus about what the stock market will do in 2009. For some, the pre-Christmas rally was a pause for breath in the longer bear trend. For others, we've reached the bottom already. So are structured products, which offer a combination of capital protection and exposure to upwards movements in the stock market, the ideal choice?
YES, says Nick Lee, sales manager, NDFA:
"When is the recovery going to start? Will we see further substantial falls? There’s a good chance but of course I may be wrong. So what can structured products offer that other funds cannot?
Simplicity. They do what they say on the tin. They don’t "aim to" or "target" a return. They offer a clearly defined return with a known level of risk. They are also much cheaper than most funds – typically 6 per cent in total over a 5 year term compared to possibly 5 per cent upfront and 1.5 per cent per year using funds, totalling 12.5 per cent over the same period.
I suspect a number of investment commentators will take issue with me. I’m writing this having read a Sunday paper money section which was dotted with the usual negative comments regarding structured products: "With these products you are limiting your upside and with the market where it is arguably this is the worst time to buy a guarantee". This referred to a product which offered five times the first 20 per cent of any rise in the FTSE capped at 100 per cent growth. I would suggest that any investor would be delighted with a 100 per cent return. It also limited any losses unless the FTSE fell by more than 50 per cent, at which point you are exposed to market risk. Experienced fund managers will charge a lot more than the structured product with full market risk from the outset. How many will outperform the market by five times?
Another ill informed gem: "The main point of the marketing spin on structured products is that you can have the return without the risk". We lay out the potential returns along with the potential risk, yet I am dumbfounded that so called financial advisers take so little time to look at how these work, therefore depriving investors of what are some of the best value opportunities available.
I firmly believe structured products are as good a way to be prepared for a recovery as any other fund."
NO, says Richard Saunders, chief executive, Investment Management Association
"Many structured products offer you a guarantee that you will underperform cash when the markets go down and underperform equities when the market goes up. So, if you think a recovery is coming, why on earth would you want to be in something that is guaranteed to underperform?
Not all structured products fit that description of course. But they all cater to the natural human wish to earn a decent return without running risk. That is certainly something that would be very nice right now, with interest rates plunging towards zero, house prices continuing to fall, and hugely volatile equity markets.
But hard experience shows that reward without risk is a chimera. If you do not want to take risk you should stick to low risk assets, even if the yield is unattractive. And if your time horizons are long enough, you can afford to invest in higher risk assets.
Structured products seek to offer the best of both worlds. A common product is the Guaranteed Equity Bond (GEB), which offers participation in the growth of an index, together with a money-back guarantee. IMA’s analysis of returns on maturing NS&I GEBs suggests that they have in rising markets underperformed index tracking funds by 3-4 per cent a year. This is of course more or less what many people think is the equity risk premium. In other words, over time they seem to be delivering only a risk-free return. But they do not even achieve that when markets decline.
The more sophisticated products, offering a set return provided certain conditions are met, may be attractive to those seeking absolute return. But they are not a way to take advantage of a rising market. And as many investors have discovered to their cost in the wake of the Lehmans failure, they introduce a completely new set of counterparty risks that many did not realise they were running.
I do not know when the bear market will end. But once you’ve called it, an equity fund is surely the logical way to back your judgement."
To access the original article from Investors Chronicle, click here.
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