Despite challenging market conditions in the second half of 2007, the structured products business is coming off an exceptional year. As reported by Jeff Benjamin in Investment News , “The structured-products industry has been relatively obscure among most U.S. investors and financial advisers, but lately, it is basking in the glow of a record-setting 78% increase in 2007 sales. The $114 billion in sales has surprised even some industry insiders, who have watched annual structured-product sales climb steadily from $28 billion in 2003.”This sentiment was echoed by speakers at three recent industry events.
At this weekend’s JVB Financial 2nd Annual Structured Products Educational Excursion in Breckenridge, CO, panelists from Bear Stearns (Bill Bamber), SocGen (Alexandre Ecot), Netixis (Derrick Smith), Credit Suisse (Scott Milner) and Fortis (Kelly Treseder) unanimously agreed with JVB’s structured products head Steve Peters that the industry continues to defy the volatility and turbulence roiling the rest of the US capital markets.
At the February 21 SPA/Morrison and Foerster Year-in-Review event in New York last week, Wachovia’s Rick Sandulli made the case that the volume of structured products will increasingly challenge the dominance of mutual funds as the mainstay investment vehicle of retail wealth over the next 2 to 5 years. (Other panelists included Citigroup’s Soma Rao, Cadwalader’s Ray Shirazi, and JPMorgan’s John Neubauer.
Additionally, at the 26th Annual LaSalle Bank Fixed Income Symposium at Boca Raton, FL on January 24, Barclay’s Philippe el-Asmar noted that structured investments are giving other investment vehicles a run for the money.
According to el-Asmar, while hedge funds attracted $194 billion in new assets, the total of $114 billion for structured products was highly competitive with exchange-traded funds ($151.2 billion) and superior to closed-end funds ($27.6 billion) and convertible bonds ($94.3 billion). (For copies of the presentations from the LaSalle conference, click on http://www.lasallesymposiumpresentations.com/.)
Impressive stuff, to be sure. So what does this mean – exactly?
It means that the structured products industry is under unprecedented attack by a natural competitor. The Mutual Fund industry.
The mutual fund industry is going to war to circumvent the structured products industry’s growth. Through its trade group – the Investment Company Institute (ICI) – the MF industry is working frantically behind the scenes to kill our business. An Investment News editorial, “ICI Seeks a Protected Market for Mutual Funds” was spot-on when it noted, “Call me cynical, but whenever I see a behemoth mutual fund industry trade association campaigning in the interest of the lowly retail investor, I find it prudent to consider the notion that there might be more to it.”
As the “powerful mouthpiece of the mutual fund industry” the ICI began crowing to the press that it would “prevail” in its attempts to “torpedo” the “tax advantages” of ETNs. Bloggers immediately reacted to the ICI’s nefarious efforts. In a piece entitled “Vanguard Tries to Ruin Your Investing Tax Break,” Jonas Ferris of Maxfunds.com stated that, “You can count on mutual fund companies to try to squash any product they think is a competitive threat to their multi-trillion-dollar-in-assets cash machine.” Brad Ziegler recently posted a blog (“ETNs Thrive Despite Mutual Fund Tantrums”) stating, “When Barclays Global Investors introduced exchange-traded notes [ETNs] last year, the $13 trillion industry called across the schoolyard for Congress and the Treasury Department to protect it from the big, bad bully.” SeekingAlpha.com published a piece entitled, ”ICI Pushes Congress to Punish ETN Investors for Not Choosing Mutual Funds” which stated succinctly that,” It's quite obvious that the monolithic mouthpiece of the $10 trillion mutual fund industry is working around the clock to destroy a competitive threat -- prepaid forwards generally and Exchange Traded Notes specifically -- before it takes root and swipes a few dollars from its fossilized business model. As you're reading this, the ICI is racing to erect anti-competitive barriers around its AUM before the investing public finds out about its secretive, back-room dealings.”
The ICI initially sought out a mere $10 billion snack as its prey – ETNs – but it has gotten a much bigger game in its sights: the entire derivatives industry. For the first time, a mainstream financial reporter – Bloomberg’s Ryan Donmoyer -- has cracked the real story. Believe it or not, it’s Vanguard that’s attempting to put competitive barriers upon the ETN business. “Barclays Plc introduced a new product that put a scare into Vanguard Group Inc. and the rest of the $13 trillion U.S. mutual-fund industry. Now Congress and the Treasury Department are coming to the funds' aid,” Donmoyer wrote in his groundbreaking February 14 article, “Vanguard Battles Barclays Over `Derivatives for the Masses.”'
So where does that put the industry? On Wednesday, March 5, the House Ways and Means Committee will conduct hearings on the recently introduced Neal bill on prepaid derivatives, which proposes a new tax on prepaid forwards generally, and exchange-traded notes specifically. SIFMA, Cleary Gottlieb, Shearman & Sterling and the Structured Products Association will testify at the hearings on behalf of the industry.
SPA will keep you apprised of developments at the Congressional hearings as they happen. Otherwise, we expect to have key players at the SPA-2008 Annual Conference in New York on April 9-10, 2008.
