Interview with Pradeep Dokania, MD & Head, Global Private Client, Merrill Lynch
With the stock markets showing heightened volatility, high net worth investors are looking at ways of fortifying their portfolio. Pradeep Dokania, managing director and head of Global Private Client at DSP Merrill Lynch.
How has the volatility in the stock markets impacted the investment decisions of the wealthy? Is there a loss of confidence in equities as an asset class?
Well, it would be unfair to say that equities are losing their sheen because of the market correction. In some ways this correction was very much due.
If you look at the case of the Chinese stock markets, it went up to an all time high in January this year, but has corrected about 50% already. The Indian stock market has corrected about 40% in the same time. This just goes to show that globalisation has linked all of us together; no one is insulated. Typically, our clients would have a balanced portfolio, with about 55% of their money in equity and the remainder in debt. With the correction in the markets, we would have seen a 5-10% change in the portfolio.
What are the new products that high net worth investors are looking at to invest in?
Structured products have picked up quite significantly with more investors gaining comfort with them. Structured products allow clients to take a view on an underlying (indices, stocks, interest rates, etc.,) asset class depending on their risk appetite. So if a client has a positive view of a particular asset class from a 1-2 year horizon but doesn’t want to directly take exposure, he can do so via a structured product. These are mostly capital guaranteed and fortify an investor’s portfolio to a large extent.
Other products like gold funds and gold exchange traded funds are also becoming popular. Offshore investments are a huge area where we see growth and Merrill Lynch has the most comprehensive global platform to offer these to our clients. In markets like the United States leverage products are a huge business, but they are high-risk products and are not very popular here.
What are the offshore investments options available to investors today?
Global products available to Indian investors include hedge funds, global mutual funds, private equity, commodities and real estate. The option to invest directly in equities in different markets is also available. For instance, two years ago a lot of investors put their money in eastern Europe. Products like alternative energy funds, mineral funds, water funds, gold funds and BRIC funds were pretty popular. More recently, markets like Brazil have done well and it makes sense to invest there.
Even in the US, certain stocks have done pretty well. Prime examples include stocks like Apple Computer and Nintendo.
In ideal circumstances, how much of an investor’s portfolio should be diversified into offshore investments? What are the tax implications?
In ideal circumstances, 15% of an investor’s portfolio should be diversified into offshore products and the rest in domestic investments. At the moment, maybe only 1% of an investor’s portfolio would be exposed to overseas investments. It is also important to remember that people are just beginning to experiment with global products because they have very little exposure or experience of investing abroad. There is no additional tax burden of investing overseas. A high net worth individual would pay at his marginal tax rate, 33% in most cases.
What is the impact of exchange rate fluctuations for an investor looking at putting his money overseas?
Well it’s not that big a deal really. I mean for someone who is wary of putting his money in the dollar, we can give them the option of investing in the euro. Private bankers overseas say that India doesn’t have the product suite to offer to clients. Is that true? Well there is no doubt that in certain developed markets the product basket is quite wide. For instance, structured products are huge business offshore but they are built on over the counter derivatives (OTC), which are not allowed here. Similarly, hedge funds and theme-based funds give investors a lot of options. However, every market evolves over a period of time and our wealth management industry is still at a nascent stage of growth. In the next five years our product basket will match the best in the world.
For original article, click here.
SPA-2008
Saturday, August 16, 2008
China: Overseas Banks Grab Bigger Share (ShanghaiDaily.com)
By Zhang Fengming
OVERSEAS banks grabbed a bigger slice of the yuan wealth management products market in Shanghai in the first half of the year, the local regulator said yesterday.
Nine overseas banks, including HSBC, Citi, Standard Chartered and Bank of East Asia, had launched yuan-backed wealth management products by the end of June with an outstanding products value of 7.3 billion yuan (US$1.06 billion), up 65.82 percent from the beginning of the year, said the Shanghai Bureau of the China Banking Regulatory Commission.
The outstanding products value grew 3.76 times the level of a year ago. Overseas banks took in 5.14 billion yuan in the first half, already more than last year's total, the local banking watchdog said.
"Domestic banks still lead the yuan wealth management products market," said the regulator. "However, the rapid expansion recorded by overseas players is worth more attention."
Yuan-backed products contributed 78.06 percent of the total wealth management products in the city in terms of outstanding value. Yuan products accounted for 84.91 percent of products launched in the first six months.
Overseas currency-denominated products grew sluggishly in the city.
Overseas banks dominate in the structure products and qualified domestic institutional investors, while domestic banks have a bigger say in the trust-investment and currency products.
With more overseas banks offering yuan-backed trust products and more lining up to do so, this may change. Overseas players accounted for 49.53 percent of the city's total structured products, such as those linked to stock or commodities, with an outstanding products value of 13.2 billion yuan.
New products launched in the first half of this year have already surpassed last year's total in value.
OVERSEAS banks grabbed a bigger slice of the yuan wealth management products market in Shanghai in the first half of the year, the local regulator said yesterday.
Nine overseas banks, including HSBC, Citi, Standard Chartered and Bank of East Asia, had launched yuan-backed wealth management products by the end of June with an outstanding products value of 7.3 billion yuan (US$1.06 billion), up 65.82 percent from the beginning of the year, said the Shanghai Bureau of the China Banking Regulatory Commission.
The outstanding products value grew 3.76 times the level of a year ago. Overseas banks took in 5.14 billion yuan in the first half, already more than last year's total, the local banking watchdog said.
"Domestic banks still lead the yuan wealth management products market," said the regulator. "However, the rapid expansion recorded by overseas players is worth more attention."
Yuan-backed products contributed 78.06 percent of the total wealth management products in the city in terms of outstanding value. Yuan products accounted for 84.91 percent of products launched in the first six months.
Overseas currency-denominated products grew sluggishly in the city.
Overseas banks dominate in the structure products and qualified domestic institutional investors, while domestic banks have a bigger say in the trust-investment and currency products.
With more overseas banks offering yuan-backed trust products and more lining up to do so, this may change. Overseas players accounted for 49.53 percent of the city's total structured products, such as those linked to stock or commodities, with an outstanding products value of 13.2 billion yuan.
New products launched in the first half of this year have already surpassed last year's total in value.
Tuesday, August 12, 2008
Derivatives Week: Ex-Countrywide Structured Pros Hunt New Home
A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.
by Katy Burne
Derivatives Week
A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.
“We’re looking to attach our group to a broker/dealer or a dealer/bank,” says Kevin Mahon, former senior v.p. at Countrywide in Ft. Lauderdale , Fla. “We’re talking to several firms,” he added, declining to elaborate. The structured products team specialized in underwriting equity-linked and principal protected notes and also focused on reverse convertibles.
Bank of America bought Countrywide in July but opted not to keep its securities arm due to overlaps in the businesses, Mahon said. He spent 10 years at the firm and was supported by six salespeople—five at the v.p. level and one a senior v.p.—as well as two traders. Three staffers were based in Calabasas , Calif. , and their last day will be Sept. 9. The others’ last day was Aug. 10.
All are serving non-working notice periods with non-competes. “We were told we were free to look for jobs. They are not trying to see anyone unemployed,” said Mahon , who is leading discussions with potential employers.
Countrywide’s main rivals as a structured products wholesaler were Barclays Capital and LaSalle Bank’s broker dealer services division.
by Katy Burne
Derivatives Week
A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.
“We’re looking to attach our group to a broker/dealer or a dealer/bank,” says Kevin Mahon, former senior v.p. at Countrywide in Ft. Lauderdale , Fla. “We’re talking to several firms,” he added, declining to elaborate. The structured products team specialized in underwriting equity-linked and principal protected notes and also focused on reverse convertibles.
Bank of America bought Countrywide in July but opted not to keep its securities arm due to overlaps in the businesses, Mahon said. He spent 10 years at the firm and was supported by six salespeople—five at the v.p. level and one a senior v.p.—as well as two traders. Three staffers were based in Calabasas , Calif. , and their last day will be Sept. 9. The others’ last day was Aug. 10.
All are serving non-working notice periods with non-competes. “We were told we were free to look for jobs. They are not trying to see anyone unemployed,” said Mahon , who is leading discussions with potential employers.
Countrywide’s main rivals as a structured products wholesaler were Barclays Capital and LaSalle Bank’s broker dealer services division.
Friday, August 8, 2008
Bonds.com to Distribute Structured Products (StructuredRetailProducts.com)
BOCA RATON, Fla. -- Bonds.com Group, Inc, through its subsidiary Bonds.com, Inc., provider of an innovative comprehensive online trading platform providing execution, liquidity and competitive pricing to the fragmented fixed income marketplace, announced today that it was recently the subject of a feature article on StructuredRetailProducts.com, the leading online resource for the structured products market. The article highlights the Company's recent major announcement that it will shortly be adding structured products to its offering.
"We have had a tremendous amount of reverse inquiries," Bonds.com CEO John Barry told SRP. "We realized that eventually we wanted to roll into this product segment." Until now, Bonds.com offered only plain vanilla fixed-income securities (specifically corporate agency securities, corporate retail notes, municipal bonds and fixed-rate certificates of deposits).
"Adding structured retail products (including commodity-, currency-, equity- and interest rate-linked securities) allows Bonds.com to help clients diversify their portfolios beyond fixed-income products and gives the firm a whole new revenue stream and business to grow," Barry said. "Bonds.com can offer the one-stop-shopping everyone is looking for."
Click here to read the entire article.
"We have had a tremendous amount of reverse inquiries," Bonds.com CEO John Barry told SRP. "We realized that eventually we wanted to roll into this product segment." Until now, Bonds.com offered only plain vanilla fixed-income securities (specifically corporate agency securities, corporate retail notes, municipal bonds and fixed-rate certificates of deposits).
"Adding structured retail products (including commodity-, currency-, equity- and interest rate-linked securities) allows Bonds.com to help clients diversify their portfolios beyond fixed-income products and gives the firm a whole new revenue stream and business to grow," Barry said. "Bonds.com can offer the one-stop-shopping everyone is looking for."
Click here to read the entire article.
Thursday, August 7, 2008
IndexUniverse.com: DB ETNs Replicate Graham Strategies
Written by Heather Bell
Thursday, 07 August 2008 14:19
Deutsche Bank is further expanding its offering of exchange-traded notes - this time through its association with the ELEMENTS platform rather than its agreement with Invesco PowerShares.
Thursday saw the launch of three ETNs tracking the Benjamin Graham Intelligent Value indexes through the ELMENTS platform. The indexes, according to a press release from Deutsche Bank, are "based on the investment philosophy of Benjamin Graham, which seeks to identify businesses with strong, liquid balance sheets that trade at a discount to their implied intrinsic value."
Benjamin Graham, an economist and investor considered to be the originator of the value investing concept, is an icon in the financial world. He was a strong influence on the opinions of many of the world's best-known financial minds, including and especially Warren Buffett. Graham died in 1976.
The indexes are designed by Hyde Park Group, which is owned by Nuveen Investments.
The three value-oriented funds cover the total market and the large-cap and small-cap segments. They include the following:
== Benjamin Graham Large Cap Value ELEMENTS (NYSEArca: BVL)
== Benjamin Graham Small Cap Value ELEMENTS (NYSEArca: BSC)
== Benjamin Graham Total Market Value ELEMENTS (NYSEArca: BVT)
It's not clear who these ETNs are targeted at, although there are plenty of investors who still take Graham's philosophy to heart more than 30 years after his death. It's also unclear how the indexes will replicate Graham's philosophy.
Each fund charges an expense ratio of 0.75%.
Source: IndexUniverse.com. Click here for original posting.
Thursday, 07 August 2008 14:19
Deutsche Bank is further expanding its offering of exchange-traded notes - this time through its association with the ELEMENTS platform rather than its agreement with Invesco PowerShares.
Thursday saw the launch of three ETNs tracking the Benjamin Graham Intelligent Value indexes through the ELMENTS platform. The indexes, according to a press release from Deutsche Bank, are "based on the investment philosophy of Benjamin Graham, which seeks to identify businesses with strong, liquid balance sheets that trade at a discount to their implied intrinsic value."
Benjamin Graham, an economist and investor considered to be the originator of the value investing concept, is an icon in the financial world. He was a strong influence on the opinions of many of the world's best-known financial minds, including and especially Warren Buffett. Graham died in 1976.
The indexes are designed by Hyde Park Group, which is owned by Nuveen Investments.
The three value-oriented funds cover the total market and the large-cap and small-cap segments. They include the following:
== Benjamin Graham Large Cap Value ELEMENTS (NYSEArca: BVL)
== Benjamin Graham Small Cap Value ELEMENTS (NYSEArca: BSC)
== Benjamin Graham Total Market Value ELEMENTS (NYSEArca: BVT)
It's not clear who these ETNs are targeted at, although there are plenty of investors who still take Graham's philosophy to heart more than 30 years after his death. It's also unclear how the indexes will replicate Graham's philosophy.
Each fund charges an expense ratio of 0.75%.
Source: IndexUniverse.com. Click here for original posting.
Monday, August 4, 2008
WSJ: FAQs on ETNs - What You Need to Know
Here's what you need to know about exchange-traded notes. Starting with: What are they?
By SHEFALI ANAND
August 4, 2008; Page R2
Wall Street firms may be facing all sorts of financial woes, but that hasn't stopped them from churning out a new type of product: exchange-traded notes. The big question: Should you buy?
Exchange-traded notes, or ETNs, are basically debt instruments in which the issuer promises to pay a specified return, usually based on a market index's performance, minus specified fees. Similar to their exchange-traded-fund cousins, ETNs trade throughout the day like stocks.
The issuer typically is a large financial-services firm such as an investment bank or commercial bank. Staking out market share have been Deutsche Bank AG, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and UBS AG, among others.
So far this year, 63 ETNs have been launched, compared with 22 in all of 2007. In contrast, ETF issuance has slowed, with about 104 launches so far this year, below the pace that resulted in 259 new ETFs last year. Research firm Morningstar Inc. now tracks 89 ETNs with $7.3 billion in assets, versus 732 ETFs with about $586 billion under management.
A majority of ETNs provide exposure to commodities, while others focus on currencies and the
stock markets of single countries. For whom are these investment vehicles best suited? And are they dicey if they are issued by Wall Street firms? Here is what you need to know:
Q: What is the history of these products?
A: These aren't new inventions. Since the 1990s, banks have created "structured notes" for wealthy clients and institutional accounts, often with bells and whistles. For instance, a note might promise an investor 1.2 times the return of the Standard & Poor's 500-stock index over two years, up to a capped amount, and it might promise to give investors at least some of their principal back in the event of a decline.
When stock markets are distressed, think exchange-traded funds -- specifically bond funds.
In 2006, Barclays Bank PLC, a unit of Barclays PLC, issued a fairly simple structured note that could be traded on a stock exchange in small units. Its first two ETNs focused on well-known commodity-basket indexes: iPath S&P GSCI Total Return Index ETN, which tracks the Standard & Poor's Goldman Sachs Commodity Index, and iPath Dow Jones-AIG Commodity Index Total Return ETN, which tracks an index from American International Group Inc. and Dow Jones & Co., a unit of News Corp. and the publisher of this newspaper.
Q: Who uses them and why?
A: ETNs have become popular among financial advisers looking for ways to put their clients into certain asset classes that previously were difficult to tap.
For instance, only a handful of mutual funds and ETFs provide exposure to commodities. This is partly because mutual funds and ETFs are governed by mutual-fund regulations that prohibit direct ownership of commodities and restrict the level of financial futures and debt leverage that can be used to juice returns. (The well-known SPDR Gold Shares is often referred to as an ETF, but it actually is a complicated "grantor trust" in which gold bullion is held in trust for the benefit of shareholders.)
Since ETNs aren't governed by the same laws, they have more liberty to invest in complex financial derivatives and use heavy leverage. "A lot of these [ETNs], you just couldn't pull them off in an ETF structure," says Brian Kazanchy of financial-advisory firm RegentAtlantic Capital LLC, in Chatham, N.J.
Of the 54 commodity ETNs on the market, some track a diversified commodity index and others
focus on a single commodity, like coffee or sugar. The largest is iPath Dow Jones-AIG Commodity Index Total Return, at nearly $3.4 billion.
Some ETNs issued by Deutsche Bank promise to double the return of a commodity, like gold, and others promise to double the inverse of the returns, making it an ultrabearish bet.
Two-thirds of ETNs currently hold less than $10 million apiece, according to Morningstar.
Q: Should small investors buy ETNs?
A: Financial advisers say investors should fully understand these products before jumping in. They say individuals probably should steer clear of the niche ones, such as single-currency or single-commodity ETNs, or those that promise to double the returns of an index or double the inverse of a commodity's performance.
Lou Stanasolovich, a financial adviser in Pittsburgh, believes that all investors should have commodity exposure of 5% to 10% in their portfolio. He recommends that individuals stick to a broad-based ETN like the iPath Dow Jones-AIG Commodity Index Total Return.
He says investors should start with a 1% to 3% allocation, and add another percentage point or two as they get more comfortable with these instruments.
Investors also should diversify among ETN issuers to reduce exposure to the debt of any single firm. "You'd want less than 5% in any one counterparty," says RegentAtlantic's Mr. Kazanchy. Investors might want to build up to a 10% allocation to commodities by using commodity ETNs in conjunction with commodity ETFs and mutual funds.
"It is important not to put all your eggs in one basket," says Nelson Lam, an investment adviser in Lake Oswego, Ore.
For the complete article from the Wall Street Journal, click here.
By SHEFALI ANAND
August 4, 2008; Page R2
Wall Street firms may be facing all sorts of financial woes, but that hasn't stopped them from churning out a new type of product: exchange-traded notes. The big question: Should you buy?
Exchange-traded notes, or ETNs, are basically debt instruments in which the issuer promises to pay a specified return, usually based on a market index's performance, minus specified fees. Similar to their exchange-traded-fund cousins, ETNs trade throughout the day like stocks.
The issuer typically is a large financial-services firm such as an investment bank or commercial bank. Staking out market share have been Deutsche Bank AG, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and UBS AG, among others.
So far this year, 63 ETNs have been launched, compared with 22 in all of 2007. In contrast, ETF issuance has slowed, with about 104 launches so far this year, below the pace that resulted in 259 new ETFs last year. Research firm Morningstar Inc. now tracks 89 ETNs with $7.3 billion in assets, versus 732 ETFs with about $586 billion under management.
A majority of ETNs provide exposure to commodities, while others focus on currencies and the
stock markets of single countries. For whom are these investment vehicles best suited? And are they dicey if they are issued by Wall Street firms? Here is what you need to know:
Q: What is the history of these products?
A: These aren't new inventions. Since the 1990s, banks have created "structured notes" for wealthy clients and institutional accounts, often with bells and whistles. For instance, a note might promise an investor 1.2 times the return of the Standard & Poor's 500-stock index over two years, up to a capped amount, and it might promise to give investors at least some of their principal back in the event of a decline.
When stock markets are distressed, think exchange-traded funds -- specifically bond funds.
In 2006, Barclays Bank PLC, a unit of Barclays PLC, issued a fairly simple structured note that could be traded on a stock exchange in small units. Its first two ETNs focused on well-known commodity-basket indexes: iPath S&P GSCI Total Return Index ETN, which tracks the Standard & Poor's Goldman Sachs Commodity Index, and iPath Dow Jones-AIG Commodity Index Total Return ETN, which tracks an index from American International Group Inc. and Dow Jones & Co., a unit of News Corp. and the publisher of this newspaper.
Q: Who uses them and why?
A: ETNs have become popular among financial advisers looking for ways to put their clients into certain asset classes that previously were difficult to tap.
For instance, only a handful of mutual funds and ETFs provide exposure to commodities. This is partly because mutual funds and ETFs are governed by mutual-fund regulations that prohibit direct ownership of commodities and restrict the level of financial futures and debt leverage that can be used to juice returns. (The well-known SPDR Gold Shares is often referred to as an ETF, but it actually is a complicated "grantor trust" in which gold bullion is held in trust for the benefit of shareholders.)
Since ETNs aren't governed by the same laws, they have more liberty to invest in complex financial derivatives and use heavy leverage. "A lot of these [ETNs], you just couldn't pull them off in an ETF structure," says Brian Kazanchy of financial-advisory firm RegentAtlantic Capital LLC, in Chatham, N.J.
Of the 54 commodity ETNs on the market, some track a diversified commodity index and others
focus on a single commodity, like coffee or sugar. The largest is iPath Dow Jones-AIG Commodity Index Total Return, at nearly $3.4 billion.
Some ETNs issued by Deutsche Bank promise to double the return of a commodity, like gold, and others promise to double the inverse of the returns, making it an ultrabearish bet.
Two-thirds of ETNs currently hold less than $10 million apiece, according to Morningstar.
Q: Should small investors buy ETNs?
A: Financial advisers say investors should fully understand these products before jumping in. They say individuals probably should steer clear of the niche ones, such as single-currency or single-commodity ETNs, or those that promise to double the returns of an index or double the inverse of a commodity's performance.
Lou Stanasolovich, a financial adviser in Pittsburgh, believes that all investors should have commodity exposure of 5% to 10% in their portfolio. He recommends that individuals stick to a broad-based ETN like the iPath Dow Jones-AIG Commodity Index Total Return.
He says investors should start with a 1% to 3% allocation, and add another percentage point or two as they get more comfortable with these instruments.
Investors also should diversify among ETN issuers to reduce exposure to the debt of any single firm. "You'd want less than 5% in any one counterparty," says RegentAtlantic's Mr. Kazanchy. Investors might want to build up to a 10% allocation to commodities by using commodity ETNs in conjunction with commodity ETFs and mutual funds.
"It is important not to put all your eggs in one basket," says Nelson Lam, an investment adviser in Lake Oswego, Ore.
For the complete article from the Wall Street Journal, click here.
Saturday, August 2, 2008
Happy Birthday, iPath ETNs (seekingalpha.com)
By Brad Zigler
Reprinted from June 10, 2008 edition of seekingalpha.com
Slice the cake, pour the punch and let's hope we're not headed into the "terrible twos" now that two groundbreaking exchange-traded notes are celebrating their two-year anniversaries. The iPath S&P/GSCI Total Return Index ETN (NYSE Arca: GSP) and the iPath Dow Jones-AIG Commodity Index Total Return ETN (NYSE Arca: DJP) reached that milestone Friday.
Owners of the notes have reason to celebrate, too. The benchmarks tracked by both ETNs have sharply outdone both the stock and bond markets since their launch. The S&P/GSCI, for example, has risen at a compound annual rate of 21.9% since GSP's inception. The Dow-Jones-AIG Commodity Index, meanwhile, has cranked out a 16% annual return. Compared against the S&P 500's average annual return of 5.8% and the Lehman Aggregate Bond Index's 6.6% average gain, a dollop of commodity exposure, in retrospect, would have been a wise choice for most portfolio allocators. The commodity benchmarks' further value as portfolio diversifiers is manifested by their low correlations - 3.8% for S&P/GSCI and 10.4% for DJ-AICGI - to the S&P 500. Both commodity indexes are negatively correlated against the Lehman bond benchmark.
Issued by Barclays Bank plc, an operating unit of British financial-services giant Barclays plc, the iPath ETNs are 30-year senior zero-coupon debt securities that promise to pay investors their underlying commodity index returns, less annual fees of 0.75%.
ETN investors, thus, rely on Barclays to remain solvent until they liquidate their ETNs, trading off portfolio tracking error for credit risk. Unlike exchange-traded funds, there's no physical portfolio to manage with an ETN. Therefore, there are no frictional transactions to cause returns to vary from the benchmark: no commissions, no spreads and no timing error.
ETNs are more tax efficient than exchange-traded funds, too. Commodity ETFs hold futures contracts in portfolio that must be rolled forward, creating taxable events. In addition, portfolio positions open at year-end must be "marked to market" for tax settlement. Any capital gains realized from rolls and marking to market are treated as 60% long-term gains and 40% short-term, translating into a top blended tax rate of 23%.
Futures ETNs, though, are presently taxed as prepaid contracts, exposing investors to a tax liability only if a gain is recognized upon the ETNs' sale or when the notes mature. Holding the notes for more than a year, then, means the tax bite on gains max out at 15%.
For the full article from SeekingAlpha.com, click here.
Reprinted from June 10, 2008 edition of seekingalpha.com
Slice the cake, pour the punch and let's hope we're not headed into the "terrible twos" now that two groundbreaking exchange-traded notes are celebrating their two-year anniversaries. The iPath S&P/GSCI Total Return Index ETN (NYSE Arca: GSP) and the iPath Dow Jones-AIG Commodity Index Total Return ETN (NYSE Arca: DJP) reached that milestone Friday.
Owners of the notes have reason to celebrate, too. The benchmarks tracked by both ETNs have sharply outdone both the stock and bond markets since their launch. The S&P/GSCI, for example, has risen at a compound annual rate of 21.9% since GSP's inception. The Dow-Jones-AIG Commodity Index, meanwhile, has cranked out a 16% annual return. Compared against the S&P 500's average annual return of 5.8% and the Lehman Aggregate Bond Index's 6.6% average gain, a dollop of commodity exposure, in retrospect, would have been a wise choice for most portfolio allocators. The commodity benchmarks' further value as portfolio diversifiers is manifested by their low correlations - 3.8% for S&P/GSCI and 10.4% for DJ-AICGI - to the S&P 500. Both commodity indexes are negatively correlated against the Lehman bond benchmark.
Issued by Barclays Bank plc, an operating unit of British financial-services giant Barclays plc, the iPath ETNs are 30-year senior zero-coupon debt securities that promise to pay investors their underlying commodity index returns, less annual fees of 0.75%.
ETN investors, thus, rely on Barclays to remain solvent until they liquidate their ETNs, trading off portfolio tracking error for credit risk. Unlike exchange-traded funds, there's no physical portfolio to manage with an ETN. Therefore, there are no frictional transactions to cause returns to vary from the benchmark: no commissions, no spreads and no timing error.
ETNs are more tax efficient than exchange-traded funds, too. Commodity ETFs hold futures contracts in portfolio that must be rolled forward, creating taxable events. In addition, portfolio positions open at year-end must be "marked to market" for tax settlement. Any capital gains realized from rolls and marking to market are treated as 60% long-term gains and 40% short-term, translating into a top blended tax rate of 23%.
Futures ETNs, though, are presently taxed as prepaid contracts, exposing investors to a tax liability only if a gain is recognized upon the ETNs' sale or when the notes mature. Holding the notes for more than a year, then, means the tax bite on gains max out at 15%.
For the full article from SeekingAlpha.com, click here.
SPA Asks SEC to Distinguish SPs from Asset-Backeds (StructuredRetailProducts.com)
by Lori Pisani
August 1, 2008
The US Structured Products Association (SPA) has written to the US Securities and Exchange Commission requesting that the regulator make a clearer definitional and regulatory distinction between structured products, and structured finance and credit products at the heart of the US subprime crisis.
The SPA says it does not want the growing structured institutional and retail industries to become entangled in the recent regulations proposed by the SEC regarding credit rating agencies deciding and awarding credit ratings to structured credit products.
“We do not believe that the Commission intended to address… the ratings process for other securities, nor do we believe that the proposed rules… are appropriate for structured products, in light of their different structure, economics and risks,” said SPA chairman Keith Strycula in a letter dated 25 July.
He added that press citations often confuse structured products with the controversial structured credit products, which are continuing to cause turmoil for investors in the US.
“There are many… important differences between asset-backed securities and structured products, which suggest that it is important for any new rules and regulations to make a distinction between them,” said Styrcula. “If the Commission were to determine not to specifically exclude ‘structured products’ from the application of these proposed rules, the Association is concerned about the chilling effect these will have on the market.”
“It’s fair to assume that the SEC was focused on structured finance products, but in the release, the language used was pretty general and broad,” said Anna Pinedo, partner in US law firm Morrison Foerster’s and a member of the SPA committee addressing this issue. “Our intent is to have the SEC take a look at definitions.”
The SPA’s stated mission is to promote the development of the structured products market in the US, distinguish them as a separate asset class and ensure that investors understand the terms and risks of their investments.
August 1, 2008
The US Structured Products Association (SPA) has written to the US Securities and Exchange Commission requesting that the regulator make a clearer definitional and regulatory distinction between structured products, and structured finance and credit products at the heart of the US subprime crisis.
The SPA says it does not want the growing structured institutional and retail industries to become entangled in the recent regulations proposed by the SEC regarding credit rating agencies deciding and awarding credit ratings to structured credit products.
“We do not believe that the Commission intended to address… the ratings process for other securities, nor do we believe that the proposed rules… are appropriate for structured products, in light of their different structure, economics and risks,” said SPA chairman Keith Strycula in a letter dated 25 July.
He added that press citations often confuse structured products with the controversial structured credit products, which are continuing to cause turmoil for investors in the US.
“There are many… important differences between asset-backed securities and structured products, which suggest that it is important for any new rules and regulations to make a distinction between them,” said Styrcula. “If the Commission were to determine not to specifically exclude ‘structured products’ from the application of these proposed rules, the Association is concerned about the chilling effect these will have on the market.”
“It’s fair to assume that the SEC was focused on structured finance products, but in the release, the language used was pretty general and broad,” said Anna Pinedo, partner in US law firm Morrison Foerster’s and a member of the SPA committee addressing this issue. “Our intent is to have the SEC take a look at definitions.”
The SPA’s stated mission is to promote the development of the structured products market in the US, distinguish them as a separate asset class and ensure that investors understand the terms and risks of their investments.
Tuesday, July 29, 2008
DWS Scudder Doubles S-Notes Sales to $600 Million (Investment News)
Excerpt: DWS Scudder has launched 155 structured notes since 2006, including 59 through June 30 of this year, with another 61 expected by the end of the year. It expects to sell $600 million in structured notes this year, compared with $300 million last year.
By Aaron Siegel
Investment News
In a bid to increase its market share among retail investors in the United States, DWS Investments has pursued a branding strategy and broadened its product line.
Its parent company, Deutsche Asset Management Inc. of New York, changed the name of its U.S. retail unit to DWS Investments, from DWS Scudder. The name switch means that the company will operate under a single brand.
"It makes sense for DWS to have a global brand ... so the brand positioning is consistent with the rest of the world," said Howard Schneider, a former Scudder employee and president of Boxford, Mass.-based Practical Perspectives LLC. "Having multiple brands just causes confusion as to who you are, unless you are creating a certain brand for a certain way of managing money."
The company has been pushing to penetrate the U.S. adviser market long before the re-branding. It has expanded its sales organization to 200 wholesalers, from 172 in 2005, and plans to expand its head count next year.
Additionally, the firm plans "to play a bigger role in the U.S. market" and has expanded the company's product mix beyond mutual funds, said Axel Schwarzer, chief executive of DWS Investments.
The asset management firm wants to become a multiwrapper absolute-return manager that integrates retail, alternative investments, insurance and institutional businesses, the company said.
To attract advisers, New York-based DWS Investments has unveiled a slogan and a website to highlight its commitment to advisers.
Using the "Reshaping Investing" slogan, the company is emphasizing how it will help investors cope with lower-return expectations and higher volatility through investments in alternative investments, structured notes, absolute returns and structured products, according DWS Investments.
DWS has launched 155 structured notes since 2006, including 59 through June 30 of this year, with another 61 expected by the end of the year. It expects to sell $600 million in structured notes this year, compared with $300 million last year.
Additionally, DWS Investments launched the DWS RREEF Global Infrastructure Fund this year, after bringing to market in 2007 the DWS Disciplined Market Neutral Fund, DWS Alternative Asset Allocation Fund, DWS LifeCompass Protect Fund and DWS Life Compass Income Fund.
DWS Investments manages $817 billion in assets worldwide, including $345.9 billion of retail assets under management as of March 31.
Fully 71% of those assets are from European investors, while 24% are from the Americas, and 5% are from the Asia-Pacific region.
The figure also includes $80 billion in retail and retirement assets in the United States.
The company also wants to move up its asset rank to the top 10, from 24th, in the United States, and to the top five globally, from ninth.
However, Mr. Schneider questions whether DWS' strategy to focus on just niches will help propel it into the top 10 among asset managers. DWS Investments is "doing lots of innovative things, and the challenge is to get critical mass" in products such as alternatives and structured notes, he said.
A danger in creating these kinds of products "is that you can be successful but not raise enough assets to raise the core of your business," Mr. Schneider said. "If their goal is to become a top 10 asset manager, they have to hit the right niche, then they have to have the right product to bring to market."
Meanwhile, one analyst is taking a wait-and-see approach.
"DWS has made some positive changes to focus on their strengths, and we need to see them stabilize and deliver good results for shareholders," said Miriam Sjoblom, a mutual fund analyst for Morningstar Inc. of Chicago. "Just putting the changes in place is not good enough, and we need to see them actually work."
E-mail Aaron Siegel at asiegel@investmentnews.com.
By Aaron Siegel
Investment News
In a bid to increase its market share among retail investors in the United States, DWS Investments has pursued a branding strategy and broadened its product line.
Its parent company, Deutsche Asset Management Inc. of New York, changed the name of its U.S. retail unit to DWS Investments, from DWS Scudder. The name switch means that the company will operate under a single brand.
"It makes sense for DWS to have a global brand ... so the brand positioning is consistent with the rest of the world," said Howard Schneider, a former Scudder employee and president of Boxford, Mass.-based Practical Perspectives LLC. "Having multiple brands just causes confusion as to who you are, unless you are creating a certain brand for a certain way of managing money."
The company has been pushing to penetrate the U.S. adviser market long before the re-branding. It has expanded its sales organization to 200 wholesalers, from 172 in 2005, and plans to expand its head count next year.
Additionally, the firm plans "to play a bigger role in the U.S. market" and has expanded the company's product mix beyond mutual funds, said Axel Schwarzer, chief executive of DWS Investments.
The asset management firm wants to become a multiwrapper absolute-return manager that integrates retail, alternative investments, insurance and institutional businesses, the company said.
To attract advisers, New York-based DWS Investments has unveiled a slogan and a website to highlight its commitment to advisers.
Using the "Reshaping Investing" slogan, the company is emphasizing how it will help investors cope with lower-return expectations and higher volatility through investments in alternative investments, structured notes, absolute returns and structured products, according DWS Investments.
DWS has launched 155 structured notes since 2006, including 59 through June 30 of this year, with another 61 expected by the end of the year. It expects to sell $600 million in structured notes this year, compared with $300 million last year.
Additionally, DWS Investments launched the DWS RREEF Global Infrastructure Fund this year, after bringing to market in 2007 the DWS Disciplined Market Neutral Fund, DWS Alternative Asset Allocation Fund, DWS LifeCompass Protect Fund and DWS Life Compass Income Fund.
DWS Investments manages $817 billion in assets worldwide, including $345.9 billion of retail assets under management as of March 31.
Fully 71% of those assets are from European investors, while 24% are from the Americas, and 5% are from the Asia-Pacific region.
The figure also includes $80 billion in retail and retirement assets in the United States.
The company also wants to move up its asset rank to the top 10, from 24th, in the United States, and to the top five globally, from ninth.
However, Mr. Schneider questions whether DWS' strategy to focus on just niches will help propel it into the top 10 among asset managers. DWS Investments is "doing lots of innovative things, and the challenge is to get critical mass" in products such as alternatives and structured notes, he said.
A danger in creating these kinds of products "is that you can be successful but not raise enough assets to raise the core of your business," Mr. Schneider said. "If their goal is to become a top 10 asset manager, they have to hit the right niche, then they have to have the right product to bring to market."
Meanwhile, one analyst is taking a wait-and-see approach.
"DWS has made some positive changes to focus on their strengths, and we need to see them stabilize and deliver good results for shareholders," said Miriam Sjoblom, a mutual fund analyst for Morningstar Inc. of Chicago. "Just putting the changes in place is not good enough, and we need to see them actually work."
E-mail Aaron Siegel at asiegel@investmentnews.com.
Friday, July 25, 2008
SPA Comments to SEC on Proposed ABS' Credit Rating Rules
July 25, 2008
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Attn: Nancy M. Morris, Secretary
Re: Proposed Rules for Nationally Recognized Statistical Rating Organizations Release No. 34 57967 (File No. S7 13 08)
Ladies and Gentlemen:
This letter is submitted on behalf of the Structured Products Association in response to the request of the Securities and Exchange Commission (the “Commission” or the “SEC”) for comments on Release No. 34-57967 (the “Release”). The Release sets forth proposed rules that aim to increase transparency and avoid conflicts of interest in the credit rating process. We note that at or about the same time that the Commission published the Release, the Commission also published several other proposed revisions to the Commission’s rules and regulations that refer to and rely upon credit ratings. We are not commenting on those additional rule proposals.
The comments presented in this letter represent the views of the Structured Products Association (the "SPA" or the "Association"). The Structured Products Association is a New York-based trade group. The Association’s mission includes positioning structured products as a distinct asset class; promoting financial innovation among member firms; developing model “best practices” for members and their firms; and identifying legal, tax, compliance and regulatory challenges to the structured products industry. The Association was the first trade organization for structured products in the United States and now has more than 2,000 members, including members from securities exchanges, self-regulatory organizations, law firms, compliance professionals, investor networks, family offices, and buy-side and sell-side structured products firms. The Association counts among its members some of the largest and most active investment banks and distributors in the U.S. structured products market.
The Association is committed to promoting the development and growth of the structured products market in the United States, and to ensuring that investors in structured products understand the terms and risks of their investments. To our dismay, there has been a great deal of confusion in the popular business press regarding the nature of “structured products.” For example, in articles and commentaries on the current credit crisis, “structured products” have been frequently confused with products issued by securitization vehicles, including mortgage-backed and asset-backed securities, such as CDOs and CLOs.
Please note that, unlike the securities at the heart of the current credit crisis, the holders of these structured securities are subject only to the creditworthiness of the issuer of these securities. The issuer of structured products does not typically pass along (and therefore depend upon) the payments from the underlying assets, as would occur in the case of a securitization transaction.
The entire comment letter can be accessed from the SPA website by clicking here.
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Attn: Nancy M. Morris, Secretary
Re: Proposed Rules for Nationally Recognized Statistical Rating Organizations Release No. 34 57967 (File No. S7 13 08)
Ladies and Gentlemen:
This letter is submitted on behalf of the Structured Products Association in response to the request of the Securities and Exchange Commission (the “Commission” or the “SEC”) for comments on Release No. 34-57967 (the “Release”). The Release sets forth proposed rules that aim to increase transparency and avoid conflicts of interest in the credit rating process. We note that at or about the same time that the Commission published the Release, the Commission also published several other proposed revisions to the Commission’s rules and regulations that refer to and rely upon credit ratings. We are not commenting on those additional rule proposals.
The comments presented in this letter represent the views of the Structured Products Association (the "SPA" or the "Association"). The Structured Products Association is a New York-based trade group. The Association’s mission includes positioning structured products as a distinct asset class; promoting financial innovation among member firms; developing model “best practices” for members and their firms; and identifying legal, tax, compliance and regulatory challenges to the structured products industry. The Association was the first trade organization for structured products in the United States and now has more than 2,000 members, including members from securities exchanges, self-regulatory organizations, law firms, compliance professionals, investor networks, family offices, and buy-side and sell-side structured products firms. The Association counts among its members some of the largest and most active investment banks and distributors in the U.S. structured products market.
The Association is committed to promoting the development and growth of the structured products market in the United States, and to ensuring that investors in structured products understand the terms and risks of their investments. To our dismay, there has been a great deal of confusion in the popular business press regarding the nature of “structured products.” For example, in articles and commentaries on the current credit crisis, “structured products” have been frequently confused with products issued by securitization vehicles, including mortgage-backed and asset-backed securities, such as CDOs and CLOs.
Please note that, unlike the securities at the heart of the current credit crisis, the holders of these structured securities are subject only to the creditworthiness of the issuer of these securities. The issuer of structured products does not typically pass along (and therefore depend upon) the payments from the underlying assets, as would occur in the case of a securitization transaction.
The entire comment letter can be accessed from the SPA website by clicking here.
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