Australia house of the year: UBS

Structured Products Asia Awards 2017: UBS’s firm grip on Australia is rewarded by upswing

Edward Burns, UBS

Australia’s economy and stock market is geared to the commodity cycle, which has meant that as commodity prices have risen over the past year, the good times have returned for Australian investors. Amid soaring demand for equity-focused solutions, the structuring team at UBS was in pole position to oblige.

The benchmark S&P/ASX 200 went on a gallop from the beginning of 2016 until the middle of May this year, reflecting sharply higher commodity prices and strong demand from China. Volatility, however, remained relatively contained, except for spikes around surprise events such as the UK vote to leave the European Union and the election of US president Donald Trump.

“The broad trend over the past year has been for clients to seek out yield opportunities and to opportunistically monetise volatility whenever possible,” says Edward Burns, executive director at UBS Derivatives. “In addition volumes in geared equity trades rose sharply, reflecting the performance in the equity market, and we were able to capture that increase in our structured business. We also saw an increase in demand for tail-hedging strategies, which were cheap to put on, given the consistently low volatility environment outside of specific events.”

UBS was able to steal a march on its rivals because of the work it has put in over a long period in Australia to develop and maintain relationships with the country’s thriving pension industry, one of the world’s largest with A$2.3 trillion (US$1.83 billion) assets under management. With Australian interest rates flatlining below 2%, the lowest level on record, many of those superannuation funds, or ‘supers’, have relied on the UBS team to locate and provide more enticing yields.

“We have spent a lot of time working out what these clients need and how we can achieve that through tailored products,” says Burns. “We are still in a post-financial crisis environment where people don’t necessarily want complex payoffs, but demand is there for investors to generate more returns than they can do by taking exposure to volatility. Of major importance to clients is the ability to access liquidity and best-of-breed execution.”

Alongside bespoke structuring, UBS has been successful in building out its structured flow business, and has seen solid demand in products such as single-stock warrants, over-the-counter options and single-stock goals for a broad range of clients. On single-stock derivatives trading, the firm runs a book of around 80 names on Australian underlyings – unmatched by any other house – and its flow business around longer-dated reverse convertibles continues to fire, with the book increasing significantly this year.

Unlike most international players, UBS has a dedicated onshore presence in Australia across derivatives sales, trading and structuring, which allows the bank to recycle risk more efficiently and compete aggressively on pricing. On the bespoke side of the market, it has built a reputation as a consistent price provider for large trades, routinely trading clips of more than A$1 billion on equity benchmark trades.

One area where the investment bank has added value over the past year is in the equity space, where it was able to support investor demand for protected exposure. One outstanding product was a portfolio principal loan with a collar, which offered investors the chance to reduce volatility in protected loan portfolios through an investment in a cash trust, alongside an allocation to a portfolio of ASX-listed securities. The cash element of the deal allowed the investors to reduce borrowing costs to an average 6.6%, compared with as much as 14.5% for a pure equity loan.

“Traditional protected lending often looks optically expensive even in a low interest rate environment, so we looked at how we could make that cheaper. In effect we asked the question of how we could bring down the volatility of the entire investment,” says Burns. “By adding in a cash component we were able to reduce the volatility of the portfolio, which in turns brings down the interest rate on the loan, while still giving the client leveraged equity exposures in a limited recourse and tax-efficient manner at about half the rate they would have to pay if they bought straight equity.”

Another product that attracted attention in the past year was a twist on the traditional reverse convertible structure in the form of single-stock callable calls, which are designed to offset the impact of low interest rates through targeted yields of sometimes more than 10% and capitalise on any equity market volatility.

“Essentially, the client is trying to generate yield over a three- to six-month period,” says Burns. “However, what we did was introduce a callable feature that provides a monthly autocall. This means that if the underlying stock increases in value, the investment is autocalled and the client is able to reinvest the proceeds.”

The product is delivered in a fully funded deferred purchase agreement format – setting it apart from lookalike contracts in the listed space.