Absa Capital enjoys the boost from Barclays

Absa Capital has steadily expanded its structured products range in the past few years and is optimistic that new product offerings supported by parent company Barclays’ house views on strategy will push demand for structured products even further. By Magda Ali

Ryan Sydow, Absa Capital

Structured products have been around in South Africa for nearly a decade, but it is only now that they are being used by retail investors as part of core investment portfolios. "Gone are the days of opacity and in their place is a set of very simple clear products where the risks are clearly presented for all to see," says Aileen Campbell, head of product and distribution support at Absa Private Bank in Johannesburg. "Structured products are being offered directly from investment banks rather than as part of a strategy within a life insurance wrapper and so forth," says Campbell.

In the first quarter of 2011, Absa only had one kind of structured product on offer to retail investors. One year later, the firm had launched seven different products. "In general, other providers in South Africa are adding to their ranges as well. Increasing demand from clients for alternative investments has skyrocketed, ensuring that the depth and breadth of the product range continues to evolve," says Ryan Sydow, head of retail distribution at Absa Capital, the investment banking division of Absa Bank in Johannesburg.

Integration between Absa and Barclays has enabled the bank to access a wider range of local and international underlyings in a variety of structured products for investors and advisers alike, he says. "New product shapes are supported by strategic asset allocation views, client demand and the need for simplicity. It is important that we have a core range of six to eight products on offer at any one time to cater for varying client risk profiles and investment needs."

Depending on market conditions and client demand, Absa launches structured products to retail, high-net-worth and institutional investors on a tranche basis - so as one trade closes, another opens, the only difference being the dates and payout structure. "This ensures that clients and advisers are not pressurised into signing up for a particular issue and can make a considered investment decision," says Campbell.

As in Europe and the US, capital-protected products dominate the market, with volatility-adjusted underlyings increasing in popularity. Capital-at-risk products with large downside barriers are also attracting interest given the low interest rate environment, says Campbell.

The bank has seen most demand from local investors for its four-year Top 40 Accelerator, which offers two times the market performance with a 50% barrier on the downside. Another theme that has been popular is emerging markets, typified by Absa's Bric Optimiser linked to the S&P Bric 40 Daily Risk 15% Index, with 100% participation and 100% protection, while the most popular product in the past 12 months has been the Diversified Commodity Note, which is a 100% protected basket of eight commodities from the energy, agriculture and metals sectors, with participation levels of 140% and above.

"Globally, the low price/earnings ratios in developed markets provide an opportunity to offer high participation rates in those markets while providing full capital protection and no currency risk," says Campbell.

Given the size of the market in South Africa, as well as the prevailing low interest rates in the country, it is very difficult to structure vanilla investments that can compete with guaranteed life insurance products, many of which use tax losses to provide a better return, she says. "There is an opportunity to introduce passive, algorithmic strategies that are not complex that could provide a better opportunity for investment growth, which is arguably where structured products play best, albeit that they can be designed to pay income too.

"Volatility is public enemy number one when it comes to options pricing, but that is behind the global trend towards using volatility-adjusted underlyings instead," she says.

Volatility-adjusted indexes are growing in popularity in South Africa. The bank has seen demand for products based on Bric 40 and Top 40 linked products with volatility adjustments to limit drawdowns and provide a smoother return profile.

The fees charged by active and discretionary fund managers have come into question. "Many investors are questioning whether these managers are indeed adding the value they are charging for," says Sydow. "In many respects, the passive world is starting to become more and more mainstream and structured products are an integral part of that."

Currently, there is very little co-operation between the banks that do compete in South Africa. "On the back of rising investor demand, investment platforms and advice tools will need to catch up to reflect the subtle operational intricacies of these structured products," says Sydow. "We anticipate that structured products will become part of the mainstream investment universe, offering explicit capital protection, defined returns or access to underlyings that have been traditionally difficult and/or expensive to offer through traditional collective investment schemes."