Investment markets around the world are increasingly exposed to risk and structured products are likely to play a bigger role in managing that risk.
And technology is ensuring that risk will increasingly be managed on a customised basis to suit the risk profile of the individual rather than groups of investors.
Luvhani Makoni, lead specialist for investment proposition at the Liberty Group, believes that there is a growing interest in structured products because rising geopolitical tensions, a very significant election at home, the pandemic, wars and the heightened risk of trade wars have all increased investment anxiety over the past five years.
Makoni believes that as uncertainty increases volatility, a cohort of investors looking for market exposure feel uncomfortable investing directly. In such cases, structured products with a predefined return from global equity markets with a level of protection are attractive to these investors who are uncomfortable with market volatility and the attendant uncertainties.
Customised for risk
Structured products will have a key role to play in future portfolios that are customised to investors’ risk budgets, according to Roland Rousseau, an independent listed product strategist. In a paper entitled, “Why Portfolio Management is replacing Fund Management”, Rousseau argues that technology has made it possible to create bespoke “financial journeys” for investors on wealth management platforms.
Advisors, wealth managers and discretionary fund managers (DFMs) are increasingly manufacturing portfolios because they understand the investor’s individual needs and can adapt portfolios to suit those changing needs, he continues. These customised solutions use exchange traded funds (ETFs) and guarantees in structured products to ensure that investors achieve their goals instead of just beating a benchmark. The risks in the portfolio can be monitored and adjusted using guarantees to ensure investors are not exposed to risks they do not want to take, Rousseau says. The portfolio can be corrected constantly as the risk of each asset class changes over time to ensure the portfolio is managed to the investor’s “risk budget”.
This is better than a one-size-fits-all unit trust or mutual fund selected to match the investor’s risk profile in the hopes that it will achieve the desired outcome and the investors will remain invested regardless of how the markets perform, Rousseau argues. It is easy now for advisors, wealth managers and DFMs to offer balanced portfolios for small investment amounts using cheap ETFs, actively managed ETFs and certificates and capital guarantees, he says.
Samukelo Zwane, head of product at FNB Wealth and Investments, also expects the role of structured products in South Africa to grow steadily. Structured products will not replace traditional asset classes but will become increasingly useful in complementing them by shaping the risk/return profiles to meet a specific objective, he believes.
The role of these instruments has expanded significantly globally, and a similar trend is emerging locally as technology, platforms and regulation evolve, he adds.
As investors demand more defined outcomes and more efficient offshore access, structured products naturally fill that gap.
Zwane expects banks will continue to lead on the issuance, listing and engineering side, while asset managers and multi-managers will increasingly use these tools within portfolios. Advisors and private-bank wealth managers are likely to drive adoption among retail and high-net-worth clients. Retirement funds will use structured products more selectively, but usage will increase as trustee comfort and governance processes improve, Zwane predicts.
According to Rousseau, it is already possible to list protected versions of large managers’ balanced, equity or global funds on the JSE. These new fund-linked derivatives will allow investors using a trading account or investment platform to choose the fully guaranteed version of any fund rather than the riskier long-only version. Progress has also been made on offering the same fund derivatives without credit risk through collateralisation or ring-fenced trust accounts both onshore and offshore.
Rousseau predicts that in the future, providers with the best risk technology to manage risk more precisely and adapt to major market dislocations, shocks or black swan events will gather the most assets.
BlackRock has created a platform that takes into account 3000 different risk factors and stress tests thousands of “what-if” scenarios to allow advisors and wealth managers to create portfolios suited to investors’ risk tolerances and needs.
Advisors and wealth managers can add a floor at any point to ensure investors do not lose more than a specified amount over any period. When any crisis passes and markets are stable again, this floor can be removed, Rousseau says.
