Welcome Unveiling the Results of the First Comprehensive Study on Structured Products in Switzerland

Transcription

1 Welcome Unveiling the Results of the First Comprehensive Study on Structured Products in Switzerland SFI Evening Seminar 2 July 2015, SIX ConventionPoint, Zurich

2 Governance Authors of the study Dietmar Maringer, Full Professor, University of Basel. Walter Pohl, Researcher quantitative business administration, University of Zurich. Paolo Vanini, Head of Knowledge Transfer, Swiss Finance Institute; Head of Structured Products, Zürcher Kantonalbank. Is this acceptable governance for the study? No bias in the time period under consideration for the performance study. The start of the study period coincides with the onset of the most recent global financial crisis, of 2008, and covers the entire crisis period. The analysis of costs is a delicate matter given the very definition of structured products. Relying on purely academic authorship is likely to produce only low quality results. This can be observed in many purely academic contributions of recent years. Almost impossible to write about realistic investments from a purely academic perspective. The different backgrounds of the authors ensure a system of checks and balances. SFI Evening Seminar July 2015: 2

3 Agenda Context of the study and our presentation today SFI White Paper study results Questions & answers SFI Evening Seminar July 2015: 3

4 The first comprehensive, representative study of structured products in Switzerland Figure 1: Scope of the study. Performance Transparency Methodology Empirical investigation into the Swiss market. Survey conducted among major issuers to estimate risk management costs. Sample 20,000 and 7,275 products for the performance and cost analyses, respectively. Product types: - Barrier reverse convertibles; Costs Investments - Bonus certificates; - Capital protection certificates; - Discount certificates; - Tracker certificates. SFI Evening Seminar July 2015: 4

5 Performance (I) Figure 2: Fractions of products with positive returns. Main insights : Some 80% of structured products generated positive returns. SFI Evening Seminar July 2015: 5

6 Performance (II) Figure 3: Median performance. Main insights Median returns of between 5% and 15%. Best year: ; most medians were in the range of 19% to 31%. Worst years: (European debt crisis) and 2008 saw large drops in equity markets. - These drops also affected structured products, and they too had negative medians. Capital protection products behave in a similar way to bonds. SFI Evening Seminar July 2015: 6

7 Performance: Barrier reverse convertibles Figure 4: Barrier reverse convertibles. Median (red line), 25% 75% quantile band (gray area), and 15% 85% quantiles (gray lines). Main insights Return distribution widened in 2011 compared to Return versus risk. SFI Evening Seminar July 2015: 7

8 Costs: The problem (I) Figure 5: The different fee and cost components of a structured product. Issuance price (100%) Fair price of components (IEV)¹ (98.5%) Theoretical (model) price (97.5%) Net margin Production & distribution Risk management Total expense ratio (TER) ¹ IEV = issuer estimated value Problems Costs are known best at the maturity of the products. Many components of the costs are not public. Risk management is, unlike production and distribution costs, a profit and loss component of the product borne by the issuer. Price of the complexity and liquidity. SFI Evening Seminar July 2015: 8

9 Costs: The problem (II) Risk management Theoretical price = Price if all components of the product (options, stock, funds, etc.) are priced in a perfect, complete financial market. - No market frictions: bid-ask spreads; Figure 6: Historical 1-year correlation AUD/CHF from Jan 2012 to Jan 2013 (Bloomberg). - No uncertainty premium for changing price-sensitive parameters: dividends, volatilities, and correlations; - No capital-at-risk charges; - No gains from risk-free investments at early redemptions; - No risk costs for the leverage in some products. - Different issuer creditworthiness means different funding spreads. SFI Evening Seminar July 2015: 9

10 Costs: Risk management (I) Economics Investor buys BRC on ABB with a 75% barrier, coupon 5%, TtM 1y. Spot ABB CHF 20; barrier CHF 15. Pricing Zahlung Kunde 100% Distribution 0.50% Produktion 0.50% TER 1.5% ABB stock maturity Nettomarge 0.50% Funding Spread 0.15% Vola Spread 0.20% Dividenden Spread 0.40% Risikomanagement 0.75% Replication Investor: Long BRC = Long Bond + Short DIP. Trader = - Investor = Zahlungsversprechen. SFI Evening Seminar July 2015: 10

11 Costs: Risk management (II) Figure 7: Implied volatility / moneyness Investor verkauft die Option, Händler kauft die Option. Händler bewertet die Option mit einem Spread von 20 bps, d.h. er zahlt dem Investor weniger, als die Option zur Mitte wert ist. 2 Möglichkeiten - Händler verkauft die Option direkt an ein anderes Derivatehaus. Dies kostet den Händler 20 bps. P&L Optionsgeschäft = 0. - Händler behält die Option auf dem Buch und bewirtschaftet die Risiken bis Verfall selber. Bewirtschaftung durch Händler Lokaler P&L Aspekt. Globaler P&L Aspekt. Lokaler P&L Aspekt Wert Option = Anzahl ABB Aktien + Andere Anlagen. Da: Wert Option heute Wert Option morgen. Händler muss die Anzahl Aktien von Tag zu Tag ändern Transaktionskosten. 20 bps decken in der Erwartung diese Transaktionskosten über die Laufzeit decken. SFI Evening Seminar July 2015: 11

12 Costs: Risk management (III) Globaler P&L Aspekt Für den Händler entsteht über die gesamte Laufzeit ein P&L aus dem Vergleich der impliziten und den realisierten Volatilitäten. Der Vergleich wird entlang der gesamten Laufzeit aufsummiert. Das Resultat kann positiv oder negativ sein. Händler benötigt deshalb eine View über die Entwicklung der Volatilitäten, d.h. die 20 bps berücksichtigen dies. Zudem müssen die 20 bps diese möglichen globalen Verluste decken. Bemerkung: Es gibt noch weitere Faktoren, welche eine Rolle spielen. Fazit Risikomanagement aus dem Zahlungsversprechen ist eine echte Leistung. Dies hat auch Produktionskosten wie IT-Infrastruktur, etc. Händler steht im Zentrum, in guten wie in schlechten Zeiten. Kostentransparenz bei strukturierten Produkten ist definitiv ein komplexeres Thema als bei der Produktion von iphones. Frage der Materialität: Wie wichtig ist diese detaillierte Kostentransparenz? Es gibt wichtigere Faktoren für den Anleger, welche verstanden werden sollten. SFI Evening Seminar July 2015: 12

13 Costs: The results Table 1: TERs p.a. for the period April 2012 to April 2015 amounted to: Product type Number of products 25% quantile 50% quantile 75% quantile Barrier reverse convertibles 5, % 1.71% 2.64% Bonus certificates % 0.98% 2.22% Capital protection certificates % 0.58% 1.38% Discount certificates 1, % 1.39% 2.28% Tracker certificates % 0.32% 0.62% Tracker certificates versus funds: Tracker certificates face similar costs to ETFs. Core ETF costs are lower than those of tracker certificates. Active tracker certificates seem to have a price advantage over mutual funds. SFI Evening Seminar July 2015: 13

14 Costs: The German Study Average expected issuer margin, representative data set. Figure 8: Definition of costs. It is a function of time; estimated using linear regression starting from a snap shot day. Risk management figures from implied market values. Secondary market. Our view - Primary market - Customer view Net margin Production & distribution Risk management Total expense ratio (TER) Net margin Production Distribution Risk 1 Risk 2 SFI Evening Seminar July 2015: 14

15 Investments: Investor behavior and BRC case study (I) Figure 9: Lowest value of the S&P500 for annual 3y investments (S&P). Table 2: Barrier events of active BRCs, (Derivative Partners AG). Year Number of Number of Number of Percentage active BRCs active BRCs¹ barrier events ,196 5,196 3,115 60% ,461 3, % ,182 6, % ,839 9,480 3,418 36% ,498 9, % ,932 11, % ,905 10, % ¹ Less BRCs with barrier event in the previous year. Main insights Swiss investors prefer to invest in barrier reverse convertibles on stocks. Such investments occur more often when markets are calm, which is remarkable. In turbulent markets investors in such products receive a higher coupon and/or can choose a lower barrier for the same coupon than in normal markets. A 50% or lower barrier level would have led to capital protection in most past periods. A 70% or 80% barrier cannot be considered to be appropriate for investors that seek a stock-market-cycleindependent investment. SFI Evening Seminar July 2015: 15

16 Investments: Investor behavior and BRC case study (II) Figure 10: Returns of tailor-made BRCs for the investors who used a tailor-made structured-product platform of a Swiss structured products issuer. Main insights (see figure on the left) Average return: 2.2%. Products with a positive return: 77%. Main insights Average return: 7.7%. Products with a positive return: 97.9%. Poison pills. SFI Evening Seminar July 2015: 16

17 Investments: Opportunities and SNB and ECB Events (I) Events occurred. There is no need to hope that something will happen. Strong events often distort the markets. This simplifies the investment view: Do you believe that markets will return to their normal states? There is no need to bet whether markets will increase or decrease; only on whether they will return back to their normal states. Advantage of events Investors Need to be fit to invest; cold-blooded; rational. Need to have a short time-to-market, otherwise opportunities are gone. Need to carve out accurately the investment idea it is all about alpha. Setup for structured products Investment products SFI Evening Seminar July 2015: 17

18 Investments: Opportunities and SNB and ECB Events (II) Opportunity 1 SNB and ECB: Stronger CHF against EUR, and QE boosts European stock markets. Investment idea: Buy for 0.85 CHF a high quality European stock portfolio selected by the issuer's research unit. Product: Simple tracker certificate. Time-to-market: 2 days after the SNB s announcement. Risks: Strong corrections in European stock markets. Opportunity 2 SNB: Negative performance on deposits after costs for private clients and before costs for corporate clients. High volatility in equity markets. Investment idea: Invest in 3 diversified stock indices (SMI, S&P500, EUROSTOXX50) with a very low barrier of, say, 40%. Coupon of 1% to 2% expected. Product: BRC (worst of). Time-to-market: 1 hour after the SNB s announcement. Risks: Although market risk is low, the risk properties are not the same as for a deposit. SFI Evening Seminar July 2015: 18

19 Investments: Opportunities and SNB and ECB Events (II) Opportunity 3 SNB: Almost all Swiss stocks suffered heavy losses. Investment idea: There was no distinction on the part of market participants between Swiss firms facing heavy exposure to CHF and those facing weak exposure. Overreaction is the market distortion. Product: Simple, static tracker certificate on research-selected stocks. Time-to-market: 2 days after the SNB s announcement. Opportunity 4 SNB: USD 1m rates at 0.2% in cash markets. USD 1y rates via FX swap with -0.75% CHF rate at 2.7%. Interest rate basis is the market distortion. Investment idea: Exploit this difference as a qualified investor with a USD account. Product: FX swap. Time-to-market: Immediate. Risks: The opportunity does not converge. Risks: Second correction in Swiss equity markets. SFI Evening Seminar July 2015: 19

20 Investments: Opportunities and SNB and ECB Events (II) Opportunity 5 SNB: Negative interest rates YtM of bonds in CHF becomes negative sell. Investment idea: Product that is close to bonds i.e., pays notional amount plus coupon with similar risk and a positive YtM. Product: Credit linked notes (CLN). Choice from CDS markets for debtors with positive basis (=market distortion). CLN are: - More liquid than bonds; - Have the same debtor risk plus the issuer of CLN note risk; - Enable investors to have a CHF exposure in a large corporate in Europe or the US that has no CHF bond outstanding CLN are a diversification tool for bond portfolios; - CLN follow a procedure well defined by the ISDA in cases of default. What happens to your bond if it defaults? Time-to-market: Several days. Limited number of issuers. Risks: Irrationality when it comes to credit risk. All 5 investment opportunities had a positive return year-to-date. SFI Evening Seminar July 2015: 20

21 Fragen Fragen? Besten Dank für Ihre Aufmerksamkeit. SFI Evening Seminar July 2015: 21