By her own admission, Cathy Kovacs, the group’s director had “never thought” about the institutional market for structured products until early this year, when she took phone calls from a couple of super funds interested in the group’s portfolio protection capabilities. Kovacs’ team itself has now begun making approaches to institutions, for whom she says investment banks are able to offer a wide gamut of services around their capabilities in risk underwriting and derivatives management, made possible by their large balance sheets. Kovacs says most of the institutional interest so far has been for capital protection wrappers around particular member investment choice options, as well the group’s “access” products – where an investment bank will provide synthetic (and possibly leveraged) exposure to a basket of underlying ‘exotic’ funds managers or indices, with an optional capital guarantee thrown in, that usually limits both the potential upside and downside performance. One of the major differences between retail clients and potential super fund clients is their investment outlook.
The structured products released to date have rarely had a life of more than five or six years, whereas retirement investing is for the serious long haul. But Kovacs is unfazed, saying the beauty of structured products is that they live up to their name, and can be built to adapt to all kinds of environments. “We’ve got no problem with the longer investment horizons of institutions. Earning an income from a piece of business over thirty years would be great,” she says. Macquarie is not the only investment bank to have noticed that the wholesale market could be an untapped gold mine. UBS hired Patrick Liddy from the superannuation-friendly milieu of National Custodian Services early last year, originally as head of transition management. However his title has since expanded to head of wholesale services, and he is marketing a three-pronged product offering to lure super funds – portfolio protection strategies, mandate transition management, and a buybacks service not offered discretely elsewhere.
Under this service, UBS will go where funds managers focussed on pre-tax outcomes often fear to tread, and will participate in a buyback on behalf of an institution, consolidating its holdings in the stock and purchasing a call option to hedge repositioning risk. JPMorgan and Citigroup are also gearing up for institutional business. Citigroup’s Irfan Khan thinks super funds will eventually embrace protected products as a way to “lock in” gains, particularly now that the extended bull run of Australian equities looks like it could be over. He also thinks that investment banks’ “rules-based, set-and-forget” access products will be useful for funds who are seeking to separate alpha and beta, given they offer replication strategies for the most exotic of asset classes, free of keyman risk. Investment banks aren’t the only ones making concrete changes in preparation for their playing a bigger role in wholesale funds management. When Intech Investment Consulting announced it was looking for a 50 per cent equity partner last month, it said a major reason was the need for capital to fast-track the development of innovative products, which managing director Michael Monaghan said would emerge due to the “convergence of investment banking, technology and know-how”.
