Image problem Macquarie Bank’s Kovacs is acutely aware that along with the extended horizons of super funds comes a more conservative culture, within which investment bankers will need to tread sensitively if they are to win business. “The thing we have to come to terms with is the longer lead times in getting the business, the one or two years of listening to the institution, tailoring the product and matching it to their needs,” Kovacs says. “The key to building those relationships is strong product knowledge, and we are all conscious of the need to be more patient,” with Kovacs adding she has so far taken on most of the institutional marketing herself, with no immediate plans to hire up for a wholesale sales push.
“I know it’s not like selling Mars Bars – it’s not like you can front up to Mr. Telstra Super and say ‘have I got a great new product for you today’.” An objective observer of investment banks’ first forays into the institutional world, Brett Sanders of Grove Research & Advisory, says some over-zealousness from the bankers during the first wave of structured product offerings, two or three years ago now, still needs to be corrected. “There was a bit of mis-selling in the early days. We have a lot of local government and endowment clients for our research, a few of them who bought into some of the early collateralised debt obligations (CDOs) without advice subsequently came to us for tips on selling out,” Sanders says, adding that most structured listings are still trading below their issue price today.
“Floating rate notes were offering 30 or 40 basis points over cash at the time a couple of years ago, but CDOs were advertising 80 to 120 over and a few instos thought ‘wow, that looks pretty good’.” “But before going into structured products, you need to stop just thinking like a depositor, where you only look at yield and credit rating and assume everything will be fine. You need to start thinking like an investor, and consider risk and volatility and fees,” Sanders says. Fees indeed. Say “investment banking” around most institutional gatekeepers, and the ‘f’ word is not far away. “Investment banks have got to get over the trust barrier, and more transparency around fees will help,” says David Neal, the managing director of Watson Wyatt.
“There is just a feeling out there that these structured products are opportunistically priced, the old ‘how much are they making?’ syndrome. Within the swaps they use, it’s not always easy to determine how much you’re actually being charged for the thing.” Neal’s colleague at Watson Wyatt, Tim Unger, points out that when it comes to the over-the-counter derivatives which the investment banks use to make a market for many of their products there is only a limited amount of price discovery. “You’ve got to take it or leave it, and when it’s tactically the best time to buy is usually when they are most expensive,” he says. The image problems which investment bankers might face with an institutional audience are not confined to their fees.