The head of structured products research at Aegis Equities Research, Matthew Bullock, bemoans the fact that many providers are defiantly ‘black box’ in their attitude, limiting their market. He picks on the Macquarie Winton Global Opportunities Trust, a structured product based on managed futures whose underlying manager, Winton Capital Management, won’t even disclose its investment process to its own staff. “There are only two or three people on Earth who know how it works,” Bullock says.
“The best we can do in our reports on products like that is say to be aware of the volatility, and decide from what you know about them whether you can trust them.” It’s a sentiment one suspects would be laughed out of the average trustee board meeting. And if investment bankers think they are some big cultural hurdles to jump over, they might be better off not calling Frontier Investment Consulting just yet. Managing director Fiona Trafford-Walker considers structured products, with their fee levels imported from retail land, to be unsuitable for her clients full-stop. “We look at the odd one but as a general rule they are too expensive. They are structuring things for a particular moment in time. If you are a long term investor with a prudent strategy, you really don’t need protection.
At the super fund level, it’s probably not advisable to invest in a single item like a collateralised debt obligation – do they, or we, have the expertise to pick which ones are best in comparison to an experienced bond manager who does nothing but invest in fixed interest? I don’t think so,” she says. “Funds are too conscious of MERs to accept structured products. They should only be worried about net returns to members but let’s face it, you can touch and feel MERs so they’re very conscious of their spend on each product.” Not surprisingly, funds managers are also dismissive of their potential new competitors in the wholesale space. A marketer for one, who used to work for a funds manager under the same umbrella of a big investment bank, says that apart from their balance sheets, the banks don’t offer anything that managers could not access themselves. With funds facing more reputation risk than ever, he says that the wheeling-and-dealing image of investment banks, and regular media reports of their executives’ massive salaries, do not chime well with trustees’ self-preservation instincts.
“It’s a legal liability issue – my feedback is that most boards are uncomfortable signing a contract with the structured products area of an investment bank,” he says, adding that many funds still have trust deeds which prohibit such investments. Watson Wyatt’s Tim Unger concurs. “Our clients have a natural wariness and hesitancy to engage directly with an investment bank. They would certainly be looking for a three-way partnership, involving us as a cross-check.” Cultural revolution There is some evidence that investment banks are beginning to get a foot in the door of super funds. A handful of funds, such as Westscheme, have invested directly in collateralised debt obligations, while UBS’ Liddy says there have already been institutional clients for the buybacks service and capital protection strategies.