Anyone in Asia's structured-products world faces a crisis of confidence in the wake of the Lehman minibond fiasco and heavy losses among the region's richest families from 'accumulator' products (structures that sold options on a variety of underlying assets).
Lehman Brothers was not the only bank creating complex derivative products for high-net-worth, retail and institutional investors: all the banks were. The industry now faces not just the potentially heavy hand of regulation, including pressure on distributors to reimburse retail investors, but a challenge to its legitimacy. Complex products appear to have enriched the banks but not the investors, and since mid-September sales have slowed to a crawl.
Despite these headwinds, "The structured-products business is not going to get smaller," asserts Sandra Lee, managing director and head of retail structured products at Societe Generale in Hong Kong. "But the credit crisis will catalyze changes regarding distribution, product quality and investor education."
She defends complex products as a necessary part of a diversified portfolio. The credit crisis has caused securities markets to move in tandem. "Investors need to diversify not only assets, which are highly correlated, but also strategies, to include long/short, structured products and other tools along with long-only exposures," Lee says.
For example, in China, where she spends a lot of time, the bull market caused investors to only buy IPO products -- funds, notes, securities -- with little regard for issues like diversification. Now investors realise there's no sure thing with any of these products, and they need both a broader toolbox and better advice, she says.
Manufacturers, distributors and investors have been shocked into remembering that investment isn't just about headline return expectations, but also about risk controls, liquidity and counterparties. The industry needs to do a better job at ensuring products are sold appropriately.
"Confidence is poor now, but the industry will develop better practices," Lee says, adding the Lehman minibond debacle reminds her of the Nick Leeson scandal, when a rogue trader brought down Barings Bank in 1995, at a time when mutual funds were still catching on in Asia. Barings was one of the early fund providers in Asia (and Baring Asset Management today continues this business), and the collapse of the bank led to a populist backlash against mutual funds in general.
"Again, a whole category of products is under fire," Lee says. "But there are good structured products as well as bad ones."
Just as the Asian financial crisis taught the risk of over-leveraged investments in equities, and the tech bubble's bursting led Asian investors to discover bond funds, Lee predicts the Lehman minibond failure is a chance to put structured products on a sustainable footing.
Investors need some positive experiences, however, before they will return to such products en masse. For now, SG believes products registered with local authorities are likely to find favour with high-net-worth individuals. Traditionally, rich people preferred private placements to retail products (and banks could charge more for creating more complex, customised solutions).
But Lee says that since the end of 2008, sales have risen on SG's retail platform, thanks to new interest from institutions, funds of funds and buy-side firms looking for protected exposure to certain asset classes.
Lee's group also markets exchange-traded funds manufactured by SG affiliate Lyxor Asset Management. ETFs and other listed products are going to comprise a bigger portion of her team's sales efforts, she says. This is particularly true for China, where the exchanges are eager to develop ETFs and the like, and where there's scope to wrap these for QDII programmes, bringing global listed products to the mainland investor base.