An increasing willingness by derivatives houses, including Société Générale and Citigroup, to price structured products linked to baskets of European and global mutual funds will likely trigger a flood of issuance, according to distributors. The products, which offer investors varying levels of capital-protected exposure to the upside of mutual funds, appeal principally to retail investors still wary of equity products and direct investment in mutual funds.
Skandia Investment Management launched the first U.K. mutual fund basket product in May (DW, 5/16), but noted at the time only a few banks could price the option on the mutual fund basket, which it bought from Morgan Stanley. In the last three to four weeks, more banks have offered comparable prices to the Morgan Stanley option, noted Jasper Thomas, in investment marketing at Skandia in Southampton. "It seems to be getting a little easier to make these products attractive," he added. Since the Skandia issue, most bulge-bracket houses have priced these investment products with issues in the last few weeks from Kleinwort Benson Private Bank and AXA Investment Managers. Banks are also beginning to price more ambitious products. Last week, for example Banque de Neuflize in Paris, a subsidiary of ABN AMRO, issued a product with exposure to 13 global and European funds.
"It's a good way for the retail network to lead customers back to equity via mutual funds with capital guarantees," said Arnaud Sarfati, head of pricing and new products at Société Générale in Paris. Citigroup has started to dedicate resources to these instruments and beef up its offerings. "It's definitely a growth area," said Daniel McNeill, equity derivatives structurer at Citigroup in London
Fund managers also welcome structured products that give investors exposure to their fund because it increases their assets under management, noted Richard Pavry, director at Jupiter Asset Management in London. However, some structures, such as threshold-based guarantees known as constant proportion portfolio insurance or CPPI, are path dependent and therefore can affect the performance of the fund because capital has to be moved between assets to provide the protection rather than according to perceived value.
