UBS in London is marketing investment notes linked to tailor-made property and commodity indices. The firm launched the Global Property 40 Index with Standard & Poor's two weeks ago, and the Constant Maturity Commodity Index in partnership with Bloomberg last week.
David O'Donoghue, responsible for commodity index and exotic structuring at UBS in London, explained commodities and property have been hot areas for both retail and institutional investors. Structures based on real property indices have been hampered by liquidity, however, while investors have been losing faith with existing commodity indices after seeing low returns in recent months. This is due in part to the indices rolling front-end futures contracts for commodities such as crude oil, for example, when futures prices have been higher than the spot prices, resulting in what's known as negative roll yield.
The UBS Bloomberg commodity index looks to avoid this problem by referencing futures contracts with maturities from three months to five years. O'Donoghue said institutional investors will be able to pick the point on the curve they want exposure to. A retail index that includes the range of maturities across 28 different commodities is also being put together. The S&P global property index avoids liquidity problems by referencing companies that have met certain size and liquidity requirements. Working with counterparties like S&P and Bloomberg added independent credibility to the indices, added O'Donoghue.
O'Donoghue said it was coincidence that the two indices have launched so close together but noted this reflects a trend toward theme-based structured products and away from engineering different equity payouts. "There's only so far investors want to go in relation to delivering new payoffs," he noted.
