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Schroder Eyes Pioneering Use Of Credit Derivatives In Retail Funds

02 Dec 2002

Schroder Investment Management, a fund manager with USD156.6 billion under management, is considering using leveraged credit derivatives to construct mutual funds in a move several bankers said would be the first instance of pitching credit derivatives to retail investors. John McLaughlin, head of the structured investment team in London, explained Schroder is looking at creating mutual funds that invest mainly in high-grade corporate paper, rated from AA to AAA, and also sell leveraged credit instruments, such as first-to-default baskets, to boost yield. The funds would be closed investments with a fixed-term and offering period, marketed to all types of retail investors and ranging in size from USD15-300 million.

If Schroder detects sufficient demand for the product from retail clients it likely will go ahead in the next 12 months, McLaughlin said.

The fund manager has already begun speaking to derivatives houses about purchasing credit derivatives for these types of products, McLaughlin said, declining to name the firms.

Credit derivatives structurers and marketers said this is the first time they have heard of a mainstream fund manager considering targeting retail clients with credit derivatives, although high-net-worth accounts have expressed interest. A well-known investment manager such as Schroder could be the key to unlocking the retail market, commented a derivatives marketer. "The market needs someone mainstream, with a household name," he said.

About a year ago, Schroder began to canvass opinion among mainly institutional clients about setting up its first fund to sell single-name credit default swaps to enhance yield (DW, 11/26/01). However, there was little appetite from investors. "Now what we are talking about is much more conservative," McLaughlin said, explaining that it would look to purchase fixed-income products that are high up the credit curve with yields of LIBOR plus 50-300 basis points.

02 Dec 2002