ING seeking to deliver transparency in Luxembourg

For private bank ING Luxembourg, meeting investor demand for capital-protected structured products has been difficult due to low yields and high volatility. Magda Ali speaks to ING’s Dirk Adrianenssens about how to capture a transparent investment solution which delivers on maturity

"Low yields, volatility and transparency of underlyings are the three main concerns for investors in Luxembourg," says Dirk Adrianenssens, general manager, retail and private banking at ING in Luxembourg. "Either an investor goes for a high participation ratio with a cap, or a lower participation ratio without a cap."

The Benelux market is heavily reliant on capital protection themes. The sweet spot for securing an attractive investment solution is when interest rates are high and volatility is low, says Adrianenssens. "Only then are banks able to incorporate capital protection in structures that offer investors high yields."

The bank adopts a closed architecture approach to its structured products business. Using discretionary management and advisory mandates, it acts as both issuer and distributor of its products.

While its underlyings consist mainly of stock indexes, ING has added specific features to help deliver higher potential returns, says Adrianenssens.

The bank most recently introduced Serenity VSX, a discretionary management product that invests in a wide range of assets, including equities, fixed income, money market investments, currencies, raw materials, real estate and alternative funds run by specialist managers. Serenity VSX seeks to offer an absolute return and reduce the risk of capital losses and offer exposure to market opportunities that are generally unavailable via traditional investments but offers investors no capital or performance guarantees.

With most of its products that track indexes, structures play on the performance of equity buckets to boost yields. "If stock markets remain between certain boundaries for instance, clients play the statistical probability game to have a higher potential return," says Adrianenssens.

Adrianenssens says that the Luxembourg market is driven by payout structures rather than underlyings. This ranges from income paying products, kickout products, capped and uncapped growth products, as well as a whole variety of capital protection options, the actual underlying is not much of a concern, he says. Asset raising has therefore been an issue, he says. In terms of cross-asset allocation and solutions, Adrianenssens says that he does not see much scope for innovation. Around 95% of structures sold are aimed at private offshore investors, reflecting the few retail and institutional investors in the market.

The bank has seen that its traditional investors are looking for larger cashflows. The preference is for growth products, says Adrianenssens. "Most of the time we create these by developing structured notes with an underlying equity risk and with a bond-like payout structure."

This is somewhat linked to the continual battle between structured products and mutual funds, he says. "From time to time people seem to shift the blame from the packaging to the content."

This has a lot to do with marketing, says Adrianenssens. Historically, funds were seen as vehicles that would generate fees, but investors soon moved to structured notes, "thinking that they would represent the ultimate transparency, and they came to the realisation that perhaps this is not the ultimate transparency unless they buy and hold until maturity without looking at the position before maturity.

"When a structure reaches maturity, investors begin to ask questions like why is the product value not rising despite the underlying going up?" he says.

There is still a lack of transparency between the issuance of the structures and the maturities. "Evolutions in yield and volatility during the lifetime of the structured product can create a specific track record which can be very different from that of the underlying. At the maturity date it will converge, though there might be some divergence in between," says Adrianenssens.

This has led investors in the region to favour structures with short maturities, he says.

Investors have realised that between issuance and maturity, structures that are supposed to deliver on maturity tend to perform differently to the underlying. Explaining this to investors remains a huge challenge for banks. And while there is a general consensus among investors that structured products may be a good diversification, he says, "most of the time you're not working on one share or a bond, most of the time you are working on a basket or an index.

"When you look at it from an asset management perspective, it's hard to have a coherent approach in the portfolio. It's not only a question of considering but also of respecting the clients' desired risk profile."

The solution for ING is twofold. "We should be able to explain in a transparent way what is happening in between the issuance and maturity, and explain the value drivers of structured products, knowing that it is more than the rise or downfall of the underlying," he says.

"We see that clients are anticipating a higher yielding environment. Inflation-rate linked products will be the name of the game one day, but for the time being they are being kept in the fridge."