Morgan West Group looks further afield

Market turmoil has led to a decline in structured product volumes in South Africa and investors have turned to vanilla products featuring capital protection. Magda Ali speaks to Thomas Breslin at Morgan West Group, one of the first providers to introduce capital guarantees to the South African market

In 2001, market turbulence had left a lasting dent on the South African rand. Many investors who had built their portfolios around US and European equity structures hoped they would benefit from the swift depreciation in their home currency, but most were left nursing losses after they discovered that the zero-coupon element was denominated in rand. Coupled with a collapse in global equity markets, this put people off complex products and the structured products market came to be viewed with cynicism.

“Everyone is still scared to death of equities – now because of absolute levels and, for the past couple of years, because of the crisis overhang,” says Thomas Breslin, chief executive at Morgan West Group in Johannesburg. “The South African market is led by maximisation of returns, particularly in a low-interest-rate market like today,” he says.

“What is happening now is that there is huge capacity and need for offshore hard currency-denominated exposure,” says Breslin. “The problem is that the interest rate environment in dollars and euro is so low that you need real, focused expertise to get a simple, saleable and economically valuable exposure out of those currencies.”

Morgan West Group has been distributing products in South Africa since 1996, and was one of the first structured products distributors to introduce the concept of capital guaranteed products into the retail market. “We were one of the first players in the major institutional markets in the country and were the first to introduce a listed market for structured products in conjunction with Standard Bank,” says Breslin. “The products we issue reflect two major efficiencies: the platform used and economic or underlying used in the structure. The listed platform assures absolute transparency of cost structures and liquidity, and our independence allows us to source the best economic outcome available either here or from offshore.”

The investment group distributes products in the South African market across two profiles. The retail business is predominantly backed through life assurance and private bank branding. The institutional side includes portfolio structured trades hedging specific liability profiles as well as pension fund trades where it generates risk-adjusted investments through the listed platforms.

Historically, the firm has tended to distribute its trades through over-the-counter platforms, but since its 2008 collaboration with Standard Bank and Absa Capital in co-developing two listed platforms in South Africa, the group issues the majority of its structures within the ambit of those developed platforms.

“We prefer to distribute through our listed platforms because the cost of the structured investment is heavily transparent, and it is generally cheaper than any other entry point, including unit trusts. It is certainly the most efficient and simple investment structure for the retail and institutional markets where the objective is to maximise exposure into the riskier asset classes such as commodities and equities while providing for risk limiting protection.“

In terms of the products that sell, it is “simple, protected beta exposure with the capacity to overlay alpha for institutions, paying as little as you possibly can for a properly benchmarked beta solution, particularly for offshore exposures,” says Breslin. “Complex products can work if the concepts are marketable and the risk parameters are easily explainable.”

The group works in collaboration with life assurers, private banks and large brokerage networks in South Africa and develops an array of investment exposures and platforms across all asset classes. Where necessary, they also help in the marketing of that product to that distribution base. Morgan West is independent and works closely with the major South African banks in co-developing platforms and underlyings for products, and effectively underwriting the delivery mechanisms. In the offshore product markets, the group is not tied to any specific bank but works mostly with BNP Paribas, Deutsche Bank and Goldman Sachs.

The distribution of structures in South Africa is behind the curve because of the huge long-only history of the market, and the reticence of asset managers to change a highly profitable game. In terms of how he sees the South African structured products industry evolving, Breslin says that the benefits of diversification into offshore markets and properly formulated protection strategies need to be communicated. “Investors need to get used to the fact that offshore diversification is not a bad thing just by virtue of a few historic problems and that structures are there as a tool with which to reduce risk,” he says. “They need to be taught the benefits of protection and diversification into the offshore markets, as well as the benefits of getting into listed structured products, which gives you the tradability instead of lock-ins which are usually associated with those structured products.”