A combination of booming commodity prices and stable domestic economies for the first time in generations has boosted the wealth of Latin America's entrepreneurs over the past few years. And as the high-net-worth segment expands, structured products are becoming its investment of choice.
However, dealers warn that levels of financial literacy remain low compared to other parts of the world. Education is therefore the basis of many sales, and dealers that want to penetrate the market must spend a lot of time teaching distributors how best to place their products. The distributors then have to spread the word to their clients. Securing therefore requires more than just innovation and marketing. It takes time, patience and consistent effort, even when there is no guarantee of a sale.
Merrill Lynch's rapidly expanding Latin American structured products business comes on the back of such a commitment, and perhaps more than any other dealer the bank is raising awareness of derivatives-based investments in the region. It is a strategy that is paying off in a big way as multi-million dollar deals are regularly brought in by the team, headed by JJ Fernandez, managing director and head of Merrill's structured solutions group for Latin America.
As well as commuting between London and Madrid, Fernandez spends much of his time travelling in Latin America, building a solid book of product buyers. "At least one third of our annual budget is dedicated to education and training," Fernandez says.
Oriol Rius, a colleague of Fernandez in New York, echoes this. "It's not just the banks that are asking us to go and explain how to position a particular product," Ruis says. "We are also holding sessions with the regulators. Last year, for example, we hosted seminars specifically for the regulators in Chile, Colombia and El Salvador."
This level of commitment is attracting a loyal client base to the bank. "Any time we needed more help or training, Merrill were really open to that, and they have made frequent trips to our office in Miami to explain how structured products work," says Juan Carlos Arandia, a product seller with Lloyds TSB, which sells structured notes to private banking clients throughout Latin America. Arandia first established a relationship with Merrill Lynch when based in Lloyds TSB's Miami office. He then transferred to New York. "Their team is really well distributed, and they have access to all the different markets. Another strength is their ability to access what the Merrill Lynch internal client list is doing, and what they are doing with other clients in terms of lead products," he says.
Fernandez says the bank closed more than 340 transactions in Latin America last year, and by mid-March this year had closed around 110 deals. The bank has seen considerable growth in relatively short-dated - one or two-year - yield products linked to either a single stock or a stock index and featuring partial capital protection. Although the bank offers the usual reverse convertibles linked to individual Latin American stocks, a distinguishing feature of the region is the relatively limited opportunity to invest domestically (the market capitalisation of the entire region's stocks sum up to little more than those listed in Italy), which means investors are generally eager to take foreign exposures. "The last transaction we did was for just over $25 million and was a very short-term, one-year product linked to a fund invested in Japan," Fernandez says.
The bank's multi-asset class Allocator Notes have also been popular. The notes have a five-year term, come with full principal protection and are linked to three diversified global portfolios: an income portfolio that is weighted in favour of fixed income, with a further allocation to equities and commodities; an income and growth portfolio that is more equally weighted between fixed income and equities, with some allocation to commodities; and a growth portfolio heavily weighted in favour of equities. At maturity, the notes redeem the principal plus the participation rate of 120% of the net performance of the best-performer of the three portfolios. The performance is not subject to any sort of cap or averaging. Merrill Lynch's commitment to the Latin American market should ensure the continued uptake of these and other products.
WHY MERRILL LYNCH WON
Merrill Lynch has invested heavily in the region, with a firm focus on education. Its allocator notes have proven particularly popular.