In a challenging market, characterised by low interest rates, low volatility and increasingly tight regulatory constraints, the secret of BNP Paribas’s success in the French market is a straightforward one, says Terence Darrigade, the bank’s head of equity derivatives sales for France.
“When we win an award, it is because we have met our clients requirements. Why have we met clients’ requirements? Because we have spent many hours meeting with them trying to understand their needs,” he says.
For BNP’s insurance sector clients, their needs are twofold: yield in a low interest rate environment and capital relief in the face of Solvency II. The solution from BNP and its subsidiary Theam Quant was the Equity Income Defensive Fund series, which allows insurance companies to tap into relatively high-return equity markets without incurring the punitive capital charges normally associated with equity market investments.
These funds invest in high-dividend-paying, non-financial European and US stocks, in addition to a sophisticated overlay programme that generates income and reduces risk, providing ‘systematic protection.’ Risk is mitigated to the extent that it earns the investment capital relief under the Solvency II regime, Darrigade explains.
That overlay involves systemically selling short-term calls on the Euro Stoxx 50 equity index, earning some revenue and reducing volatility. The premium earned allows the managers to buy one-year at-the-money put options for 50% of the notional.
“It’s very powerful, because it means that, when an investor wants to know where is his protection, he can go to Bloomberg, and look at the 250-day moving average of the Euro Stoxx 50, and he knows exactly how the fund is positioned if there’s a market correction tomorrow,” says Darrigade.
Furthermore, any increase in the cost of the puts will be offset by rising premium income from the calls, he adds. This ensures that the hedging programme is sustainable regardless of market conditions, thus earning capital relief.
The bank has issued more than €1.7 billion ($2 billion) of equity income defensive funds, Darrigade says, of which more than half have been sold to insurance companies.
BNP Paribas has also achieved success with a product designed to tempt risk-averse French insurance company clients to take more risk. Rather than investing 100% in the general account, the product places 30% of the investment in a unit-linked structured product that offers exposure to the Euro Stoxx 50, with an 85% capital guarantee as well as a 4.25% annual coupon if the index closes above its initial level.
Because the product transfers risk from the insurance company to the investor, the former gets some capital relief, while the capital guarantee has proved reassuring to investors.
Investors see that they are anticipating the needs of the futureTerence Darrigade, BNP Paribas
“This type of solution will be adopted by all French insurance companies in the years to come,” predicts Darrigade.
Clients of the bank praise the wide range of the structured product solutions it offers – and its strong position in sustainable investments provides a case in point.
“Institutional clients are increasingly integrating environmental, social and governance (ESG) criteria into their investment decisions and starting to take into account the carbon footprints of their portfolios,” he says.
A big factor in building awareness of the subject in the French institutional market, in particular, was the breakthrough international climate change talks, which took place in Paris in late 2015. This transformed how investors were considering ESG issues, says Darrigade. “COP 21 in Paris really changed the way institutional investors are incorporating ESG criteria and climate change in their asset allocation,” he notes.
That increase in awareness also coincided with more “appealing investment solutions,” he says. “In the past, [ESG products] were underperforming the benchmarks… Over the last two or three years, we’ve been able to show that you can have investment solutions that are close to, or even outperforming, the benchmark, but which are ticking all the boxes regarding sustainable criteria.”
In recent years, BNP Paribas has developed or licensed a range of ESG indexes. One particularly novel launch has been with ESG research house Solactive, which has developed an index that tracks the stocks of companies whose business is aligned with the Sustainable Development Goals, a series of 15 global objectives agreed by the UN in September 2015 aimed at supporting social and environmental development in the years to 2030.
The 50 companies selected must earn at least 20% of their revenues from products or services “which answer fundamental social and environmental objectives and with a clear, positive net impact on sustainable development,” Solactive says.
While investments in products linked to the index allow investors to demonstrate that they are directing their capital towards socially worthy activities, the assumption is also that they should outperform over the long term. In the 12 months to November 10, the US dollar version of the index has returned 26.68%, compared with 20.04% for the MSCI World USD Index.
“There’s a positive effect at work, a virtuous circle,” says Darrigade. “These companies are investing in the future; investors see that they are anticipating the needs of the future.”