UBS cemented its status as Switzerland’s top structured products house in 2017, making the most of a surge in demand to post a 60% increase in turnover as investors looked to pick up yield in a low-volatility environment.
Swiss asset managers and institutional clients shrugged off early caution in 2017, during which some focused on hedging against high valuations in stock and bond markets, to pile into yield enhancement products in the second half of the year. The bank did brisk business in autocallable and reverse convertible notes, sometimes offered with barriers to generate extra yield, and added a number of innovative twists to enable customers to access a new range of underlyings.
“Retail markets were focused on yield enhancement through the year, but the institutional market was more wary at the beginning of the year and was buying three- to nine-month protection – for example, through customised warrants, which were very cheap in any event,” says Adrian Steinherr, managing director of derivatives distribution at UBS in Switzerland. “By around May, it became clear that hedging money was lost and that it would require a big shock to monetise the protection they had bought. At that point, many decided it wasn’t worth spending any more money and switched to yield enhancement strategies.”
While in 2016 the equity inflation trade was focused on the US and its newly elected president’s promised fiscal boost, investors swung back towards Europe this year, with stronger economic growth across the region powering equity markets higher. The Euro Stoxx 50 has returned 11.4% year to date and 22.7% in the past year. Turnover in the Swiss structured products market increased by 21.4% year on year in the first half of 2017, according to UBS figures, mostly due to rising demand for yield enhancement products.
“People started buying European stocks in the first quarter, and now even US investors have high allocations to European markets,” says Steinherr. “Still, with high valuations across the board, we were also focused on delivering solutions that allowed clients to continue to access markets but in a less risky manner, through either increasing the probabilities of locking in gains, hedging gains already achieved in their portfolios or by reducing the volatility of their returns.”
In 2017, UBS reaped the rewards of its mini-futures initiative the previous year, which gave investors easy access to leveraged and tailor-made hedges in a low-volatility environment. The past year saw a big rise in volumes.
Risk premia strategies also continued to attract demand, with clients either cherry picking single strategies or seeking to understand how risk premia can improve the risk/return of portfolios, based on UBS analysis.
“We were heavily invested in expanding our multi-asset risk premia offering, and clients could access momentum, value, carry and volatility across all asset classes,” says Steinherr. “For portfolio investors, we were able to wrap structures into actively managed certificates, which gave the client the option to switch allocations within the wrapper through the Neo platform.” UBS starting moving its actively managed certificates offering to the online Neo platform, a cross-asset client services portal, in 2015, and completed the job over the last 12 months.
With high valuations across the board, we were also focused on delivering solutions that allowed clients to continue to access markets but in a less risky mannerAdrian Steinherr, UBS
A standout product of the past year was a strategy certificate based on the actively managed UBS Short Term Investment Opportunities Portfolio, containing up to 10 long/short certificates. The investment is focused on time horizons of less than six months, which are mainly model based and with modest leverage.
“This strategy was ramped up quickly over the past year, and investors could take exposure to a single strategy, which might for example be long Euro Stoxx/short S&P or long rates/short European rates, or a basket,” says Steinherr. “It has been a big hit and we have seen around half a billion dollars of flows into this trade.”
Another highlight of the year was a delta one tracker certificate, offering exposure to Swiss-listed, family-owned companies – in which families own at least 32% of voting rights – after research showed that family-owned businesses outperform their publicly owned peers, largely because they are not managed with the aim of meeting quarterly targets. In January, the bank launched a tracker certificate on the Solactive Swiss Family Owned Companies Index, leveraging its balance sheet and trading capabilities to get access to sometimes illiquid shares. The index has generated a positive return of 21.4% since its launch, also in January.
UBS was also active in emerging markets in 2017, offering yield enhancement products against commodity underlyings and structuring bespoke equity deals where the opportunity arose. An example of this was built for a Brazilian investor who held two stocks, both of which he expected to increase moderately in value and on which he wanted to use some leverage.
“The client was looking for the maximum leverage against the stocks, so instead of offering him a loan or warrant, we came up with a structured note in which he was exposed to the performance of the worst stock on the downside with no protection,” says Steinherr. “If both stocks were positive, he would receive five times leverage on the worst-performing stock, capped at a maximum redemption level of 150%.”
At the time of writing, the mark-to-market of the product was at 140%, further evidence that in 2017, a key driver of UBS’s success was the bank’s ability to listen, tailor products and thus seize opportunities.