UK investors were not alone when the end of the dotcom boom heralded severe losses for structured product investments. La Poste, the French post office, France’s top structured products issuer by volume in the late 1990s, was mired in a scandal which, even now, is yet to be resolved.
La Poste sold three tranches of a product called Bénéfic to around 300,000 investors between 1999 and 2000. The product offered a guaranteed return of 123% over a three-year investment period. However, if the underlying index – which was either the CAC40 or the EuroStoxx50 – fell, investors stood to lose 1% of their initial capital for every 1% drop in the index. Because both indexes plummeted so sharply during the first years of this decade, many investors experienced significant losses.
These losses ranged between 12% and 36%, depending on which tranche was bought. Around 13,000 investors subsequently lodged complaints with La Poste, claiming they had been mis-sold the investment. La Poste dealt with these complaints on an individual basis, repaying those investors it decided had genuine grievances. However, a separate investigation, launched by the Autorité des Marchés Financiers (AMF), concluded last month and its decision on whether to prosecute is pending. La Poste, and even individual department heads, could face litigation.
For Jean-Hubert Blanchet, La Poste’s head of structured products since 2000, the past few years have been a rough ride. The company’s market share fell and it slipped from being France’s top issuer to just fifth. However, a concerted effort to regain the public’s trust and to issue simpler products with strong ratings propelled it back to the number one spot again in 2003, only for it to slip back to third last year. This is a lapse that Blanchet wants to see reversed.
Competition hots up
Eight distribution networks together share 50% of the French market for retail structured products, according to Blanchet. Of these, the top three issuers are the giant savings banks Caisse d’Epargne and Crédit Agricole, and La Poste itself. These companies each sold upwards of €800 million of products last year, approaching €1 billion for the top issuer. In 2004, La Poste’s share of the retail market was reduced to 5%, while Caisse D’Epargne secured 8% and Crédit Agricole managed 7%.
“The competition is intensifying, and growth of market share is becoming more important,” he says. “To get back to first position, we’ll need to increase our sales by around €200 million. It will be hard to do this year, but maybe next year.”
Small is beautiful
French product providers launch only a small number of products each year. According to data from StructuredRetailProducts.com, they issued an average of 3.7 products each in 2004, compared to 6.8 in the UK. There were fewer issuers, too, with 38 in France compared to 83 in the UK. This may explain why the large marketing campaigns seen in France are so rare in this country. La Poste and its rivals are able to embark upon something of a ‘blitz’, typically marketing their small stable of products over a two-month period.
La Poste itself plans to launch only about four separate offers in 2005, and aims to sell €200 million worth of each one. This focus on a few star products is partly a result of the vetting procedures of the AMF – the relatively new agency which covers securities, exchanges, collective investments and investment professionals.
All structured product launches require the AMF to sign-off the actual structure as well as the prospectus, a process which hinders issuers who want to issue multiple products in a single year. “I think the AMF wants four or five campaigns a year, not 20. It would be impossible for customers to remember all the products and make effective choices,” he says. But Blanchet does not view the regulator as a drag on industry and is in fact highly complimentary about it: “The work of the AMF is good. There is a good level of protection for investors; one of the fairest in Europe, I think.”
In addition to this, however, a smaller range of products fits well with the issuers’ increasingly sophisticated marketing campaigns. At a conference in London last month organised by industry website StructuredRetailProducts.com, Marie-Pascale Bonhomme, marketing manager for Crédit Agricole Asset Management, said that marketing was becoming an increasingly important part of the whole process. “Products will become stars”, she said, indicating a shift towards fewer product launches each year, with greater marketing emphasis placed on each product and repeat launches for those that are successful.
Although Blanchet says La Poste’s marketing expenditure has not risen much since 2000, it is becoming much more targeted. The company used many expensive television campaigns around that time, for instance hiring Spanish film star Victoria Abril to promote Vivango, the first product launched during Blanchet’s tenure. Now, although despite still using television, Blanchet is keener on other media such as newspapers and, especially, the radio – mostly because they are cheaper.
Part of Blanchet’s strategy to see La Poste win back its place at the top of the industry involves embracing the new FTSEurofirst80 index as the company’s first-choice European benchmark. Blanchet cites its lower volatility, wider range of shares and improved sector weighting as key benefits over the incumbent EuroStoxx50, and believes that investors understand and appreciate these factors. He is not a fan of the weighting problems inherent in narrower indexes, citing French oil giant Total’s 14.6% weighting in the CAC40, for example, as too heavy. In fact, the top five members of the index have a combined weighting of 41.6%. Blanchet says La Poste’s salesforce is happy with the new index and he hasn’t looked back after moving to it in September of last year.
Alongside this, he sees growth in the structured products industry arising from new derivatives, which are becoming more acceptable and available in the retail market. He mentions, for instance, that derivatives on hedge funds or hedge fund indexes are an interesting development. Currently, only three such products have been launched in the French market, one from BNP Paribas and two from PanEuroLife. However, unlike the Italian market, the AMF is not opposed to the sale of hedge fund-linked products to the public, as long as they are sold to the right investor base, which the AMF monitors very closely.
Another trend Blanchet cites are the new types of automatic allocation payoffs. Here, the weighting in the payoff of the various indexes used is left until the end of its maturity. The best performers receive a larger weighting when the final payoff is calculated. Blanchet says that when the company issues a raft of new products in September, they will be highly innovative, however he declined to comment on their specific structures as they have yet to be approved by the regulator.
According to the AMF, only 6.7% of assets under management in France are in guaranteed form. Money market products have the largest share, at 34.9%, with equities and bonds taking up the rest. This leaves plenty of room for expansion within the industry. And La Poste is in the unique position of having at its disposal the largest distribution network of all the French issuers. Crédit Agricole has around 9,100 branches and Caisse D’Epargne, while it has only 29 branches, controls over 350 regional subsidiaries, each with their own branch networks. La Poste, however, has in the region of 70,000 branches, 10,000 of which actively sell structured products. Although not all are in a situation where they could expand to sell products, La Poste potentially has a distribution network that could dwarf that of the banks.