According to Derivate Forum, a German trade association that includes structured products providers such as BNP Paribas, Deutsche Bank, DZ Bank, ABN Amro and Dresdner Bank, investors are demanding capital-at-risk products. In 2006, sums invested in bonus certificates and other partially protected products increased by 83.1% compared to 2005. For capital-guaranteed products the increase was a less impressive 18.5%.
However, German fund manager Deka Investment hasn't been swayed by this surge of interest in partially protected products. This is because the market for capital-guaranteed funds - as opposed to capital-protected certificates - is also doing well. Deka Investment is the fund management arm of the DekaBank Group. It offers a range of capital-guaranteed funds and has more than EUR3 billion of assets under management. The fund manager anticipates increasing interest from retail investors in its offerings.
"On the retail side our guaranteed products are among our core offerings," says Ulrich Neugebauer, Frankfurt-based deputy manager, head of quantitative products at Deka Investment. "The underlyings of the most successful capital-guaranteed products are mainly a basket of indexes that cover Europe, US and Asian equities."
The fund manager's latest capital-guaranteed fund is the Deka WorldGarant 2/2012. Launched at the end of February, the fund invests in zero-coupon bonds and a basket of indexes that initially allocates 40% of assets to European equities indexes, 35% to US equities indexes and 25% to a Japanese share index.
The fund has seen a lot of interest from investors and Deka expects sales volumes to exceed EUR300 million, Neugebauer says, adding that best-of and rainbow options are among the most popular structures.
An example of a capital-guaranteed fund with a best-of structure is the Deka-Best-Of-Garant, launched last year. The seven-year, capital-guaranteed fund is linked to the performance of seven funds, one of which is a fund of hedge funds. In the first year, the return of the best-performing fund will be locked in. In addition, a 50% return on the Deka funds is guaranteed in the first year. In the second year, the return of the best-performing fund of the remaining six is locked in, and this process is repeated until the end of the investment term.
Capitalising on the massive interest surrounding last year's World Cup in Germany, Deka launched its Kickgarant capital-guaranteed fund. "Kickgarant was launched before the World Cup," Neugebauer says. "The fund is linked to the best-performing of three baskets, each containing 11 single funds. We sold around EUR600 million of these products."
Neugebauer says that Deka regularly works with major issuers, who provide the structures, although he declines to name them. Following the success of bonus and express certificates with retail investors in Germany, Deka is considering how to apply such structures to its own funds, he says.
A bonus certificate offers a payout, the amount of which depends on a pre-determined upper and lower price level. Bonuses are paid out if the price of the underlying falls between these two levels at maturity. If the price of the underlying exceeds the upper level at expiry then investors receive 100% of returns. An express certificate offers a premature repayment of the invested capital plus an additional amount if the price of underlying is higher than a specified barrier. But if the price of the underlying is less than the barrier, the certificate will run for another year. The maximum running time ranges between three and five years.
In addition to capital-guaranteed funds, Deka also has a discount products range. "Our discount products, launched last quarter, are particularly suitable in the current market environment," Neugebauer says. "They offer decent returns at a time when the equity bull market is running out of steam. And investors are also protected against falls in the market."
An example is the Deka Discount Strategy 2013, which invests in the DJ Eurostoxx 50 index and also allocates part of its assets to discount certificates linked to the same index. "For our discount product line, we are looking into switching from indexes to single company shares to get bigger discounts," Neugerbauer adds.