The French market for retail structured products is one of the most mature in Europe. All the major retail financial product providers launch regular product offerings on a virtually continuous basis. Indeed, the leading five players (Societe Generale, BNP Paribas, Credit Agricole, Caisse d'Epargne and La Poste) often sell more than EUR500 million of products in a single product offering.
As one would expect, these five players also dominate the market in gross sales terms. The market share held by the leading five players in the first half of this year was 78%, almost identical to the 77% share in the first half of 2005.
As home to two of the pioneers in structured equity derivatives (SG and BNP Paribas), both of whom have access to large retail distribution networks, it is also unsurprising that over the past 10 years the market has acted as a test-bed for some of the most innovative structures.
Products such as the Himalaya and Altiplano were first launched in the French retail market before spreading to the rest of Europe, while France has also been a leader in the development of CPPI and other, more advanced forms of portfolio insurance. More recently, the 'profiled' style of product payoff was first offered widely to retail investors in France.
Given the dominance of the major retail distributors and access to some of the most innovative structures around, it is therefore disappointing that overall gross sales of structured products in France have remained almost static during the past few years.
According to data from StructuredRetailProducts.com, total gross sales in 2003, 2004 and 2005 were EUR14.3 billion, EUR13.5 billion and EUR14.9 billion respectively. In the first half of this year total gross sales were EUR8.56 billion, which is in fact marginally down on the EUR8.82 billion seen in the same period of 2005, although average tranche sizes have risen from EUR90 million to EUR113 million.
Is this failure to grow overall sales simply a sign of a mature market, in which product penetration is now fully achieved? If one compares the French market to other European markets of comparable size, such as Italy or Spain for example, one can see that annual gross sales of structured products in France is significantly lower. Even Belgium, France's much smaller neighbour, achieves much higher annual sales volumes.
So it would seem that there is room for further growth. Perhaps what is required is the development of new distribution channels or new kinds of products that can appeal to a wider range of investors.
In terms of distribution the French market is one of the most closed in Europe because the majority of investors purchase products directly from their local banks, which only supply their own investment products.
Controlling this captive distribution network is obviously appealing for the banks, but could it be acting as a brake on the wider growth of the market?
Independent distribution in France is developing slowly, but for structured products it remains tiny. Both SG and BNP Paribas have been making efforts to expand this element of the market using their Adequity and Privalto brands respectively. Typically, these products have also used the medium-term note form of product instead of more typical wrappers, but total sales this year are only around EUR300 million or so (albeit 50% higher than the comparable period in 2005).
On the product side, we have seen changes in the types of payoff and underlying used this year, perhaps in an attempt to reach a broader range of investors.
Last year, simple uncapped calls accounted for EUR2.1 billion in gross sales in the first six months, out of a total of EUR08.82 billion. This year, however, we have seen just 10 products using this payoff, generating only EUR608 million in sales out of a total of EUR8.56 billion.
Portfolio insurance remains a very popular structure. A total of 18 CPPI products with sales of EUR2.72 billion have been offered so far in 2006 taking by far the largest share of the market by payoff type. La Banque Postale's Progressio and BNP Paribas' Hawaii, which struck in January, were notable CPPI successes at the beginning of the year with sales, respectively, of EUR530 million and EUR650 million.
A few products have now been listed on the Euronext exchange, targeting French retail investors. The most recent of these was a Nasdaq-linked exchange-traded fund product from SG Asset Management. While the offering was a leveraged portfolio insurance product, previous issues by this provider linked to the FTSEurofirst 80 and the Cac40 have provided some element of capital protection. Perhaps this is a sign that the market is trying to reach out to other potential investors who are looking for different structures in a listed product form.
In terms of product underlyings, for products striking in the first half of 2006, share baskets dominate in terms of issues (18 out of 76), ahead of managed funds (15 products). The dominance of the DJ Eurostoxx 50 does appear to be slipping a little, but it remains the most common single index used (it has featured in 11 products so far this year, compared to 21 out of 98 products in 2005).
What is perhaps disappointing is the lack of interest in some of the other so-called hot asset classes such as commodities and emerging markets. Only one product launched this year has had any exposure to commodities (and this only via a basket with other asset classes) and only four products have featured emerging market exposure - again as part of a wider basket of assets or indexes.
Is all this merely a reflection of conservative investors and product designers? Or is there actually an untapped market for products offering exposure to underlyings that lie outside the mainstream, especially if it can be achieved with capital protection thrown in?
Perhaps the arrival of more foreign competition in the local market will help to answer these questions. Recently, some foreign providers have been attempting to access the French market, often with products not usually seen in France. The most recent of these has been Belgian provider Fortis, which has launched four products in France so far this year, and which, of course, has considerable structured products experience in its home market.
One of its recent structures, Fortis F Atout Performance, was a six-year fund eligible to life and tax-free wrappers linked to a basket of 20 international shares. At maturity it will pay 100% of the rise in the basket where the five best performances are considered to be equal to 80%. This is not a payoff often seen in France but it has been very popular in Belgium.
- Robert Benson is managing director of Arete Consulting, the owner of StructuredRetailProducts.com. He can be reached at [email protected]