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Structured products have become increasingly important during the past few years to the clients of Copenhagen-based private bank, Jyske Bank Private Banking, according to the company's product development manager, Ebbe Möller. "Everybody wants these products," he says, adding that equity investors in particular are still licking their wounds following the bursting of the technology bubble five years ago.

"This is especially true in places like Sweden and Finland, where people are heavily invested in equities. Now they are limiting the risks while still ensuring a reasonably profitable return compared to investing directly in the underlying," Möller says.

Jyske Bank Private Banking began selling structured products about four years ago. It creates its own in-house products, on a relatively small scale, and occasionally buys products from dealers. "We aim to launch between four and six products a year," says Möller, adding that the bank has six staff committed to developing structured products. "We can tailor-make a product for an individual client or we can create a package that targets a larger number of clients with broader interest."

The private banking business itself operates on a much larger scale. Jyske has private banking offices spread throughout the parts of Europe where wealthy expatriates tend to accumulate. As well as Copenhagen, it has branches in Zurich, Gibraltar, London, Cannes, Fuengirola (on the Costa Del Sol), Aabenraa (on the border between Germany and Denmark), Hamburg and Warsaw. But its business is not just concentrated in Europe. The bank says its advisers serve more than 35,000 clients in 135 countries.

Like many private banks, most of the structured products Jyske sells have capital guarantees. One of its recent in-house products is a two-and-a-half-year structured investment called the JBPB Blue Chip Stock Basket 2007. This offers full principal protection, exposure to 10 blue-chip companies selected by Jyske, and denomination in Polish zloty. "To improve the participation rate for the client we look at currency alternatives, and something that has a story behind it," Möller explains. "We expect the Polish zloty to improve in value." The underlying companies are selected to provide diversification and include names such as Citigroup, Cisco and Lufthansa.

Möller says the bank's next principal-protected product will offer exposure to commodities, because that is the area in which the group's clients are expressing most interest. "We will launch a commodities product within the next two months," he says. "We already have an oil product, but our next one will probably be based on gold and maybe some other commodities. At one stage we considered coffee because we thought it was particularly cheap, but we still see demand for gold and other basic metals, particularly in light of the booming economies in China and India."

Short maturities

Möller says a typical Jyske Bank Private Banking structured product has a maturity of between two and three years. This can pose problems from a structuring point of view, in that the economics of a capital-guaranteed transaction using a zero-coupon bond will not be as favourable as it would be for a longer-dated product. The participation rate on the riskier assets will not be as high, for example.

"These investments are fairly short-term compared to what a lot of other companies are doing, where they are offering products which run for five, seven or 10 years," Möller says. "But our clients do not want to commit funds for such a long time. They want much more flexibility in their investments." But he adds that investors can certainly be deterred by low participation rates. "Many of our clients have a barrier, and if the participation rate drops too low then they are not interested." This explains the use of currency alternatives to help increase the participation, he says.

The bank also guarantees that it will buy back any product early if a client wishes to cash out. "We always say that we will buy our structured products back as a market-maker at the market price, even though it's a closed investment. We will either keep it on our own account or sell it on to other clients."

Of course, investors must accept mark-to-market risk if they pull out of an investment before it matures. "If the interest rates on the underlying investments change, or if expectations for the performance of the underlying index change, a client could be faced with a situation where he has to sell the structured product at a loss, says Möller. "Although it could also be the case that he might cash in a profit."

But clients are not encouraged to pull out of their investments early. "We make it very clear in our brochures that clients should not invest for less than the maturity period, because they could be taking unforeseeable risks in the short term. For example, even if we expect the Polish zloty to appreciate over the next two and a half years, it will still fluctuate in value during that time. If a client is suddenly faced with a foreclosure situation with only a year remaining on the investment, then it may be better for them to wait and at least be guaranteed their 100%."

If the bank is unable to create a certain structure, it buys it from outside, says Möller. "We make a lot of the products ourselves under our medium-term note programme, but some of the underlyings are issued by other banks. We work with the largest banks across Europe and overseas," he says. "Of course, if it's another bank that's issuing the product, and we're just selling it, then they are the ones who profit from the issuance."

Möller says the typical Jyske structured products investor is probably semi-retired and looking for a steady income. "It could be a UK client who spends half his time on the Costa Del Sol, doing business from there and going back to the UK for meetings. Or it could be a person who, having sold their house or company in the UK to realise their capital, now wants an income to live on. They are looking for secure returns rather than to speculate."

Despite the rising popularity of capital-guaranteed products, Möller says the bank's advisers do not automatically recommend them. "We need to know a lot of basic information about the client's financial status so that we can tailor a solution that suits them best. First, they talk to an account manager, who then creates an investment profile for them by assessing their risks, investment horizon, expectations of any cashflow to be worked into their investment, and any special preferences. Then we will come up with a proposal based on these findings. But it won't necessarily be a structured product solution."

As more wealthy private investors become familiar with the benefits of structured products, the model of a middleweight European private bank establishing its own small-scale structured products desk may well become the norm rather than the exception. As Möller says: "Demand is increasing from clients, so we are seeing our competitors all offering these products."

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