Dynamic retail offerings

Dynamic retail offerings

Alexander Hazbun Rius, Banchile

Santiago-based Banchile’s clients tend to fall into two camps – cautious retail investors and high-net-worth individuals willing to take on slightly more risk for potential upside. With those differing segments to cater to, the bank distributes two classes of product: capital-at-risk structured funds based on structured notes and 100% principal-protected structured funds based on algorithmic underlyings.

Capital protection is important for the bank’s retail clients, who have not fully recovered their confidence following the financial crisis, even though Chile was more prepared when the recession struck than many other economies. The budget policies put in place by the government after the Chile’s banking and economic collapse in 1982 meant the country was hit less hard than Europe and the US. However, it is suffering from high inflation and low interest rates, never an ideal combination for investors.

Providing clients with 100% capital protection allows them to take on exposure to less familiar underlyings, and Banchile offers products linked to indexes that use quantative strategies. It has distributed products linked to Société Générale’s SGI Wise Long/Short Index, BNP Paribas’ Millennium Commodity Index and ING’s S-Box Lion Financial Volatility Target Index.

“Our target is to offer different types of product for different types of client, but always by using innovation,” says Alexander Hazbun Rius, portfolio manager at Banchile in Santiago. Hazbun Rius’s role is to advise the bank internally on structured products, options and derivatives and he manages the bank’s structured funds.

The bank serves the domestic market where investor confidence is recovering although the debt crisis in Europe in the first half of the year shook investor confidence again, says Hazbun Rius. As a result, investors are not willing to put any of their capital at risk.

“Principal protection is a very important issue for the client. If we offer 100% principal protection, you can take some risk on the underlying in order to get more upside. The volatility target index, for example, performs well and is a more efficient way to access the market. It is the type of product that retail clients cannot normally access.”

The S-Box Lion Financial Volatility Target Index tracks the US Financial Sector through the Financial Select Sector SPDR Fund and has a volatility target of 18%. It has provided the basis for the bank’s most popular product so far this year. The Banca Americana Voltarget Fund is an open-ended structured fund which offers 43% participation in the index and 100% capital protection.

Like elsewhere, Chile’s retail structured products investors want protection but with low interest rates, which is not easy to deliver. “It is a difficult time. Our most common products are principal-protected notes, and with these low rates you cannot have principal protection and high participation,” says Hazbun Rius. “We have sought cheaper options. The volatility target index was a good option, where you buy a targeted volatility that you are comfortable with and if the volatility decreases you can obtain levered exposure to the underlying index.”

The high-net-worth clientele is less risk averse. This is a new area for the bank, which embarked on offerings for wealthy investors late last year and has launched two products for high-net-worth investors so far. The Booster China Fund (another open-ended structured fund) invests in structured notes, giving investors access to the iShares FTSE/Xinhua China 25 Index Fund. It pays twice the rise in the underlying index, with a cap at 30% and 1:1 downside exposure.

Banchile works with a range of counterparties for its products, though it sticks mainly to US and European banks. The products on dynamic strategy indexes are an example of where Banchile has worked with issuers to develop products based on their strategies.

As well as low rates, the Chilean structured products market has to contend with strict financial regulations. Brochures have to be approved by regulator Superintendencia de Bancos e Institutiones Financieres, a process that can take up to three months.

“Chile needs more fluid development of products because market timing is important for structured products,” says Hazbun Rius. “It is important for the client to be protected and to understand what they are buying, but it is also important to have more flexibility in the market.” The regulations have not changed since the global financial crisis, but it did prevent them from allowing that flexibility, he says.

Hazbun Rius expects rates to rise in the coming months and volatility to settle down, which will make it much easier to launch new products. “The Chilean market is accepting new types of investments such as quantitative indexes and algorithmic strategies, which improve the possibilities for new products. In my opinion, investment volumes will pick up, especially by next year.”

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