Structured products are so well established in the Czech Republic that they make up a third of the savings held with CSOB Asset Management, according to Jan Barta, the Prague-based chief executive of the asset management arm of CSOB Bank.
The success of these investments has continued throughout the current recession, with CSOB maintaining and supplying its investors with an average of four products a month. "Distributors could sell structured products in 10 minutes because they understood the prospectuses and the parameters, and so they knew how to deal with this type of investment product. They also knew how to explain them properly to investors," says Barta.
Funds are the main wrappers, the creation of which CSOB Asset Management shares with its parent company, the Belgium-based KBC Asset Management.
"That system is the standard one and offering it as a fund brings many benefits," says Barta. "At the same time, it also differentiates us from our direct competitors: Austria's Erste Group, which uses more bonds or certificates, and Austria's Raiffeisen, which uses investment certificates. Overall, our biggest competitor is Erste."
Barta says that after the collapse of Lehman Brothers in 2008 investors are more wary of risk, despite the limited impact of the failing US investment bank. The prevailing caution is one of the reasons that CSOB is also offering constant proportion portfolio insurances (CPPI) products, says Barta. The attraction is simple: CPPI allows investors to maintain exposure to the upside while providing capital protection against downside risk, says Barta.
Buyers of CSOB's structured products come from both retail and private banking, with a preference expressed over the past two years for theme-based baskets. Those baskets that have proved most successful have been based on food and beverage companies, with products based on these sectors making up a few hundred million euros of the new supply, says Barta.
Products have been mainly capital-protected, although the desire for full capital protection has started to change recently, according to Barta, because of the record low interest rates in the country, which have made it difficult for banks to offer full capital protection. CSOB tends to offer only 95% capital protection, while the official interest rate fixed by the Czech National Bank stands at 0.05%.
As the local financial market lacks a strong, well-traded and liquid equity index, structured products issuers have tended to seek theme-based baskets comprising foreign stock indexes, such as the S&P 500 or Euro Stoxx 50, says Barta.
The counterparties CSOB works with are mainly European big banks from the UK, France and Germany.
"Think of big banks in Europe and you will get the names," says Barta. "Our view of the structured products market is very international. Therefore, when creating a product we usually work with our colleagues from our parent company, KBC Asset Management. We discuss what kind of products are best and then act as the distributor."
Examples of products distributed include the Food and Beverages III and the Buffer Jumper 3. The former is structured using an Ucits IV wrapper. The structured product offers 95% capital protection as well as a 60% participation on price performance of the sector to which the basket of products is linked, with a cap set at 60% over the five-year and nine-month life of the investment. The equities included in this product are well-known names such as Heineken, which listed on the Amsterdam Exchange, the New York Stock Exchange-listed Campbell Soup, London-listed Unilever, and Japan Tobacco from the Tokyo Stock Exchange.
The Buffer Jumper 3 is autocallable in 2014, 2015, 2016 and 2017, as long as the underlying basket meets or exceeds the initial value, and brings potential returns of 8%, 16%, 24% or 32%, respectively. Alternatively, if the basket meets or exceeds the initial value by 2018, the return could be 40%, as long as the value of the basket does not drop below 40% at the end date. If the basket does actually fall below 40%, the investor would take the full drop.
Barta is satisfied with the development of the structured products market in the Czech Republic so far and believes progress in the sector will continue. "Structured products have been an ideal product for Czech individuals. In the past two years, we have seen new inflows and have returned to the levels we had pre-2008. Therefore, we expect further progress within the sector."