KBC Asset Management offers step-up payout and Smart Start

KBC Asset Management has changed the nature of the Belgian structured products market this year with the introduction of its step-up payout, and wins the best in Benelux award

Didier Deflem, KBC Asset Management

KBC Asset Management has been an innovative provider of structured products in the Belgian market in 2014, facing up not only to the challenge of low interest rates, but also stringent regulation in one of the most tightly controlled markets in Europe. KBC offers structured funds with a variety of equity and fund underlyings. The main challenge in 2014 has been to educate investors on new structures and payouts that have only 90% or 95% capital protection, though demand for 100% protection remains intact among the most defensive investors.

"More clients in Belgium are becoming comfortable with 90% protection," says Didier Deflem, product development manager at KBC Asset Management in Bussels. "Over the course of the year, we have tried to educate our network by explaining that if they keep buying 100% capital protection when interest rates are very low, there will be a rough ride when rates rise. We show them products with 90% protection and explain that the impact on longer-term products will be less as rates eventually rise," says Deflem.

The provider regards its introduction of the ‘step-up' payout in the Belgian market as a game-changer this year. It addresses clients' desire to safeguard capital while retaining attractive participation levels. Many Belgian retail investors missed out on the 2013 rally in equity markets. They entered this year cautious about the high level of equities and sought protection against any downside movements while still wishing to be rewarded if markets continued rising.

At the outset, the step-up payouts offer 90% capital protection at maturity. However, if the underlying increases by more than a given percentage during one of the annual observation periods, the level of capital protection rises to 100%. This product type has been a big success for KBC, and has been an effective bridge in the process of persuading investors to let go of full capital protection. The simplicity of the product has been a winning factor and has helped distributors explain it to end-clients. In the first three quarters of 2014, primary volumes amounted to €760 million.

Another solution favoured by KBC is the Smart Start feature. It noted that traditional lookback features at the beginning of the life of a fund have been very popular with clients, but have become relatively expensive - especially in euros. Smart Start is a less expensive alternative to the lookback option - there are only two observation points, one at the beginning and one at the end of the lookback period - but it still gives clients the comfort of some protection on the initial level of the underlying. Take-up of this product range was also strong, according to KBC. Four products launched this year with the feature generated sales of €225 million.

Another example of the company's innovation over the past year can be found in its Comfort Booster product line for the KBC Insurance and KBC Bank distribution channels. These products offer 90% capital protection and give increased participation in the upside of an underlying, such as a single stock or index, if it performs well. Over the past 18 months, around €950 million of Comfort Boosters have been sold.

"The Comfort Booster is one of the products clients have asked for a lot in 2014 as they get some leverage on the upside," says Deflem. "It has done very well, and we are looking to broaden the range of products that have a boost on the upside."

In the credit space, there are currently no credit-linked notes being marketed in Belgium after the financial regulator, the National Bank of Belgium, banned sales of such products to retail investors. The regulator is widely regarded as one of the strictest in the European Union when it comes to structured products. This poses challenges for all market participants, but especially the large, bank-related issuers that dominate the market.

KBC Asset Management's structured funds distribution activity is helped by the extensive branch network of KBC Bank, also part of parent company KBC Group, which has a strong focus on private clients. KBC Insurance provides another distribution channel. KBC Asset Management structures its funds for mass retail, private banking and also some ultra-high-net-worth clients, as well as institutional buyers.

KBC Group has also built up a network of affiliates across central and eastern Europe, including CSOB in the Czech Republic, which helps spread the cost of the KBC Asset Management structuring team by generating revenues beyond the Belgian market.

In a typical year, KBC Asset Management manufactures around 190 structured funds, of which around two-thirds would be distributed in Belgium. Among some of the investment themes taken up by investors in 2014 are domestic regional equities such as the Flanders equity fund, consumer durables, food and personal products, and the Eco Climate Change fund. The close relationship with the bank distribution network allows investment themes to be discussed in detail with distributors before the product developers begin with structuring work.