Japan house of the year: Credit Suisse

Bank earns praise from clients as “creative counterparty”

tomoyuki sasai
Tomoyuki Sasai, Credit Suisse

The launch of 17 new funds during the past year on Credit Suisse's structured funds platform helped the bank towards a dominant 65% of market share by volume, according to Bloomberg data. Assets under management contained on its distribution platform now totals around $10 billion, an increase of $3 billion from the previous year and far in excess of the $200 million held in 2012.

The results provide further vindication of the company's decision to plough forward into the Japanese structured funds market three years ago when other banks were pulling back amid a weaker outlook for the
domestic economy.

But over the past year, efforts from the government to boost economic recovery and the widespread belief that continuing low interest rates will keep the yen under pressure against the dollar brought investors back not only to stocks but also to structured products that could top up their investment yield.

"Many Japanese investors seek high-yielding investments and for them this is a major reason to buy these funds. A typical investor has been relatively bullish on Japan over the past several months, and such views have indeed played out - the Nikkei has more than doubled in the past 30 months," says Charles Firth, Hong Kong-based head of equity derivatives structuring for Asia-Pacific at Credit Suisse.

"Local investors also continue to have increasingly bearish views on the yen. Combined with the fact that yen interest rates are basically zero, this means funds linking to any currencies other than the yen are well received. Another aspect often employed to provide incremental yield in these funds is selling covered calls on the foreign currency. Given that investors are not bullish on the yen, they're comfortable with the downside risks of such a strategy," he says.

We have an unusual set-up here in Asia in that we design investment strategies locally. Most of our competitors have theirs designed in Paris or London

To this end, Credit Suisse's Japan Equity Premium Fund has proved to be a big success, attracting ¥150 billion ($1.2 billion) in its first 10 months. The fund draws income from four sources: dividends of Japanese stocks selected by Daiwa SB Investments; selling call options on the Topix that cover 50% of the fund's value; selling call options on the Brazilian real strengthening against the yen that cover 50% of the fund's value; and going long Brazilian real against the yen with forex forwards.

"Credit Suisse is having another record year in equity derivatives in Japan," says Tomoyuki Sasai, Tokyo-based head of equity derivatives at the bank. "Assets under management increased by 36% during the first half of this year from last year."

The bank also made a strong impact in Japan's variable annuity market with its first deal, struck with Dai-Ichi Frontier Life in April. Historically low interest rates had significantly reduced the attractiveness of variable annuities in Japan for insurers amid the high fees needed to hedge out complex risks such as lapse risk (when policy holders cash out early), which resulted in lower sales of the products in Japan in recent years.

Credit Suisse worked with the insurance company to design a new investment and hedging structure that would aim to generate returns while providing capital protection even though interest rates remained at historical lows.

Dai-Ichi Frontier Life manages the bond investments intended to provide capital protection at maturity, and separately invests in a Credit Suisse custom-built investment strategy that spans equities, bonds and commodities. This sharply reduced policy-level fees as a result of much reduced lapse risk in the structure, which made launching the product possible despite the low interest rates. After three months, the bank was already managing risk from $1 billion-worth of policies sold by Dai-Ichi Frontier Life's distributors.

"We have an unusual set-up here in Asia in that we design investment strategies locally. Most of our competitors have theirs designed in Paris or London," says Firth. "With this deal, Credit Suisse has propelled itself to the forefront of variable annuity technology in the Asian markets."

A third success for Credit Suisse in Japan has been maintaining its place as market leader in Nikkei-linked autocallable products, building on the success of its pioneering corridor variance swap trade with the introduction of a minimum/maximum variance spread trade, whereby an investor takes a long position in variance exposure to the less volatile of two pre-selected indexes while at the same time going short in variance on the higher of two other pre-defined equity indexes.

"The min/max was a way of introducing correlation into the corridor variance trade to make it a positive carry trade, enabling hedge funds to make potentially larger profits from the product," says Firth.

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