Asian markets will catch up with Japan in use of structured investment products, says Stephane Rougier, global head of structured and indexed investments at BNP Paribas Asset Management in Paris. As a result the firm intends to step up its marketing in the region, in part by introducing a new tool to help clients assess their entire structured portfolio's total risk.
Rougier acknowledges BNP Paribas AM has been slow to target the Asian space, but says the firm is well established in Japan, with 18% of the structured investment market. He says the reason is that he saw a lot of "toxic products" being sold in places such as Hong Kong and he did not want to associate BNP Paribas with that. Rivals were not explaining the actual risks of some products, and the French house felt that honesty was simply going to lose business, so it demurred from getting dirty.
Today, however, the size of the business in Asia has become too big to ignore, and client sophistication has improved. Also, BNP Paribas AM has built a track record; and unlike many rivals selling structured products, it is not an investment bank, but a pure asset management company, and it offers to deliver more upside than many protected products from banks deliver.
"We have no trading book, and we just get paid a straight management fee," Rougier says. "The product is very transparent."
Part of this transparency is better stress testing - by running a proposed quant structure through a Monte Carlo process so investors will be crystal clear about their returns under any given economic condition.
Currently the firm is rolling out a new service to institutional clients in France and the United States designed to help them understand the total risk in their structured portfolios. Again using Monte Carlo simulations, the firm stress tests client's entire exposure to derivatives and analyzes their potential upsides and downsides.
The firm hopes to make this service available worldwide next year, and use this to give prospects in Asia a clear sense of what structured products do. Rougier says the firm will also allow clients to switch among BNP Paribas products if they anticipate lower-than-expected performance.
"It is very expensive to do this but it is the key to our business for the next 10 years," Rougier says. "Many people think structured products are only good when markets are bad. But we have seen many market cycles, and demand for structured products has only grown bigger. Offering a structured product is a good way to get clients to think about risk - because if you think about it, any product can be a derivative. Clients take duration or correlation risks they don't even know about. So you should take this approach for any asset."
With this philosophy in mind, BNP Paribas AM has built a business combining its passive management and derivatives team. "Structured products is not just a fashion; it is here to stay," Rougier says.