SG's Lee says innovation not enough in structured products

SGÆs Sandra Lee takes a cue from the perils of the funds market to help grow the space for retail structured products.
A handful of providers first marketed mutual funds in Asia in the 1980s. Despite two decadesÆ worth of product development, marketing and investor education, the mutual funds industry penetrated 3% of household savings in Hong Kong until only a few years ago.

Sandra Lee has been in the funds industry for much of that period, building a career in retail business development at JF Asset Management, among the industryÆs pioneers in Asia, and then moving to HSBC Investments. At the end of 2005, she moved to a bank, SG, to shift from funds to structured products. As managing director and head of retail marketing and product development of structured products and equity derivatives for Asia ex-Japan, she sees similar challenges.

ôI hope that I can tell you in a year from now about the growth in structured products across the region,ö she says.

Like JF in the 1980s, SG has been a pioneer in the regionÆs retail structured products space. Until a few years ago, it and HSBC were among the handful of players. Now many investment banks such as UBS and Deutsche Bank have also developed a retail capability in structured products. SG brought Lee on board to develop a comprehensive, regional strategy to take its retail structured products business to the next level.

The firm has big businesses in Hong Kong and Singapore. It has begun business in markets like Taiwan and South Korea, but these remain challenging environments. It is also targeting China and India. Lee declined to specify the size of SGÆs retail structured business; Lyxor Asset Management is the group's arm for structured investment products, while traditional manager SG Asset Management manages $6.5 billion in mutual funds sourced from Hong Kong and Singapore.

Structured products have the potential to outpace traditional mutual funds. The theme of æupside plus protectionÆ has widespread appeal in Asia. And much of the recent rise of mutual fund penetration in Hong Kong, for example, is due to the wave of guaranteed funds that began in 2001.

This was the first major movement toward structured products in Hong Kong and Singapore, and began in an environment of ultra-low interest rates and the beginning of a three-year bear market in equities. The emphasis was on cash-plus, to draw bank depositors out of their shell, with an emphasis on full protection. In 2004, SG was the first to introduce callable products, which fully redeemed investors early if certain return targets were met. Other products have seen durations shorten, fuller participation in the underlying assetÆs performance, and less protection.

But Lee says investors have yet to exploit the full range of structured products available, which include index trackers, leveraged products and absolute-return products. Partly this is due to inertia and comfort with the conservative products that depositors first moved into; and partly due to the sexy performance of traditional emerging-market funds. The sharp correction of May and June this year has seen investors flee back to structured products, but usually toward those offering protection.

Lee believes the universe has more to offer to investors than just principal protection. ôThe retail benchmarks have always been two extremes,ö she says, ôeither cash or the Hang Sang Index. ThereÆs been a gap between depositors and stock pickers.ö

Fees are higher for structured products, up to 1% versus, say, a traditional equities mutual fund. But competition and scalability mean fees are competitive, Lee says. And unlike mutual funds, she says that the full use of structured features allows them to be tailored. ôI hate to use the term ætailored solutionÆ because itÆs so overused,ö she says, ôbut it really does apply to structured products. The challenge is to leverage all of our tools to grow the pie.ö

But simply making good products isnÆt enough, as her experience with mutual funds has shown. ôHow do you stay ahead of the curve and still pull people along?ö she says, noting that existing clients often stick with the same types of proven structures rather than try new things. Educating investors as well as distributors will take time, just like in the funds industry. And mis-selling is a constant threat. ôIf a client has a bad experience, theyÆll never invest in structured products again,ö she says.
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