Italians love fixed income like no one else – wealthy investors in the country had up to 27% of their portfolio in bonds in 2016, compared to 10% in Germany, 13% in the UK and 15% in the we, according to asset manager Legg Mason. Yet the past year saw the end of the long love affair between Italian investors and the bond markets.
“In Italy there is a great culture of savings and Italian asset managers have traditionally had a strong fixed income orientation. But still low interest rates in Europe have started to dampen demand, ”says Marco Tuninetti, Director of Equity Derivatives Sales at UBS. “The trend over the past 12 months has been to seek diversification opportunities, and structured products have seen increased demand from retail and institutional investors. ”
In the past 12 months, UBSThe Structured Products team has printed more notes related to commodity underlyings, particularly in the exchange traded space. It saw a sharp increase in demand for multi-asset exposure and responded to the increased interest of insurance companies in Unit-Linked and Solvency. II-exposure to equities compliant.
With the European Central Bank only recently starting to slow its quantitative easing program, interest rates traded in negative territory or approached record lows for much of 2017. increase their exposure to equities, by capitalizing in many cases on the global low volatility trend that has seen the CBOE The volatility index hit a record high in July.
“We saw strong demand for notes that paid a coupon against the unlikely event of a sudden one-day stock movement,” Tuninetti said. “Over the past year, we have worked with a number of private banks to bring these solutions to their professional clients, who see the product as an alternative to cash, linking ratings to developed and emerging market indices.
The so-called stability ratings were typically structured against the Euro Stoxx 50, with a maturity of between 6 and 12 months. Investors begin to lose their principal if the daily index return is less than 10% during the life of the note. If there is no deviation event, the ticket is refunded at 100% of the coupon.
“We have carried out a risk / reward assessment of these notes and it should be noted that over the past three years there have been several periods of significant turmoil in the equity markets – during the sovereign debt crisis European, for example. But still, no kick-in event happened, ”Tuninetti said.
The trend over the past 12 months has been to seek diversification opportunities
Marco Tuninetti, UBS
UBS has structured the notes with different spreads – some at 12%, for example – and recently sold notes with two or three day spread periods that aim to offer investors an additional increase in returns. The bank has sold up to 100 million euros ($ 117 million) of banknotes to date.
UBS was able to keep the Stability Note business running, despite the very low risk of a Deviation Event, as she maintains an in-depth and widely distributed spread book, meaning she was able to purchase the spread risk with investors in structured notes and resell it to funds, generally located elsewhere in Europe.
Excluding equities, risk premium strategies have continued their recent rise in popularity over the past year, and UBS the structuring teams carried out sustained activity on single risk factor products and risk factor portfolios. The bank’s platform is made up of strategies on stocks, bonds, commodities and currencies, with strategies designed to ensure maximum transparency and daily liquidity. In an innovative profession, UBS structured an actively managed deal for an Italian asset manager in an unfunded swap format, which allowed the client to leverage two to three times the leverage and sell ad hoc funds as an overlay tactics to its internal asset allocation model.
“It was the first [swap] transaction of this type on the Italian market, ”said Tuninetti. “It was a basket of actively managed risk premiums that offered customers diversification with a transparent methodology and all costs known in advance, and the mark-to-market only crystallized on one date. pre-established. ”
The swap was fully secured by a daily cash margin as part of a two-way credit support schedule. UBS also used the swap format for a joint project with the investment director of its wealth management unit, which has a team dedicated to short-term investment opportunities. Based on the ideas for short-term exchanges between team assets, the UBS The structuring team implemented a range of relative value trades that gave investors the opportunity to be long-short on asymmetric risks, often using the product as an overlay in the alternative compartment of its allocation. ‘assets.
“As part of this offering, the client obtains exposure to ideas generated in an unfunded format via a total return swap that benchmarks an underlying portfolio and actively manages the portfolio,” said Tuninetti. “Once a particular idea is generated, the customer can decide whether or not to include it in the exchange. ”
Popular exposure in recent months has been long we financials, sellers of sovereign securities, on the bet that banks will perform better than safe-haven bonds with rising rates.
“It was a big business in the we in 2017, ”said Tuninetti. “In Europe, we are indeed still long financials, but trade has not yet crystallized.”