Paul Thind of RBS looks at the uses of custom index products, explaining their value in volatile markets, as well as the product development phase and how to discuss the products with clients.

Date: Oct 2011

Tags: Indexes, Volatility, Risk, Fees, Structured products

• In volatile and uncertain markets, products appropriate for investors include those which can control market risks in a dynamic way, and in the context of rules-based investing
• There is no need to be restricted to a particular asset classes, given that they each have their own risk/return profiles and their own volatility profile
• Some of the new products might include, for example, those which switch from equities into bonds, or from equities to cash, when market conditions are bad

In volatile and uncertain markets, Paul Thind said in an interview that products appropriate for investors include those which can control market risks in a dynamic way, and in the context of rules-based investing.

For example, when volatility is rising and market conditions are deteriorating, there are products which can enable investors to de-risk, he said. There are also products with a type of volatility-capping mechanism, which essentially target a certain risk and according to that, there is de-risking to the extent that the risk is reduced.

Another way of reducing risk, said Thind, can be via trend-following methodologies, so when certain trends are broken, the product can reduce risk again.

Across asset classes

According to Thind, such products and strategies are not just used in the equity markets, but are increasingly used in FX, commodities and fixed income, among other asset classes.

There is no need to be restricted to a particular asset classes, he explained, given that they each have their own risk/return profiles and their own volatility profile.

Plus, in highly-volatile markets, when everything tends to become correlated, risk has to been managed across the investment portfolio, he added.

Market developments

New developments happen as a consequence of the changes in the marketplace, said Thind, which might be regulatory-led or result from market downturns.

In line with these, product developers need to react to the realities of the market, to try to address real market issues and mitigate risks, he said.

Some of the new products might include, for example, those which switch from equities into bonds, or from equities to cash, when market conditions are bad.

Product development behind the scenes

Product development today involves many groups within the bank, said Thind. For instance, regulatory risk is the first and foremost consideration, especially since the regulatory environment is constantly changing

Once these issues have been taken care of, market risks need to be factored in, by assessing the risks that the bank takes when manufacturing products and services, he explained. Further, the kind of fee the bank will make in the process is also important.

Despite all these aspects of the process, the driver behind product development is what clients want, and how the product can fulfill that need, he added.

Fee structures

With index products, the fee structure is transparent, with term-sheets including the fees to be charged, and in normal market conditions what the bid-offer spread will be on any structure, said Thind.

Ensuring suitability

When discussing these products with their clients, Thind said relationship managers should ask them critical questions about what their risk/return expectations are, and in the context of these, as well as the context of their base currency, they should suggest solutions which can either improve on their existing performance, he explained. Or, if the client is sitting in too much cash, the suggestion might be to take a bit more risk.