Use of structured
products in wealth
management
April 2008Tomas Hochmeister
EQUITY DERIVATIVES HOUSE OF THE YEAR
2This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Agenda
Why Structured Products?
Innovation dedicated to investor needs
Alternative to Equity Investments
Alternative to Global Asset Allocation Investment
Widen your horizons: Core Satellite
Niche Investments
Alpha Generator
3This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Why Structured Products ?
Structured Products have witnessed a huge increase in the past few years.
Investors have exhibited enhanced appetite for these investment solutions because of a variety of reasons
Enhancement of risk/return profile
Capital Protection has proved to be a very attractive feature
Possibility to benefit from innovative payoffs
Opportunity to be linked to multiple asset classes
Benefit from the performance of traditional and non-traditional asset classes
No currency risk ( CZK Quanto)
Insurance linked guarantees have also seen a huge demand
4This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
0
20
40
6080
100
120
140
160
Europe Asia North America
2004
2005
2006
Structured Products a fast growing activity
A business led by the European market
The most innovative
Structured products Retail market volume 2004/2006
Source: Structured retail products
EU
R B
illio
n
+52%
39% +26%
5This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Structured Products: created for a range of clients
Investment with total safety
Pattern recognition for Target Clients
Lifestyle : Simple and Safe
Risk Tolerance: Low
Current Portfolio: Bond Oriented and Less Diversified
Typical Age group: 50 +
Behavior Traits: Highly concerned about risks
Investment with the optimal balance
Pattern recognition for Target Clients
Lifestyle : Balanced
Risk Tolerance: Medium and Normal
Current Portfolio: Equities & Bonds (or deposits)
Typical Age group: 25 - 60
Behavior Traits: Willing to go the extra mile with added risk appetite
Investment with a maximum leverage
Pattern recognition for Target Clients
Lifestyle : Adventurous
Risk Tolerance: Extremely High
Current Portfolio: Equity Options Bias
Typical Age group: 25-60
Behavior Traits: Enjoy taking risks for the additional upside potential
Conservative Profile Medium Profile Dynamic Profile
“Best Size Fits all” Solution Solution for “Gambling can be fun”“Play Safe” Solution
100% Capital Guarantee
Partial Capital Guarantee
No Capital Guarantee
6This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Source: Bloomberg
From the distributor standpoint
A true and concrete tool to fight against the behavioural bias of small investors
"Odd Lot Theory" Illustration CAC 40
2 200
3 000
3 800
4 600
5 400
6 200
7 000
In In
dex
poin
ts
45,2
5,9
0
10
20
30
40
50
1998 1999 2000 2001 2002 2003 2004 2005
In €
bill
ions
Encouragement for Innovation Case Study on Principal Protected Notes
Net inflows in equity funds in France
7This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Enhancement of risk/return profileCase Study on Principal Protected Notes
From the investor standpoint
Value added as compared to balanced funds
Improvement of the efficient frontier
Exp
ec
ted
10
-ye
ar
ga
in
Source : Edhec Risk and Asset Management Research Centre. July 2005
With Principal Protected SP
Without Principal Protected SP
70%
90%
110%
130%
150%
170%
190%
-20,0% -10,0% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0%
Cvar(95%)
100% in SP
100% in Bond
100% in Equities
A
B
Portfolio A B
Equity 50% 10%
Bonds 50% 10%
SP 0% 80%
8This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Agenda
Why Structured Products?
Innovation dedicated to investor needs
Alternative to Equity Investments
Alternative to Global Asset Allocation Investment
Widen your horizons: Core Satellite
Niche Investments
Alpha Generator
9This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
“… If any one owe a debt
for a loan, and a storm
prostrates the grain, , ……
……. in that year he needs
not give his creditor any
grain, ……….. pays no
rent for this year…”
Hammurabi Code
1800 B.C.
Hammurabi was the 6th king of Babylonia. He unified his kingdom creating a unique religion, language and law: The Hammurabi Code
One of the first derivatives in history:
When did it begin? Much earlier than what you guessed
10This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Case study: Market context at the end of the 90’s
1998 LTCM & Emerging markets crisis:
Equity Market volatility is higher and higher
Risk aversion is high, interest rates are low or not high enough to match liabilities requirements
Investors can hardly afford a principal protection and an exposure on the increase
Client needs: Principal protected investments linked to Equities but not relying on bullish markets to generate performance
Answer: Creation of "promises" products / Mountain range
11This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
1998: the Everest Concept
Payoff at maturity:
200% + 100% of the performance of the worst performing stock positive or negative
If after 10 years, the worst performing stock of the portfolio displays a flat performance, the investor’s principal is doubled
Equivalent to an annual return of +7.18%
As of October 1, 1998 10-Y swap rate was at 5.00%
12This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Innovation in SP answered a Client need
What was possible at this stage:
Bet on the increase or the decrease of equity markets
What became achievable with this new range of Structured Products:
Bet on the non decrease of equity markets with principal protection
13This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Agenda
Why Structured Products?
Innovation dedicated to investor needs
Alternative to Equity Investments
Alternative to Global Asset Allocation Investment
Widen your horizons: Core Satellite
Niche Investments
Alpha Generator
14This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
An alternative to equity investments
Structured products enable to manage what asset managers dream of achieving:
1. To get the BEST ENTRY point
Example: Strike min mechanism
2. …and the BEST EXIT point
Example: Launch of emerald concept on 2002, first structured
product to offer a lock in mechanism and a high level of participation rate
Call on Max: Emerald innovation at a glance A 6-Year Fund Linked to a basket of 12 international stocks 100 % capital guarantee The maximum performance of the basket
Every 6 months, the value of the basket is observed. At maturity, the redemption value of the product is based on the best valuation of the basket reached on any of the 12 observation dates
Secure the gain
At each observation date, the price of the best performing stock since inception is locked-in, its performance is secured until maturity
15This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Agenda
Why Structured Products?
Innovation dedicated to investor needs
Alternative to Equity Investments
Alternative to Global Asset Allocation Investment
Widen your horizons: Core Satellite
Niche Investments
Alpha Generator
16This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Getting the BEST PERFORMING ALLOCATION
Efficient Allocator
3 underlying profiles,
At maturity investor is exposed to the best performing profile, and the principal is protected
Payoff:
100% of Initial Principal + 100% of the BEST PROFILE’s Performance
– The performance is calculated as the average of the performances recorded every six-months since inception, negative performances being deemed nil
Asset Class Index CONSERVATIVE BALANCED DYNAMIC
EQUITY S&P 500 10% 20% 70%
REAL ESTATE DJ Real Estate 20% 30% 15%
GOVT. BONDS Lehman Aggregate 70% 50% 15%
PROFILES
17This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Agenda
Why Structured Products?
Innovation dedicated to investor needs
Alternative to Equity Investments
Alternative to Global Asset Allocation Investment
Widen your horizons: Core Satellite
Niche Investments
Alpha Generator
18This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
The Asset Management Industry is changing rapidly
The asset management sphere has evolved towards a core satellite structure with a strong growth of the ETF and Hedge Fund industries
Source: SG Marketing
Global Mutual Fund Industry
$ 10,000 bn
ETF Industry$500 bn
ETF Industry$500 bn
Hedge Fund
Industry$1,800
bn
Hedge Fund
Industry$1,800
bn
+30% annualized growth since 2000
+20% annualized growth since 2000
19This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
ETFs and Structured Products indexation still focus on mainstream indices
Traditional indices have well-known limitations
No niche markets in terms of regions
No niche sectors
Underlyings: Demand for Alternative & Innovative Indexation
Source: SG Marketing
DJ EuroStoxx 50, CAC, DAX, FSTE
(~ €35bn)
NIKKEI, TOPIX, HSI, ASX(~ €30bn)
S&P 500(~ €85bn)
Europe
USA Asia
DJ EuroStoxx 50, CAC, DAX, FSTE
(~ €35bn)
NIKKEI, TOPIX, HSI, ASX(~ €30bn)
S&P 500(~ €85bn)
Europe
USA Asia
20This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Demand for alternative way to generate performance
Play global long term growth themes which are not represented in main stream indices
Example: SGI Thematic indices: SG in collaboration with Dow Jones Indexes and asset management specialists such as SAM Group (Sustainable Asset Management) has created the following indices:
Exotic Equity betas: new types of underlying for SP
21This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Core: β-research indices overview
Source: SG Marketing
Index Theme Advisor Calculator
SOLEX Solar energy SAM Dow Jones
TIMBEX Wood Dow Jones
URAX Uranium Dow Jones
WOWAX Water SAM Dow Jones
ERIX Renewable energy SAM Stoxx
BIOX Bio energy SAM Dow Jones
WAEX Alternative energy SAM Dow Jones
PRIVEX Private Equity Dow Jones
Dow Jones
Dow Jones
Dow Jones
SGI Global WasteManagement
Waste Management S&PSG
SGI Alternative beta Hedge funds beta
S&PSGI Bond Bonds SG
SGI Global security Security SG
SGI Global wealth Wealth
SGI Global human resources
Human resources
S&P
SG S&P
SG S&P
SGI Global Senior Senior SG S&P
S&PSG
Index Theme Advisor Calculator
SOLEX Solar energy SAM Dow Jones
TIMBEX Wood Dow Jones
URAX Uranium Dow Jones
WOWAX Water SAM Dow Jones
ERIX Renewable energy SAM Stoxx
BIOX Bio energy SAM Dow Jones
WAEX Alternative energy SAM Dow Jones
PRIVEX Private Equity Dow Jones
Dow Jones
Dow Jones
Dow Jones
SGI Global WasteManagement
Waste Management S&PSG
SGI Alternative beta Hedge funds beta
S&PSGI Bond Bonds SG
SGI Global security Security SG
SGI Global wealth Wealth
SGI Global human resources
Human resources
S&P
SG S&P
SG S&P
SGI Global Senior Senior SG S&P
S&PSG
22This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
SGI Global Environment
What is the environment sector?
Investing in environment means investing in companies involved in clean water, alternative energy and waste management. Energy and clean water savings through recycling as well as the production of heat and power in incinerators provide attractive approaches to mitigate energy and water challenges. Vice versa, rising energy prices and water scarcity will drive demand for recycled material and thus provide further impetus to the development of this sector.
Index Description
SGI Global Environment aims to reflect the environmental sector. The global index comprises 30 stocks of companies which have their biggest share of revenues in either or several of the following investment clusters: clean water, alternative energy and waste management.
Index components are selected and weighted according to their free float market capitalisation and market liquidity.
0
200
400
600
800
1000
1200
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
SGI Global Environment
23This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Satellite: generating α
α-research range: designed to outperform a reference index
Systematic or discretionary strategies (hedge fund like) that aim at creating an alpha over a specified benchmark index
Indexation to funds of hedge funds
24This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Satellite: Access to the universe of funds of hedge funds Total Return Strategies:
Alternative investments have traditionally been the province of professional investors
This asset class has enjoyed exceptionally strong returns since 1990 with remarkable consistency Indexation to funds of hedge funds
Lower market directionality of this asset class, plus its capacity to capture diverse trends across all asset classes, and to benefit from arbitrage opportunities
0
50
100
150
200
250
300
350
400
450
Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07
MSCI World
MSCI Hedge Fund Composite Index
25This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Conclusion
Equity linked Structured Products are not trendy investments but long lasting financial tools
Their ability to provide added value encourages new developments & innovation
Their flexibility allows to address almost all client needs
26This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
And what is Adequity?
First structured products brand fully dedicated to European wealth managers since 2001
Offering a complete range of investment solutions and related services dedicated to wealth managers
Every month, at least one product launch embedding the latest techniques of structured management
Benefits from the renowned expertise of GEDS in terms of market opportunities and investment solutions
27This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Thank you for your attention!
28This material is provided for information purposes only There is no assurance that a transaction will be entered into on any indicative terms
Important Information
The contents of this document are given for purely indicative purposes and have no contractual value. Prior to any investment in the product, you should make your own appraisal of the risks from a legal, tax and accounting perspective, without relying exclusively on the information with which you were provided, by consulting, if you deem it necessary, your own advisors in these matters or any other professional advisors. Subject to compliance with legal and regulatory requirements, Société Générale may not be held responsible for the financial or other consequences that may arise from the investment in this product.
This product may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to said persons or in said countries. It is your responsibility to ensure that you are authorised to invest in this product. This document does not constitute an offer for sale of securities in the United States. The securities can be neither offered nor transferred in the United States of America without being registered or being exempted from registration under the US Securities Act 1933, as amended.
The documents relating to this product will provide for methods of adjustment or substitution in order to take into account the consequences on this product of extraordinary events which may affect one or several of the underlying instruments on which it is based or, as the case may be, the early termination of this product.
Moreover the investor should be aware that the capital protection feature requires for the Issuer, the Guarantor and/or their affiliates, to enter into hedging transactions which have a cost and which may affect the market price, liquidity or value of the Notes, especially when comparing them to the market price, liquidity and value of the underlyings of the Note. The Issuer and the Guarantor assume no responsibility whatsoever for such consequences and their impact on the investment
WHEN SIMULATED PERFORMANCE OR PAST PERFORMANCE ARE DISPLAYED, THE FIGURES RELATING THERETO REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. When future performance is displayed, the figures relating to future performance are a forecast which is not a reliable indicator of future results. Furthermore, where past performance or simulated past performance rely on figures denominated in a currency other than that of your country of residence, the return may increase or decrease as a result of currency fluctuations. Finally, when simulated performance or performance (whether past or future) are displayed, the potential return may also be reduced by the effect of commissions, fees or other charges.
For the products benefiting from a guarantee of Société Générale or of any other entity of Société Générale group (hereinafter referred to as the «Guarantor»), the due and punctual payment by the principal debtor of the obligation of any sums due in respect of these products is guaranteed by the Guarantor according to the terms set forth in the deed of guarantee. In this case, the investor bears in the end a credit risk on the Guarantor.
The attention of investors is drawn to the fact that, by the maturity date, the price of certain products can be subject to volatility due to the evolution of market parameters and more precisely the price of the underlying and the interest rates. For certain products, except when Société Générale undertakes to assure a secondary market, there is no liquid market on which these products can be easily traded, and this may have a material adverse effect on the price at which these products might be sold.
The information presented in this document is based on market data at a given moment and may change from time to time. Back testing permits the calculation of returns that the product would have had if it had been launched in the past, presented according to the maturity date. It allows an understanding of how the product would have performed at different market stages over previous years.
This document is confidential and may not be communicated to a third party (with the exception of your external advisors on the condition that they themselves respect the confidentiality) without prior written consent from Société Générale.
The accuracy, completeness or relevance of the information provided is not guaranteed although it has been drawn from sources believed to be reliable.