High-risk products a cause for concern

PUBLISHED : Sunday, 20 April, 2008, 12:00am
UPDATED : Sunday, 20 April, 2008, 12:00am

Reports of losses in investing in accumulators have surfaced in the past few months, leading to rising concerns about the regulation of these products which are sold by private banks and brokers.

While most private banks push their discretionary portfolio management to clients, few want to focus on their execution business - which involves trading stocks and other leveraged products such as accumulators.

According to Dutch Bank ABN Amro, the majority of accumulators are bought by Hong Kong investors - who have a high-risk appetite, especially for accumulators - followed by investors from Singapore.

ABN Amro estimated that there were at least US$43.2billion worth of accumulators issued last year.

Philip Jehle, head of the private clients unit at Lombard Odier Darier Hentsch, said that banks avoided offering accumulator products unless clients insisted on them.

'The appetite for sophisticated derivatives products has diminished. I believe, and hope for the interest of these clients, that more transparency and clarity will be given if banks want to continue marketing derivatives products,' Mr Jehle said.

Fritz Man, head of investment consulting sales, North Asia at Sarasin Rabo Investment Management, said that many investors overcommitted their capital on accumulators and, to make it worse, on one sector of the equity market.

'A lot of investors like to buy equity derivatives products, with or without principal protection or with or without leverage,' Mr Man said.

'Accumulators are essentially good products when the market is bullish. Unfortunately some investors became greedy at the peak of the equity market and committed themselves to a large number of accumulators.'

Accumulators allow investors to accumulate blue-chip shares at a discount. Some private banks including Sarasin said investors kept piling in their cash despite bank advice on reducing asset allocation in accumulators.

Lionel Kwok, head of investment solutions for North Asia at Credit Suisse private banking, said: 'The accumulators were popular last year among our clients, similar to the overall market. The features and underlying risks were well explained and investors were fully aware of the potential loss in a down market.'

Private banks such as UBS and Julius Baer declined to comment on their equity derivatives products.

Mr Kwok said: 'We have been prudent and thorough when offering leveraged products to our clients to ensure that the products suit their risk profile. The majority of our clients who have been actively trading in equity markets recently have reduced their leveraged positions.'

However, he declined to comment on the Swiss private bank's situation in relation to equity derivatives products.

ABN Amro's Singapore-based vice-president and product specialist for structured products Stefan Ho is cautious about accumulators as an investment product.

'We are careful when advising clients on investing in accumulators. We work with them on which stocks to use,' Mr Ho said.

Mr Ho said some of the bank's clients had lost money in accumulators although he declined to elaborate. However, he said that, overall, most clients' portfolios were in good shape with less losses from its Singapore based-investors compared with Hong Kong investors.

The entry level for a contract is about HK$1million. Some banks estimated that the outstanding value of accumulators might be as much as HK$500billion. This compares with the market capitalisation of the 10 largest stock exchanges which are valued at about US$60trillion.

Mr Jehle said: 'These derivatives can be destabilising for financial markets and regulators around the world have yet to find a way to grasp the dynamics of such a huge pool of obligations. Financial institutions are in the early stages of shrinking this pool of derivatives or leverage, and these institutions still have a long way to go.'

Accumulators are leveraged products because investors can buy them on margin, which means they will have to pay up front about 30 to 50 per cent of the total value of the investment. Investors can make a large profit if the underlying stock price goes up. But if the stock price falls below the strike price set at the outset of the contract, investors will have to buy back double the amount of shares at much less than they paid for them.

Mr Man said: 'Nobody would believe the market could turn around this quickly. Receiving double the number of shares is not a problem if investors have sufficient cash. But if investors have overcommitted they might have trouble paying up the margin.'

Mr Man said that historically investors had over-concentrated on one sector during a bull cycle. In the case of accumulators, risk-hungry investors concentrated on banking stocks and H shares, many of which had fallen by 50 per cent in the past few months.

'Many private banks are calling in the margin calls. Pretty much all banks are doing the same thing at the same time,' Mr Man said.

Mr Ho at ABN Amro said that the bank offered de-accumulators to investors to respond to the more bearish market.

'Assuming investors have bought the stocks at a cheaper price, de-accumulators allow investors to sell the stocks they have at a higher price.

But Mr Ho said that de-accumulators did not add much value. The Dutch bank is offering a product called Top 15 - 15 stocks from ABN Amro's in-house research view on the equity market.

Mr Ho said that the bank had been building structured products around the Top 15 stocks selected by its research team. The selection is made up of five stocks in Asia, five in Europe and five in the United States.



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