There are number of ways for an asset manager to manage a client’s bankable wealth. Typically, a client assigns a power of attorney to the asset manager, who manages the deposits at the client’s favoured bank. This approach enables that client to see all positions and movements in the portfolio.
However, for the asset manager, handling individual client accounts is not scalable and might become cumbersome and inefficient with an increasing number of clients. Moreover, certain securities have a high minimum investment amount, and consequently are not available to every client with a diversified portfolio. These are the reasons, among others, why many asset managers choose to launch their own investment vehicles, through which they can distribute their investment strategy to more than one investor.
However, the well-known and widespread fund structures are in many cases neither accessible nor suitable due to various limitations, such as high set-up costs, poor flexibility and regulatory restrictions. An alternative that overcomes these limitations, and which has become popular in Switzerland in the last decade, is called actively managed certificates (AMCs).
Flexible and easy-to-set-up vehicles
Julius Baer acts as an issuer and administrator of AMCs, establishing the certificates, performing portfolio rebalancing, acting as market maker and continually calculating the strategy’s performance. The asset manager provides the issuer with the initial portfolio composition and any future adjustments. The asset manager may combine securities from various asset classes, from liquid stocks to less liquid bonds, alternative funds or derivatives.
AMCs are no newcomers to the structured products market and have followed a strong growth trajectory in the last couple of years. In contrast to their fund counterparts, they are set up within a few weeks with no issue costs for the asset manager and offer ongoing cost advantages due to their efficient administration. In addition, the certificates are issued with an ISIN number, making them transferable securities which may be booked at various custodians.
Asset managers benefit from a high degree of flexibility in designing their investment strategy. The tailor-made certificates might include derivatives, embedded leverage and regular coupon payments. They might also be hedged against FX risks. Furthermore, short futures can be deployed to actively manage the equity beta of the portfolio and to create market neutral positions, as well as to extract alpha.
Individualisation through feeder certificates
Even the needs of investors with different risk profiles and preferences can be satisfied by using a single AMC as a basis. A so-called feeder certificate for each client profile is plugged in to the basic AMC, while keeping the whole structure cost- and time-efficient.
The basic investment strategy is implemented by the asset manager within the AMC. For risk-seeking investors who want to increase their exposure to the underlying investment portfolio, a leveraged feeder certificate is issued. The leverage is embedded in the certificate. It is non-recourse and can either be static or dynamically adjusted to keep exposure to the underlying portfolio constant.
Conservative investors might prefer a capital-protected version of the AMC. Besides, feeder certificates are suitable to hedge duration or FX risks and to create distributing/non-distributing vehicles.
Simply put – the asset manager benefits from countless tailoring options for his underlying investment strategy.