Providing a full range of solutions for investors

The key themes of simplicity, transparency and liquidity have come to the fore in every clients’ investment strategy. It is our belief that tailored investments can satisfy all three requirements of simplicity, transparency and liquidity, and, when properly designed and marketed, often prove more resilient than a direct investment in a given asset class. Investor behaviour As for all individuals, investor behaviour is not always rational. The ‘Odd Lot Theory’, for example, is a reality: it shows that behavioural bias leads to inefficiency in investment timing. Investors tend to buy when markets are high, as they believe they will continue to rise, and sell when markets are low. It is normal human behaviour to be counter-cyclical and emotional when investing. Conversely, tailored products, through the implementation of systematic strategies and predetermined payoff formulas, have the advantage of keeping investor emotion at bay while remaining free of behavioural bias. These investment solutions combine several financial components, generally by linking a bond component and a derivative one (usually an option). The derivative component is used to design a particular payoff which depends on the performance of the underlying asset. They allow for a great diversification of risk profiles: since their redemption at maturity is formula based, the payoff can be tailored at inception to the precise need of the investor. In the current market environment, clients can choose to have a downside protection or a fully capital guaranteed product with an attractive payoff. They can also offer the possibility of early redemption for a predetermined amount, giving the investor the opportunity to monetise an anticipated scenario. These products also offer great flexibility: • Their underlying can be chosen from a wide range of asset classes (equities, interest rates, bonds, foreign exchange, commodities, credit, real estate, etc). • Maturity can vary from one month to 10 years. • The currency of the product can also vary according to investors’ needs • They can be designed to guarantee capital growth, income or a combination of both. • They facilitate access to asset classes which are difficult to get at otherwise, like private equity or emerging markets. These tailored solutions are certainly not a new concept but they appear to address the current simplicity concern of many of our clients. They can offer fairly vanilla payoffs, can be linked to a well-known index, offer capital protection while also having a short maturity – in case an investor wishes to access their cash quickly. Some of the most popular products in the private banking business are indeed very straightforward, such as reverse convertibles, whereby investors gain from a non-decrease, rather than from a rise in equity markets. These solutions are also transparent as their performance at maturity is solely based on a predefined redemption formula. Finally, they are liquid instruments, as their liquidity is identical to their underlying asset – which is daily for asset classes such as equities, indices and commodities. A UNIQUE PLATFORM These products are actively used by private bankers all across Europe and hence are at the centre of SG CIB’s PWM activities. To better address each client’s situation, we have pooled the very best of our engineering talent as well as our coverage and advisory teams to work together to analyse each client’s needs, review their assets, determine risk, address the regulatory environment, and appraise their accounting constraints to determine a variety of possible solutions addressing each client’s particular challenges. The PWM team of SG CIB is dedicated to advisory, investment and risk management solutions for the specific needs of Private Bankers across Europe via a global integrated Cross Asset platform dedicated to Private Wealth Managers. The platform is composed of dedicated products specialists committed to continuous innovation, as well as a dedicated marketing force. Each client has a unique contact for all their investment needs across all asset classes. Structured solutions in use The widening of credit spreads since the beginning of the financial crisis has allowed investors to take advantage of a high coupon, explaining the strong interest by investors in so-called credit linked notes (CLNs). CLNs are structured products that allow investors to gain exposure to the credit quality of a specified reference entity. They are structured with an embedded Credit Default Swap. By construction, CLNs generally do not protect capital at maturity. A product very much in tune with current client demand would be one using credit risk as a source of high yield without putting investors’ capital at risk. Thanks to its multi-asset knowledge and expertise, market experts within the PWM team at SG CIB have been able to issue a capital guaranteed CLN, linked with a basket of five reference entities. The product mechanism enables investors to receive an annual coupon of 7 per cent over five years in the absence of a credit event on any one of the reference entities. The genuine advantage of the product is that the initial nominal value is totally protected by Société Générale at maturity, whatever may happen to any of the five reference entities composing the underlying basket. Thanks to this product we show that innovation does not necessarily mean complexity and that it can be very successful and very simple, in the form of a capital guaranteed investment, for example. Tailored investment solutions remain an essential tool, complementary to direct investment across asset classes. We remain convinced that these products will continue to be a growing area within the global financial landscape. To best advise clients on a wide range of optimised, innovative, and multi-asset investment solutions and services, Société Générale Corporate & Investment Banking relies on its highly professional team of market experts. Etienne Roesch is head of the Private Wealth Management team for France & Monaco at Société Générale Corporate & Investment Banking