Water products flow into investors’ consciousness
The Zurich-headquartered private banking arm of Credit Suisse has made a significant tranche of its profits in recent years from the sale of structured products. Delegates at PWM’s third Open Architecture Forum questioned whether these products were genuinely pulled off the bank’s shelves by needy clients, or pushed by greedy advisers.
The man to answer these questions, Burkhard Varnholt, Credit Suisse’s head of financial products, is widely seen as the enforcer within the bank. He travels around Europe, motivating the sales forces, instructing them about the latest investment theme, and giving them pointers on how to sell it.
While he naturally denied selling inappropriate products to boost his balance sheet, the forum’s audience witnessed some of Mr Varnholt’s skills of persuasion as he shared some of his ideas.
“There is very little push effect at Credit Suisse, as the more you push, the more you backfire,” suggested Mr Varnholt, claiming that typically, his advisers cannot place the volume of structured products which their clients are demanding.
“We have placed much money this year in index derivatives and structured products in commodities,” said Mr Varnholt. “A topic that a lot of investors are really interested in is the theme of natural resources. Water is particularly compelling. A cup of coffee consists of 7g of coffee and 75ml of water, yet requires much more water than that to prepare it – for washing the beans, transporting the water and boiling it.”
Coffee drinking spreads as a country becomes wealthier, said Mr Varnholt. “You don’t drink coffee because you are thirsty, but as an expression of a lifestyle and degree of wealth.” Starbucks branches were opening in China, reflecting the rise of the country’s middle class.
“As the BRIC [Brazil, Russia, India and China] countries grow their middle classes, their lifestyles improve and levels of income rise, people start to drink coffee and change their diets from vegetarian to fish and meat. These require much more water than vegetarianism, so water is a compelling long-term theme in which you can interest investors.”
More than 50 per cent of water flowing through pipes in the UK or US currently leaks into the ground, according to Mr Varnholt, which means huge investment is required in the water infrastructure. “Something which investors rarely cared about will become more interesting than they originally thought.”
Credit Suisse recommends a fund-based approach to water investment. “It is very difficult to structure derivatives in this area,” confirmed Mr Varnholt. “You need to concentrate on active equity managers, established groups who know where the sectoral opportunities are.” Credit Suisse advisers use such thematic funds managed by Swiss banks Clariden and Pictet.
While derivative products which play the fixed income yield curve have proved popular this year among credit Suisse clients, the fact that equities are now 60 to 70 per cent cheaper than bonds has again become a selling point, revealed Mr Varnholt. “Increasingly, equity market investors are getting excited about markets once more. Certain markets have made headlines, and Japan is one of them,” he added.
The way to transform a useful long-term story such as Japanese recovery into a compelling product proposition, was through open architecture, Mr Varnholt told the forum. His advisers are offering Japanese funds from RMF, Schroders and Axa Rosenberg among others.
“Selling a mutual fund is about selling hope. We can only sell them when there is optimism that a fund will rise above the index. Structured derivatives provide long-term comfort in an investor’s psychology. They can work when investors are not feeling good about things.”
