The sheer magnitude of fixed income inflows should not escape investors, especially in Asia, as credit spreads continue to tighten to new levels, squeezing the value of what remains in the asset class. Credit-linked notes (CLN) continued to register strong inflows in 1Q17, but quickly moderated towards the middle of the year.
According to Kenneth Choy, director, cross-asset solutions sales, wealth management and family offices distribution, global markets, APAC at BNP Paribas, clients then started to rapidly explore to other areas on the credit spectrum.
“Clients began to shift focus to European banks and insurance, US high yield and then zero recovery credit indices, but fixed income investors struggled to find value as the credit spreads move intensified to their tightest levels since 2007,” Choy says. “At that point, we began to promote hybrid structured products that combined credit with other asset classes to improve pay-offs.”
The French structured product provider took vanilla CLNs—often linked to Asian sovereigns, Chinese banks, European banks and insurance subordinate debt—and added a hybrid component linked to a myriad of other reference assets. Such components included rates, such as the US 3-month LIBOR or CMS 30-10, FX and, to a lesser extent, equities.
Few in the market would question BNP Paribas’ manufacturing capabilities. But more often than not, success in the delivery of hybrid structured products hinges on organisational and philosophical factors, whereby investment banks adapt multi-asset mindsets and a client-centric approach to discourage internal competition and foster collaboration.
“This is a testament to the engagement of our structuring team post-reorganisation,” Choy explains. “Our teams, regardless of their asset class expertise, have a collective responsibility to cover clients as a multi-asset business. Just because there are no credit-only flows does not mean our fixed income specialists have no role to play.”
This multi-asset approach may not be groundbreaking, but few today are capable of executing in practice. BNP Paribas is an exception, distinguishing itself in 2017 as the Best Provider of Hybrid Structured Products.