With many portfolios suffering losses in 2008, it's natural for investors to look for new ways to generate returns.
Many are now turning towards a more thematic approach to seek out the brightest prospects – investments that have the potential to outperform the general market.
As structured product providers, we want to offer thematic products that will capture investors’ imaginations. Before each product launch, we spend considerable time working out what will really appeal to investors.
As well as gathering feedback from IFAs, we look at the views of our internal Research department and Economists, and share ideas with our structured product teams in other regions. It can take some time to put a product together – researching the theme, developing the payout and structure, writing the brochures and creating advertisments.
Therefore we have to try to pick up on any new trends and investment themes as early as possible, so we have a product ready when investors recognise the investment opportunity and want to gain access.
Globalisation, the internet and constant access to the news makes it much easier for us and our investors to look for new investment ideas. Sometimes a particular country or region (e.g. Asian economies as highlighted in my last blog ‘Tame the Tiger’) might be an obvious ‘hotspot’. But more often not, it’s the broader global trends or themes that spark our interest – like infrastructure.
The infrastructure sector includes fundamental services and facilities, such as utilities, transportation and energy, which are necessary for the growth and development of every economy.
This is one of the world’s fastest growing sectors: significant investment is needed globally to build new and maintain existing infrastructure. A report last year by the Organisation for Economic Co-operation and Development (OECD) found 3.5% of the world’s annual gross domestic product would need to be spent up to the year 2030 to meet the need for telecommunications, transport, energy and other infrastructure developments.
Across emerging markets, demographic and economic growth has resulted in the need for new infrastructure.
Investment is also needed to maintain existing infrastructure in the developed world. In recent years, it has been hard to escape the images of huge infrastructure projects worldwide, from the Beijing Olympic Stadium to the replacement of the Victorian water mains in the city of London.
The project pipeline also looks healthy: the Mayor of London’s office estimates that $30bn needs to be spent in order to update transportation in the capital for the 2012 Olympics.
Our changing energy needs and growing concerns regarding the impact of our energy usage could also lead to significant projects: if we want to reduce the proportion of electricity that is generated from the burning of fossil fuels, new plants and infrastructure will need to be built in order to support alternative energy sources.
So we like the idea of showing infrastructure to investors. What happens next? First, we dig a little deeper. What is the real investment opportunity? What kind of companies stand to benefit? Infrastructure companies tend to have stable, dependable long-term cash flows due to the nature of their customer base and the essential services they provide. In addition, the investable universe in this sector has expanded over recent years due to the increasing use of Public Private Partnerships to finance projects.
That brings us to our next challenge: choosing the underlying. A broad, global infrastructure index can help us to capture opportunities across both the emerging and developed world, and also across the different infrastructure sub-sectors: transportation, energy and utilities.
Finally, and importantly, we have to price the structured product. Should we offer a neutral or bullish product? What kind of participation levels can we offer? Often, we have to do some tweaking (maybe adjusting the participation levels, or capping the returns) to make sure we can still offer capital protection, which we believe is important to investors in the current economic environment.
It’s sometimes frustrating when the ideas that we think are the best turn out to be very expensive but that’s the challenge – getting the right combination of a great investment story and a good value product for investors to be able to access it.
Marc Chamberlain is a Vice President at Morgan Stanley, focused on creating multi-asset structured solutions for distribution to UK retail investors. He has been working at Morgan Stanley for over 11 years, during which time he has gained experience in a number of areas, including European Exchange Traded Funds, Fund-Linked Derivatives and Equity Structuring.
The views expressed in this article are those of its author and do not necessarily represent those of the company he represents, IFAonline, or any other Incisive Media affiliated organisation.IFAonline
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress