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Patrick Peters3 MIN READING TIME2018-11-17

Fixed Income: Investors are ready to go alternative ways

Structured products are an interesting asset class and offer investors good opportunities to generate distributions or profits with individually controllable risk. As alternative fixed income, they are therefore also suitable for semi-institutional investors.

Fixed-income disbursements (Fixed Income) are of interest to many investors, whether private individuals or semi-institutional investors such as foundations, associations and pension funds. This used to be possible with relatively secure bonds, but that time is over. The current yield of ten-year Bunds is currently 0.29 percent, ie de facto zero - and the money market for larger assets more and more negative interest rates of up to -0.4 percent due. A risk to the assets of foundations and Co., to which the preservation of the basic assets is prescribed by law.

This situation has led to increased interest in alternative fixed income strategies. "Especially conservative investors do not want to forego current distributions. But they are aware of the difficulty that this is hardly possible with the traditionally known instruments, "says Thomas Lenerz, partner of independent asset management Rhein Asset Management from Wasserbillig (Luxembourg) and Dusseldorf. As a replacement for traditional fixed income strategies, asset managers therefore rely on certificates that they use in the custody accounts according to the risk profile of the investor.

According to Thomas Lenerz, experience shows that, depending on the structure of the certificate strategies, returns are possible that are not dissimilar to stock performance. For example, a discount certificate * on the Dax newcomer Wirecard (ISIN: DE000TR32EY4) yields a yield of 8.72 percent during the maturity, ie 9.86 percent per annum. This will be payable in cash if the potential loss in value of the Wirecard share in the period until September 20, 2019, does not exceed 18.65 percent.

If the loss threshold is exceeded, the investor receives the share and then benefits from the subsequent recovery of the share and possible dividend payments. Due to the built-in price risk buffer of 25.10 percent (the so-called discount) occurs for the investor only at a discount above at the receipt of the share a loss.

That sounds like a tangible risk: After all, massive price falls are nothing extraordinary. For Thomas Lenerz, therefore, conscious and professional risk management is always the basis for the use of certificates. "We do not buy certificates on stocks that we would not buy that way. The concept only works with really trustworthy values, we have to be convinced of the sustainability: either we get an above-average return if the stock goes up or sideways, or we get a value that has a reasonable upside potential for an attractive price. " or so: A cleverly selected certificate is always suitable for generating fixed distributions. Because even if the investor receives the stock, this generates a fixed income in the form of a dividend for a net asset value.

Speaking of risk management: For the Rhein Asset Asset Manager, it is particularly important to keep an eye on the issuer risk. "Certificates are bearer bonds in which the insolvency of the issuer may threaten the total loss - just think of the Lehman certificates and bankruptcy. Therefore, we check the credit default swaps as an internal rating instrument for all issuers of certificates. The price of the credit derivative indicates the short-term credit quality of the issuer: the higher the value, the worse. At prices over 100, we no longer purchase any securities from one issuer. "

Lenerz also emphasizes that certificates can be used very structured as a substitute for typical money market instruments. "Negative interest on high savings salute. Especially semi-institutional investors are afraid of this and are therefore willing to take alternative ways to generate at least a small positive return that they can count on in their fixed payout. "

For example * a Classic Discount Certificate on the Euro Stoxx 50 (ISIN: DE000CV6XD33). This can be equipped with a security buffer of almost 38 percent. The return is then only 0.4 or 30 cents per certificate. But the risk of not receiving this payout does not exist, says Thomas Lenerz. "The Euro Stoxx 50 has never suffered such a loss in its history within twelve months. Therefore, the payout on such a certificate is almost certain. "Some pension funds and associations would have hundreds of millions in such strategies to make from the current distributions pension payments or the like. "For semi-institutional investors with a very safety-oriented approach, we only buy certificates on large indices to minimize risk and achieve fixed income."

At the same time, according to the asset manager, it is also part of the concept to maintain a high degree of flexibility. This can best be controlled over the term of a certificate. "Duration is an important criterion for us. We do not want to tie up capital in a product for too long, but always have the ability to react quickly and dynamically to changes in the capital markets, both in equities and bonds and in structures. "

* The certificates listed as examples in the article are to be regarded as examples, the prices are purely indications. The products are not an investment recommendation, but serve to illustrate how a certificate works.