Customised equity indices that have been re-engineered to pay fixed dividends have helped to reinvigorate demand for structured products by providing improved pricing flexibility against a backdrop of low interest rates.
Natixis has raised more than €2.2bn from products linked to a customised CAC 60 – an equally-weighted index that combines constituents of the CAC 40 benchmark of Paris-listed blue chips with the next 20 largest stocks. After reinvesting net dividends, the index pays out a fixed 5% annually, eliminating the dividend risk and enabling issuers to structure products with chunkier yields and improved capital protection.
“In a context where investors are very keen to invest into Europe – and France in particular, given the recent elections – a lot of overseas clients are interested in this index,” said Eric Le Brusq, global head of equity derivatives at Natixis.
“The fixed dividend means that we can optimise the way we structure products to offer higher yields to clients and with the benchmark at least equalling or outperforming the CAC 40, clients are very satisfied.”
Plummeting interest rates sapped demand for structured products as it became prohibitively costly to provide a full capital guarantee. Investors have settled for the partial protection afforded by autocallable notes, but structuring remains a challenge as issuers juggle near-zero rates and razor-thin distributor fees.
Fixed-dividend indices such as the CAC Large 60 Equal Weight Excess Return index aim to address that. Launched by Euronext, the index was licensed to Natixis in 2015. The bank has sold a range of short and long-term notes with a typical 10-year autocallable on the benchmark targeting performance of 8%-10% per year, depending on the protection barrier.
Le Brusq said the index has effectively replaced the CAC 40 as the main underlying for French-focused structured products, with issuance referencing the new index outpacing its better-known counterpart by 10 to one.
“To a certain extent we helped the French market to recover an index, as investors would typically look at the EuroStoxx instead of buying a product linked to French stocks,” said Le Brusq.
Research shows that equal weighting is a key factor in equity index outperformance, providing investors with exposure to the small equity risk premium. The index has returned 6.8% in the year to-date, compared with 5.35% on the market cap-weighted CAC 40.
Natixis has expanded its efforts across Europe. Last year, the bank combined with FTSE Russell to license the FTSE 150. It also licensed Deutsche Boerse’s Euro iSTOXX 70 Equal Weight Decrement 5% index, which expands on the EuroStoxx 50 – one of the most popular underlyings in the structured products market.
Products linked to the expanded pan-European benchmark have been sold across Continental Europe, with the US and Asia on track to begin distributing the products.