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EXECUTIVE SUMMARY Introduction Market context Distribution landscape Future Outlook INTRODUCTION What is this report about? Who is the target reader? How to use this report MARKET CONTEXT Introduction - Structured products: a vast umbrella term Interest in structured products is on the rise - A range of factors have supported development - Market size indications suggest strong growth ahead -- Both the number and net assets of guranteed funds have grown strongly across Europe -- There is scope for capital protected funds to take a greater share of the total fund markets in some countries The retail market is considered the core target - The European structured product market is geared towards private individuals - But there is variation across key European countries The Institutional sector is less favoured by asset managers - Less than fifth of asset managers see the insitutional segment as the core market for structured products - Insurance companies are the most favoured targets - Issues in targeting European pension funds -- Pension funds are in theory a good target for structured products -- But in practice certain factors have restrained the take up by pension funds Some aspects of structured products have raised debate - Do structured products represent good value for money? -- Asset managers believe structured products represent poor value -- Longer-term capital guarantees divide opinion - Are structured products subject to sufficient transparency and understanding? -- Transparency and complexity are two major criticisms of structured products by European regulators and trade bodies -- Complexity is reducing client understanding and sales effectiveness Data tables DISTRIBUTION LANDSCAPE Introduction Relative importance of channels for the mass market - Retail banks are considered the key distribution channel - Financial advisers offer strong potential - Some possiblities exist in remote and direct channels Relative importance of channels for the HNW segment - Private banks and wealth managers are most favored - But financial advisers and retail banks represent strong competition for private banks Relative importance of channels for the institutional sector - Insitutional sales relationships are most often handled directly - But investment consultants play a key role in some countries Data tables FUTURE OUTLOOK Introduction Asset Managers' growth expectations by customer segment - The mass market to remain the greatest source of opportunity - The HNW sector will require asset managers to prove themselves on key counts - Opinion is more divided over the growth in demand among institutional investors Asset Managers' growth expectations by country - German asset managers are strongly optimistic across the board - Demand expectations are more client segmentdependent in other countries Future market direction - Asset managers believe there is plenty more room for innovation - Innovation could take a number of forms -- Commodity-linked structured products are one area of perceived opportunity -- But there are also a host of other possibilities - Structured products are strongly expected to shift heavily towards fund structures - But innovation for innovation sake is not the answer Future barriers to growth - Expense to remain a key issue, especially for the institutional segment - Client understanding and demand is a potential barrier -- Product understanding a key issue for the mass market -- But question marks remain as to client interest/demand for all segments - Sales expertise is the most significant supply-side concern -- The level of supply from asset managers and promotion by distributors is not anticipated to be a problem -- But sales expertise is subject to concern - Impact of regulatory difficulties expected to vary by market Building successful structured product propositions - Winning propositions in the mass market and mass affluent sector -- Mass market structured products must deliver simplicity -- Mass affluent clients will require greater choice - Winning propositions in the HNW and institutional sectors -- Customized and flexible solutions will be key for longer-term needs -- But the right shorter-term product solutions will also be successful Strategic priorities for asset managers Data tables APPENDIX Research methodology - Survey details - Methodology for aggregating wealth manager's growth expectations Definitions - Alternative investment - Capital protected product - Hedge fund - High net worth (HNW) - Liquid assets - Mass affluent - Private client - Structured product - Traditional investment Further Reading - Savings and Investments SPP -- Asset Management and Funds -- Offshore Financial Services -- Retail Savings and Investments - Related Global Wealth Service SPP Reports SPP writing team List of Tables Table 1: Number of capital guaranteed/protected mutual funds, Q4 2002 to Q4 2004 Table 2: Net assets of capital guaranteed/protected mutual funds, Q4 2002 - Q4 2004 Table 3: Overview of number and net assets of capital protected funds across various European countries, Q4 2004 Table 4: Question: Which customer segment do you consider to be the core target market for structured products? (by country) Table 5: Statement: Capital guaranteed products are more relevant to mass market customers rather than HNW or institutional clients (by country) Table 6: Statement: Customers don't value 100% capital guarantees if it is attached to a term of over five years (by country) Table 7: Statement Capital guaranteed structured products offer investors good value for money (by country) Table 8: Question: What do you think is the best way for structured products to be distributed to mass market investors? Table 9: Question: What do you think is the best way for structured products to be distributed to high net worth investors? Table 10: Question: What do you think is the best way for the following alternative investments to be distributed to institutional investors? Table 11: Question: Thinking of the next three years, how do you think demand for structured products will change for the these customer segments? Table 12: Question: Thinking of the next three years, how do you think demand for structured products will change among mass market investors? (By country) Table 13: Question: Thinking of the next three years, how do you think demand for structured products will change among high net worth investors? (By country) Table 14: Question: Thinking of the next three years, how do you think demand for structured products will change among institutional investors? (By country) Table 15: Statement: There is a large potential market for structured products linked to gold and other commodity price indices Table 16: Statement: There is still significant scope for product innovation in the structured product market Table 17: Question: What do you think is the key success factor an asset manager must have to succeed in the high net worth market with structured products? Table 18: Question: Thinking of these customer groups, what do you think will be the major barriers to wider take-up of structured products in the next three years? Table 19: Percentage of asset managers anticipating regulatory difficulties will be a major barrier to wider take-up of structured products in the next three years, by country. List of Figures Figure 1: 77% of European asset managers consider private individuals to be the core target for structured products Figure 2: Product expense is anticipated to be a key barrier to growth for the institutional segment Figure 3: Drivers behind the growth in structured products Figure 4: The number of capital protected funds have grown by 24% since Q4 2002 Figure 5: Net assets in capital protected funds have rapidly outgrown the number of funds Figure 6: Proportion of total mutual fund net assets in capital protected funds, Q4 2004 Figure 7: 77% of European asset managers consider private individuals to be the core target for structured products Figure 8: French and German asset managers view the institutional segment as offering more potential than other countries Figure 9: A quarter of European asset managers consider insurance companies to be the main institutional target group Figure 10: European asset managers strongly believe that structured products represent poor value for money Figure 11: Opinion is divided as to whether customers place value on capital guarantees attached to a term of over five years Figure 12: Retail banks are the key to structured product distribution to the mass market Figure 13: Private banks are considered the best channel for structured product distribution to the HNW segment Figure 14: Distribution to the institutional segment is divided between direct relationship and investment consultant channels Figure 15: Demand in the mass market is anticipated to be the fastest growing segment for capital protected and structured products Figure 16: The majority of asset managers anticipate HNW demand to grow in the 0-5% range Figure 17: Past performance, brand and strength of distribution is key to success in the HNW sector Figure 18: Over a quarter of asset managers anticipate that demand could grow by over 10% among institutional investors Figure 19: Germany is expected to see strong growth in capital protected and structured products across all client segments Figure 20: Opportunities for product innovation abound according to European asset managers. Figure 21: Gold and commodity-linked products are thought to have significant market potential Figure 22: Product expense is anticipated to be a key barrier to growth for the institutional segment Figure 23: Regulatory difficulties are most expected to be a barrier to growth by asset managers in Germany and the UK