The rise of Actively Managed Certificates (AMCs)
In the world of structured products, actively managed certificates are nothing new. They have experienced rapid growth in recent years because of their adaptability, affordability, and range of uses. Their dynamic nature is the best fit in this environment where passive investing is losing its appeal and glory of the past.
Nowadays, the global AMC market exceeds $1 trillion in assets under management, with the most significant growth happening in the last three years.
But why the fuss?
In this article, we aim to explain the AMCs, their benefits, and risks so that our investors remain informed and able to understand and evaluate their usefulness.
What is an AMC?
In essence, AMC is a structured note offering dynamic participation in an underlying portfolio of assets.
Unlike traditional structured notes, where the underlying assets (stocks, bonds, commodities, etc.) remain static throughout the term, AMCs allow portfolios to be dynamically rebalanced based on specific mandates from the advisor.
How AMCs work?
Usually, a reputable institution (most often a bank) acts as an issuer and administrator of the note, establishing the certificate, performing portfolio rebalancing, and providing liquidity and pricing. The role of the advisor is to provide the portfolio composition and any future adjustments. Assets remain in the custody and safekeeping of the banking institution.
Value Proposition
- Time-to-market is reduced
- Ability to tailor investment strategies to client needs
- Diversification made easy (e.g. bond portfolios for small portfolios)
- Daily liquidity as there is a secondary market available
- Transparent evaluation of performance
- Ability to combine a range of securities such as stocks, bonds, commodities
- Drastic reduction of fees for clients
Risks
There are three types of risk that the investor of an AMC should be aware of:
The counterparty risk:
This is the risk of the institution that safely keeps the investment portfolio of the AMC. AMC is an on-balance sheet holding so the investor bares the custodian risk. In the recent years there is a new breed of AMCs that alleviate this risk by placing the portfolio in an off-balance sheet structure such as an SPV (unrelated to the bank)
The market/portfolio risk:
This is the risk that is reflected in the holdings of the actual portfolio. For example, the creditworthiness of the bonds that the AMC may have, or the price movement of the underlying stocks.
The portfolio strategy:
A poor strategy sponsored by the advisor obviously will affect performance and hence is also a significant risk the client has to evaluate.
KM cube offering
KM cube is already active in this market and provides a variety of AMCs for its clients. The systematic strategies offered under the Unicorn umbrella and the Bond AMCs are two of those examples.
Key takeaways
Actively managed certificates offer flexibility, reduced costs, and tailored solutions for investors. Currently, AMCs in high demand include thematic strategies, bond portfolios as well as more sophisticated mandates.
Related documents/sources
The new generation of actively managed certificates
Swiss Structured Products Association recommendations