Are investment certificates too complex?

Facts and Figures
Are investment certificates too complex?
Frankly, yes. Nearly all financial products, including most certificates, are complex. They
have this in common with many products and services that we use in our everyday lives
without thinking. For instance, ultra-fast smartphones, energy-efficient washing machines,
HD televisions with razor-sharp picture, or even train timetable apps. We hardly notice that
these are complex, and in any case we would never question their complexity because we
know that they make our lives easier and more pleasant. Does the same apply to financial
products? Yes, at least for certificates. The fact is that greater complexity almost always
means lower risk for investors.
Facts
Daten | Fakten | Argumente
Financial products are complex
For an introduction to certificates:
What are investment certificates, and what are they for, anyway?
Wer noch in den 80er Jahren als Privatanleger unkompliziert sein Depot absichern oder
von seitwärts laufenden oder fallenden Märkten profitieren wollte, der hatte leider Pech.
Teilhaben an der Wertentwicklung des DAX®, ohne dessen Einzelwerte kaufen zu müssen?
Auf einfachem Weg in Gold, Silber oder Öl investieren? Kostengünstig von der Entwicklung ausländischer Märkte profitieren? Fehlanzeige. Das war nur etwas für Profianleger.
Doch dann wurden im Jahr 1990 die ersten Zertifikate entwickelt. Sie revolutionierten die
Anlagemöglichkeiten für private Anleger.
… und was ist eigentlich ein Zertifikat?
Renditechancen in jeder
Marktsituation
Eines haben alle Zertifikate gemeinsam: Zertifikate sind derivative Wertpapiere für Privatanleger und gehören zur Gruppe der
sogenannten Strukturierten Produkte. Sie werden als struktu­
riert bezeichnet, weil sie in der Regel aus mehreren Bestand­
teilen zusammengesetzt sind. Da Zertifikate im Gegensatz zu
sonstigen Derivaten als Wertpapiere verbrieft sind, werden sie
auch „verbriefte Derivate“ genannt.
Mit einer Investition in Anlagezertifikate oder He­
belprodukte kann ein Anleger sowohl an steigen­
den als auch an fallenden Kursen des Basiswer­
tes gewinnbringend teilhaben. Auch bei seitwärts
verlaufenden Kursen sind positive Renditen mög­
lich. Der Anleger kann somit in jeder Marktphase
attraktive Renditen erzielen.
Große Auswahl an Basiswerten und
Anlageklassen
Bei Zertikaten hat der Privatanleger die Möglich­
keit, aus einer Vielzahl verschiedener Basiswerte
auszuwählen und mit nur einem strukturierten
Wertpapier in eine Branche oder Wirtschafts­
region zu investieren. Das war bis vor wenigen
Jahren ausschließlich institutionellen Anlegern
vorbehalten.
Der Begriff „Derivat“ stammt von der lateinischen Bezeichnung
„derivare“ und bedeutet „ableiten“. Derivate sind demnach Finanz­
produkte, deren Kursentwicklung sich von der Wertentwicklung
eines anderen Produktes, dem sogenannten Basiswert, ableitet.
Facts and Figures
Are investment certificates too risky?
Zertifikate richten sich ausschließlich an Privatanleger, wäh­
rend Derivate wie Optionen, Futures und Swaps in aller Regel
nur von institutionellen Investoren gehandelt werden.
Es gibt zwei große Gruppen von Zertifikaten: die eher mittel­ bis
langfristig ausgerichteten Anlageprodukte Before
und die risikoreiche­
making an investment, every private investor should be well aware of how much
ren Hebelprodukte mit einem eher kurzfristigen
risk Anlagehorizont.
is attached to the product he or she is interested in. It is easy to come to the wrong
Bestandteile von Zertifikaten
conclusion. Many people feel an investment in certificates is particularly high-risk, but this
is a misconception. In fact, the opposite is true of most categories of certificates.
Zertifikate beziehen sich immer auf einen Basiswert. Das kann
beispielsweise die Aktie eines Unternehmens sein, ein Index
wie etwa der Dax, ein Edelmetall wie GoldFacts
oder auch ein Roh­
stoff wie Öl. Von der Kursentwicklung des Basiswerts hängt die
pp
Security is important for German certificate investors.
Wertentwicklung des jeweiligen Zertifikats ab. Damit sind sie
Zertifikate kommen für Anleger jeder Risiko­
More than 68 percent of the total volume invested in
sogenannte passive Finanzprodukte, da anders als bei Fonds
neigung in Frage. So stellen Kapitalschutz­
certificates at the end of March 2012 was in products
kein Manager aktiv die Wertentwicklung beeinflusst. Und so­
Zertifikate oder Strukturierte Anleihen mit
that offer full capital protection, and for which the
mit gibt es bei Zertifikaten auch keine Managementgebühren.
100%igem Kapitalschutz eine eher konservati­
investor receives at least the nominal amount back
ve Anlageform dar. Bei Hebelprodukten stehen
at the end of the– term, even in the worst case scenario.
Zertifikate beinhalten – wie übrigens auch Bausparverträge
den ausgesprochen hohen Gewinnchancen
stets eine oder mehrere Optionskomponenten. Sie bestim­
auch ausgesprochen hohe Risiken gegenüber.
p
p
Most German
men, welche Ausstattungsmerkmale ein Zertifikat
hat. Dazucertificate investors are risk-averse.
Damit sind sie nur für sehr risikobereite Anle­
Every
investment
gehört,
wie
risikoreich
ein
Zertifikat
ist
und
ob
der Anleger
mit certificate can be allocated to a
Before buying a financial product,
all investors
should
suredie
that they are familiar
ger geeignet.
Grundsätzlich
gilt:make
Je größer
risk class,
from 1 (conservative) to 5 (speculative). Of
dem Zertifikat auf steigende, fallende oder seitwärts
laufende
desto größer
das Risiko. Soin.bie­
with the basic features ofChance,
the product
they auch
are interested
This means
that the
the total amount invested in certificates at the end
Kurse des Basiswerts setzt.
ten sichObjective
für risikoaverse
Anleger
Lösungento
mitascertain whether or
of March 2012, 76 percent was invested in products
product needs to be transparent.
criteria
are available
in the two most conservative risk classes, 1 and 2.
not a product is transparent. Investors who perform such a test on certificates and other
This
means
the investment risk attached to these
financial products may well be in for a surprise.
certificates is lower than that of equities and also most
equity or property funds.
Passende Produkte für jede
Risikoneigung
Facts and Figures
Do certificates lack transparency?
p
Facts
Market volume by product category
Discount Certificates 6.1 %
Express
Certificates 6.5 %
Reverse Convertibles 4.8 %
Leverage products 1.3 %
Bonus Certificates 3.5 %
Tracker
Certificates 5.2 %
Outperformance/Capped
Outperformance
Certificates 0.1 %
Other investment
products without
capital protection 5.2 %
Uncapped Capital Protection
Certificates 18.8 %
Capital Protection
Products with
Coupon 48.5 %
(31 March 2012)
pp
German certificate investors make long-term investments. Of the total volume invested by private individuals, 98.7 percent is invested for a medium to long-term holding period. The remaining 1.3 percent
is invested in the leverage products, which are more speculative.
In financial economics it is possible to distinguish between six forms of transparency for financial
products. It is particularly important to answer the following questions: What is the underlying on which
the product is based? What conditions come with the returns? Have the risks been clearly disclosed and
are there any indicators that can be of service? How high are the costs? Can an investor sell the product
at any time without any complications? Will the investor always know the current value of the investment
when this happens? However, transparency also means that information is available concerning the
structure and the development of the market in question.
pp
As bearer bonds, investment certificates are subject to issuer risk just as government and corporate
bonds are. However it is only if the issuer becomes bankrupt that the certificate holder suffers a total loss
or receives only part of the invested capital back. There are now ways of hedging against this default risk.
The following facts in answer to all these questions show that certificates are extremely transparent
instruments, both in terms of the product itself and in terms of the market. They even do better than
many established financial products.
The facts speak for themselves. Investors are using certificates to optimise returns and to minimise the risks
connected with a direct investment, such as in equities. In addition, passive investments are usually more
cost-effective than actively managed financial products. Investors can now also hedge against the risk of
default by an issuer.
Product transparency
Distribution of the invested volume, and the total number of
structured investment products, across risk classes 1 to 5
pp
For investors it is important to know the underlying on which a financial product is based. The
transparency of these underlyings is high if the individual elements of the financial product are
known and available to the public at all times. A certificate’s performance is always linked to that of an
underlying. These underlyings may be equities, indices, commodities or currencies. Every certificate
investor knows the underlying of his or her certificate as it is the certificate‘s most important feature.
pp
If a product‘s performance in relation to various developments and scenarios of the underlying in
question is shown even before the product is purchased, we speak of scenario transparency. In the
case of certificates, investors know what payout they can expect from the very outset, depending on
the development of the underlying.
Three-quarters of the
total amount invested in
certificates is invested
in the two lowest risk
classes.
80
70
60
50
40
30
20
10
0
Risk class 1
Volume as %
Risk class 2
Risk class 3
Risk class 4
Risk class 5
Number as %
Sources: EDG Risk Report and DDV
Market Statistics, 31 March 2012
p
Transparency of financial products: a comparison
Transparency in relation …
Open funds
(with active management)
Complexity reduces risk
Gute Gründe für Zertifikate
Volume/number as percentage
Investment certificates are complex, but so are almost all
financial products. For example, there is hardly anything
more complex than an endowment life assurance policy.
Even building savings contracts, which are very popular
in Germany and which people think they understand very
well, are actually interest rate swaps combined with interest rate options based on highly complicated mathematics.
However, despite their complexity, these investments can
make good sense. Investing in certificates is not rocket
science. Certificates are much easier to understand than
many people assume. Nevertheless, investors must take
a little time to familiarise themselves with this type of
financial product. DDV and its member banks provide comprehensive information to anyone interested.
Wozu braucht man eigentlich Zertifikate?
Underlying
Scenario
Risk
Costs
Valuation
Liquidity
0
–
++
+
+
++
Exchange Traded Funds (ETFs)
++
++
++
+
++
++
Certificates
++
++
++
+
++
++
0
0
+
–
–
Life insurance
+ + very high
+ high
––
0 average
– low
– – very low
Source: Estimation by DDV
p
Certificates often consist of two or even more components. This is primarily for the protection of the investor.
For instance, you need additional components in order to ensure the full capital protection provided by
Uncapped Capital Protection Certificates. That may be complex, but it results in maximum security, as the
investor receives at least the nominal value of the invested capital at the end of the term. The highly leveraged Knock-out Warrants, on the other hand, have a very simple structure, but they are extremely risky.
For more on the risk associated with certificates:
Are investment certificates too risky?
Complexity and transparency are not mutually exclusive
Many people think that the more complicated a financial product is, the less transparent it becomes.
That is not the case, at least for certificates. Certificates are very transparent, despite their complexity.
Investors can tell at all times the current value of their certificates as well as the selling costs and the
underlying assets on which their certificates are based. They can also sell their certificates again on any
p
Facts and Figures
stock exchange trading day without any problems. They can easily check the product information sheet
to find out what conditions are attached to the returns. The risks are also clearly specified, with key
figures being given for each certificate. There are many popular financial products to which all of this
does not apply.
More on the transparency of certificates:
Do certificates lack transparency?
Complexity is subjective, transparency is objective
Whether a particular financial product is perceived to be complex or not is completely subjective. Two
investors can see an identical product very differently. If investors are to be protected effectively, financial
products should not be assessed by their level of complexity. The decisive factors are how easy to understand and how transparent a product is, and these criteria can be objectively checked. Academic research
has given rise to six criteria for evaluation of financial products: risk of loss, credit risk, saleability, management costs, return potential, and selling costs. With reliable information on these criteria, preferably in
the form of key figures, private investors can assess and compare all financial products quickly and safely.
kkRisk reduction: Discount Certificates
Discount Certificates are securities issued by banks
and listed on a stock exchange in Germany. The performance of a Discount Certificate always depends
on its underlying asset – for instance an equity, or an
index such as the DAX, the leading benchmark index
for the German equity market. Investors buy the certificates at a more favourable price than the underlying
asset, i.e. they get a discount on the cost of a direct
investment. If the price of the underlying moves sideways or is slightly falling, Discount Certificate investors make a profit. If there is a sharp fall in the price,
they make a comparatively smaller loss. Profits from
rising prices, on the other hand, are limited by a cap.
The two components of a Discount Certificate with an equity as underlying
+ Call option
Equity
The issuer buys an equity.
Profit
0
Equity
Equity price
= Discount Certificate
The issuer sells a call option
on this equity.
The private investor buys a Discount
Certificate on this equity.
Profit
Profit
Call option
+
Discount Certificate
Option premium
0
Exercise
price
Equity price
=
0
Equity
Equity price
Cap
Discount
Loss
The value of a certificate is always based
on its underlying asset, in this case an
equity.
Loss
The issuer receives an option premium for
selling the call option. In exchange, the
buyer acquires the right to buy the equity
from the issuer at a predetermined exercise price of X.
As long as the price of the equity is below
the exercise price, the buyer will not exercise the right to buy.
If the price is at or above X, the buyer will
purchase the equity from the issuer at the
exercise price.
Loss
The option premium and the retained
equity dividend enable the issuer to sell the
investor a Discount Certificate at a lower
price than the underlying equity.
The profit of the Discount Certificate is
limited by a cap. The cap is equal to the
exercise price of the option, since the issuer must sell the equity at this price.
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Facts and Figures
Orientation guides for investors
Product information sheets
Legally mandatory since July 2011, product informa­
tion sheets are an important aid to choosing a financial
product. These brief, three-page summaries enable
investors to grasp quickly all the essential facts and
figures on a financial product.
Risk Monitor
The DDV Risk Monitor (available in German only) ranks
more than 800,000 investment certificates and leverage products into one of five risk classes, ranging from
conservative to speculative. Once they have registered
at ddv-risikomonitor.de, private investors automatically
receive an email as soon as the risk class of one of the
certificates in their portfolio changes.
The Certificate Test
Since its inception, the German Derivatives Association
has campaigned for a scientifically based rating system
for investment certificates and leverage products. Such
a system has to take into account factors relevant to
the investment decision, such as costs, trading quality,
issuer credit rating and availability of information. The
product ratings are a milestone on the road to increased
product transparency: as an objective benchmark of
quality, they enable investors to compare different offers, narrow down the range of products and choose
the financial product that best meets their needs. The
tests provide guidance for private investors and customer advisers alike, and aid them in their investment
decisions. This makes the certificate ratings a fundamental element in the efficient self-regulation of the
certificates market.
The product ratings (only available in German) can be found very easily on the DDV website: under
the Transparenz tab, click on the first heading, Certificate Test, and enter the International Securities
Identification Number (ISIN) of the desired certificate.
Dr Hartmut Knüppel
knueppel@derivateverband.de
Deutscher Derivate Verband
Berlin Office | Pariser Platz 3 | 10117 Berlin | phone: +49 (30) 4000 475 - 10
Frankfurt Office | Feldbergstraße 38 | 60323 Frankfurt a. M. | phone: +49 (69) 244 33 03 - 90
www.derivateverband.de
April 2013
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