Suzanne Salter, head of structured investments at Commonwealth Bank (CBA), talks about its new capital protected investment, Capital Series OzAsia, which offers investors a choice of three investment themes and investment terms of five-and-a-half years.

Innovative Investor: What is CBA's current strategy as regards structured product sales in Australia?

Suzanne Salter: We are working closely with our partner financial planners to understand what their clients' needs are. We are endeavouring to offer the product and the service to meet these needs.

Overwhelmingly, planners are asking for simplicity and transparency. So, as you can see, the investment options are quite easy to understand. In terms of service, we are providing substantial amounts of training. We have even included quizzes in our application form to ensure that each investor understands how the investment works, what the risks are and how much money can be made and under what conditions.

Innovative Investor: Where do you see the market moving in terms of product offerings in 2010? These products have a five and half year tenor, but a number of recent product launches in Asia have been on shorter tenors. Why does the Australian market favour longer dated products?

Suzanne Salter: The tenor issue results mainly from pricing requirements. Given the bond plus call structure, you need to find the point where the interest from the bond allows you to buy an 'attractive' option. We are using straight calls or call spreads without any averaging. We are also often including a contingent coupon feature. So this point can be reached around the five-year mark.

The new shorter term products are either capital at risk (so the client is selling an option and the above consideration does not apply). Or they are products where the client is simply buying an option, although it may be presented as a loan at a very low interest rate!

Innovative Investor: According to your literature OzAsia is your 22nd issue of Capital Series in six years. How has demand for structured products changed in this period, and more specifically how has it changed in the last 3 months?

Suzanne Salter: From a purely CBA perspective, demand is rising in regular increments, which each issue's results being greater than those of the previous issue. This results in many respects from the fact that CBA is a relatively new issuer and we are starting from a low base line.

So while CBA is most likely not the largest issuer in terms of aggregate notional placed into the market, we are most likely capturing the largest amount of new in-flows. There is a new rekindled interest in capital protection and a definite flight to quality, which the CBA guarantee represents.

Innovative Investor: What are the costs involved with these products?

Suzanne Salter: As described above, the structure is comprised of an option and a bond. So there is no management fee to speak of. As such, it is more accurate to speak of pricing variables - so the level of funding used and the cost of the option.

Innovative Investor: There has been an explosion of ETFs in the last few years, so (aside from the capital protection at maturity) what are the advantages of this product over other index funds such as ETFs?

Suzanne Salter: The two investments are really quite different. A Capital Series investment does not track the index. This is a very important point for investors to understand as it is often a point of confusion.

While some structured investments may offer 100% of the performance of the index, this will be at maturity. On a daily basis, the structured product will not track the index. Rather, its valuation will be the sum of the two parts (so bond and call option). As such, factors such as movements in interest rates will affect the secondary market valuation.

Another factor to look for is the exchange rate guarantee. This feature is always used in the Capital Series. For example, our investors will receive the performance of the Asian indices, irrespective of how their relevant currency fluctuates to the AUD. This feature, however, is not always present in the ETF products. So this means that current fluctuations will affect the value of the ETF. Potential investors need to ask the question before investing.

Innovative Investor: Capital Series OzAsia gives investors the choice of local or international share market exposure, but why is there now more demand for overseas exposure?

Suzanne Salter: Again, this goes back to listening to what our business partners want. They do like having a choice and Asia is popular due to our client base and general proximity to Asia. However the inflows into the domestic products are still far greater to those for overseas markets at this stage.
Innovative Investor: What was the strategy behind your choice of the Asian Indices (HSCEI, TAIEX, and KOSPI 200)?

Suzanne Salter: The requests for overseas exposure are still for a 'regional' exposure and not a single market.