Mon 19 Oct 2020 – 05:30 AM
DBS is launching a new phase of a structured product focusing on an ESG (environmental, social and governance) theme.
The MSCI EM Asia Leaders Outperformance Trade is designed to allow investors to profit from the expectation that the best performing ESG companies outperform the market.
This follows a successful run of a previous ESG Outperformance Trade series launched in 2018. Despite relatively low knowledge of ESG at the time, the series raised S $ 95 million in seven installments.
The new structure caps redemption at maturity at 15 percent on a cumulative basis. The product has a tenor of 36 months. It is available to accredited investors of DBS Private Bank and DBS Treasures Private Client for a minimum investment of 500,000 USD. The tranche is open until November 10.
Says Subhra Chatterjee, Head of Product Management (Equities) at DBS Private Bank: “This offer represents DBS Private Bank’s confidence in the potential of the ESG proposal to overcome market uncertainties and outperform over the long term. .
“By designing it as an outperformance trade, it works like a pure play on ESG, giving clients exposure to the alpha of ESG investing, while being immune to the beta of the large market.
In a statement, DBS said it is committed to increasing the focus on ESG investing “as a bank driven by goals, and helping clients do good while doing good.”
Other ESG-themed products are in preparation. A recent small group survey by DBS Private Bank found that 98% of clients have a positive opinion of ESG investing and believe it would have benefits such as positive social impact, portfolio diversification, financial outperformance and resistance to market shocks. There were over 60 respondents.
Currently, 40% of respondents had ESG investments. Around 77 percent aim to increase their exposure to ESG investments over the next three to five years, and 70 percent are willing to replace the portfolio’s current holdings with products with higher ESG ratings.
The new outperformance warrant takes a long position on the MSCI EM Asia ESG Leaders index while being short on the larger MSCI EM Asia index from which the ESG counterparty is derived.
The MSCI EM Asia ESG Leaders Index has consistently outperformed the MSCI EM Asia Index by around 3-4% per year over the past decade. Indeed, the ESG Leaders index has a “quality slant”, thanks to the selection of securities via an ESG screen. ESG leaders tend to have stronger fundamentals, which should translate into better performance over time.
Based on key metrics as of December 2019, the return on equity for the MSCI EM Asia ESG Leaders Index was 12% compared to 10% for the MSCI EM Asia Index. The net profit margin was 9 and 7 percent, respectively.
The structure, called a “capped outperformance bond”, delivers a return if the outperformance is positive, subject to the 15% ceiling. If the outperformance calculation is negative, the investor receives a zero return.
The structure involves the payment of a bond premium of around 6 percent. This means that the worst case scenario is that the investor fails to repay the paid warrant premium and incurs a loss of 6%.
The first series had an average cumulative return of 14% and an average return on investment of 135% as of October 13. More than 75% of customers have settled their transactions to record profits. The series did not have a cap on the outperformance calculation.
There are a number of risks in the structure, such as market risk, which can cause the investor to lose some or all of the warrant premium. There is also a currency risk: the indices are denominated in US dollars but their underlying components may be denominated in other currencies. Exposure occurs when the performance of the underlying constituents is converted to US dollars in calculating the value of the index.
There is also a liquidity risk. Although the market agent may redeem the warrant, the price may be significantly less than the initial amount paid by the investor.
Since January, the bank has integrated MSCI ESG ratings into its suite of wealth products to help clients make more informed investment decisions.