SPA Conference: New Elements program builds on partners' strengths, Nuveen's Forstl says

By Peter Heap

New York, Oct. 17 - The new Elements program of exchange-traded notes is a natural extension of existing businesses - but one with great potential for the future, according to Michael Forstl of Nuveen's structured products consulting group.

"It's an exciting product for us," he told the Third Annual Autumn Summit of the Structured Products Association in New York.

"We do feel there is a tremendous amount of opportunity on the ETN side."

The Elements program is a joint venture between Nuveen and Merrill Lynch.

For Nuveen, the ETNs build on expertise build up over many years in closed-end funds and unit investment trusts, products that are also included in Forstl's group. Nuveen also brings strength in separately managed accounts.

The firm has a long-standing relationship with Merrill, which contributes its ability to distribute investment products internally.

Elements uses open architecture: the first issuer was AB Svensk Exportkredit but a deal to price this week based on the Morningstar Wide Moat Focus Total Return index will use Deutsche Bank AG as issuer.

However, the ETNs have a major difference compared to closed-end funds and UITs. Rather than being marketed in one big push at the time of the initial public offering, they are sold continuously.

Because of this, Forstl's group is presenting the ETNs as another tool that can be included in portfolios.

"We are giving those advisors options and more efficient ways to access" various asset classes, he explained.

Continuing sales

Continuing on the theme, Philippe el-Asmar, managing director and head of investor solutions, Americas at Barclays Capital, the firm that brought the first exchange-traded note to market 1½ years ago under its iPath program, described ETNs as "open ended.

"It's available. You can get in it whenever you think is an opportune time.

"It's up to the investor to decide when is a good time to invest in emerging markets, when is a good time to invest in currencies..."

El-Asmar forecast that many more issuers of ETNs will emerge and anticipated continued innovation in structures.

"Maybe you will see down the road some other types of ETNs that are linked to not just a passive index but some kind of active index that's trying to generate alpha."

Banks, funds converge

For banks, ETNs can be more appealing than traditional structured products because they generate ongoing fees over their lifetime, which can be as much as 30 years, said William Bamber, senior managing director in the structured equity products group at Bear Stearns & Co.

Other structured products just produce fees at the time of sale and have to be repeated over and over.

"On the corporate side, recurring fees are definitely more attractive than getting paid on commission," Bamber said.

With products like these, he added, convergence between what asset managers do and what investment banks do is growing.

"Any of us, certainly on the sell-side, when you get out and try to explain products, the mutual fund market, or the fund market, certainly in the U.S., this is how people invest," Bamber said.

"Instead of trying to make the river flow upstream, we have to go downstream and see how to deliver our product in a way that most people know and understand it.

"It's just a framework that people understand so why fight it."

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