World Cup infects structured products

May 28, 2010

How much can investors earn if their national football teams perform well at the Fifa Football World Cup? Buy a structured product based on the fortunes of your favourite team and find out, some experts advise.

In 1998 England lost at football to Argentina in the World Cup. In the three days that followed, hospital admissions for heart attacks rose by 25%. In a different study, the same researchers discovered that the stock prices of publicly traded European football teams tend to go up when the teams win a lot, and fall when they lose – regardless of revenues and profits.

The first mention that was found of structured products linked to football is in 2003, when mass media reported on the Federation Internationale de Football Association, or Fifa, football’s world governing body, which launched a catastrophe-linked bond to protect itself against financial losses that would result should the 2006 World Cup in Germany be cancelled.

Investors in the $260 million bond – dubbed, niftily, the 2006 Fifa World Cup cancellation bond – took on the risk for a variety of reasons, except for specified triggers that include war and boycott.
Fifa claimed it was the first bond to transfer sporting event risk.
Home to a phenomenal structured products market, Germany’s series of structures were put together to – let’s be honest – offer retail investors the chance to take a punt on a collection of football matches.

The same World Cup saw JP Morgan and Société Générale each launch a structured product linked to a basket of companies most likely to benefit from the World Cup. The first was SG’s Football 2006 warrant, which appeared in February and provided investors with exposure to domestic German consumption, sportswear sales, official sponsorship or advertising campaigns based around the event.
The nine stocks were: Accor, Continental, Nestlé, Adidas-Salomon, Danone, Pinault-Printemps-Redoute, Beiersdorf, Heineken and Puma.
The warrant was listed on the London Stock Exchange with a minimum investment limit of £1,020 and returns were limited to twice the performance of the stocks although a stop-loss was triggered if the value of the basket fell by 30% or more.

Almost at the same time, JP Morgan launched a two-year, capital-protected note that allowed investors to participate in the performance of eight of the World Cup’s 15 official sponsors. The wager was that the sponsors would perform better on the stock market than their non-sponsoring sector rivals.
Adidas-Salomon and Continental were also in the stock basket, along with Anheuser-Busch, Coca-Cola, McDonald’s, Deutsche Telekom, Fuji Photo Film and Yahoo.
The notes were capped at 12% at the end of the first year and 24% at the end of the second. The minimum investment was €1,000 and the product was sold to Austrian and German retail investors.

A plethora of products followed, and it all got a little bit sexier.
A month later, DWS introduced the rarely seen Himalaya payoff to create the football-linked fund, Performance Sieger 2014, an eight-year, capital-protected fund based on a share basket of three shares from each of the countries participating in the World Cup.

Spain’s Banco Sabadell followed in April with a three-month deposit-based product linked to the performance of the 20 teams in the Spanish football league, with 32 variants attaching them to the teams that had qualified for the World Cup. The product paid out 10% if your team won the cup, 5% if it was the runner up and otherwise 0.1%. A version of the same product issued earlier in the year raised €50 million.

Not to be left out, Swiss investors were offered equity yield notes created by Nomura and distributed through Credit Suisse. Apparently a local lottery expert accused the banks of offering a product that is tantamount to gambling, a practice apparently forbidden by private institutions in Switzerland. A bonus payment was on offer related to the performance of the Swiss national football team, proving surely that this one really was a gamble.

The reverse convertible was based on a basket of stocks that included five of the World Cup sponsors. This time, Deutsche Telekom and McDonald’s were in there with Philips Electronics, Proctor & Gamble and Toshiba.
And there was even a product sold to investors in Northern Ireland, based on a basket that represents some of the countries in the World Cup, some previous winners and some hosts. The added bonus was a holiday to the country that won the World Cup – you’d be rooting for Mauritius and you’d get Poland.

Even more remote was the structured product offered in November 2005 by Birmingham Midshires Building Society to fans of Wolverhampton Wanderers. Promotion to the Premiership boosted capital by 1% and there were added bonuses. You’ll love these. You could get tickets in the box, or a signed Wolves shirt and a signed football.

A similar German product paid a guaranteed annual return of 1.5%, and an extra 0.5% should the national team win a match in the Fifa Confederations Cup. And if a German player was the tournament’s top scorer, you got another 1%.

As the world prepare for the latest World Cup, more structured products have emerged.
SG has recreated its sponsor stock basket, which, according to the unreliable sources, has a structured product linked to it. Heineken, Carlsberg, Whitbread, Morrisons, Tescos and Sainsburys are included and backtesting says the fund would have outperformed the DJ Stoxx 600 by 13.6% over the past four World Cups.

Then there is an electronic trading fund based on Platinum, courtesy of ETF Securities. It’s no normal metals ETF; it plays on the potential inability of Eskom to keep South Africa’s platinum producers in power at the same time as promising an uninterrupted power supply for the stadiums, broadcasting centres, base camps, and hotels, restaurants and other service industries related to the World Cup. Seventy-five percent of the world’s platinum is produced in South Africa, so keep your eyes open, or at least buy a torch: load shedding might lead to price spikes.

Returning to the research that the article started with, there is a twist. When the very clever Dutchmen who conducted their investigation in 2002 concluded that the shares of publicly listed European football teams rise when they win, they had not considered an important piece of intelligence that the author uncovered in a pub in Leicester when he was a student. Engrossed in conversation with a professor of football – yes, that was his job – he came across the same conclusion for the manufacturing industry in the UK. The professor assured the young man that from his extensive research he could conclude that manufacturing productivity across England rose in every town and city when their football team won with one exception. Unfortunately for the creation of a structured product based on football, that city was Liverpool, home to by far and away the best football team in Europe throughout the late 1970s and early 80s.

You can apply logic if you like, but you know really that you should be spending your time more profitably by finding a way of capping your exposure to emotion for the next month.