Chris Taylor, Mark Dickson and James Chu worked in a structured product division running billions at its peak, moving to other firms before teaming up again to set up Blue Sky in 2007.
While at HSBC, the team were responsible for several industry innovations, including the first equity-linked Tessa, Dublin protected Peps and early release structured products.
According to Dickson, the boutique is unique as it covers all the business bases – he headed product development at HSBC, while Taylor led the overall division and Chu was an investment director.
“Many similar firms are either investment people wan-ting to push products or distribution specialists without product expertise,” he adds. “We can boast big-firm experience on the sales, operational, product and investment sides of this market.”
After HSBC, Dickson moved to Invesco Perpetual,while Taylor went to Dawnay Day and Chu to American Express.
Their Blue Sky launch came on the back of a major acceleration in structured product usage by advisers. In the UK, for example, there was around £1bn-£2bn in this market in 1996, rising to nearly £10bn last year.
The firm is working to establish these vehicles as complementary to mutual funds, focusing on the balance between risk and reward.
As part of this, it runs a research-based approach to product design, using independent firm Redtower Asset Management to analyse markets. This research is made available to advisers, with a monthly global temperature report covering macroeconomic developments.
Dickson says this work informs the group’s product thinking and it seeks out the best return profiles based on these macro views turning out to be accurate. Based on this depth of analysis, Blue Sky considers itself a structured investment rather than structured product house.
This means creating intelligent investments to provide compelling opportunities rather than easy structured products to maximise sales.
Within this, there are two basic sides to the business: one involves basic open market products offers while the second is bespoke and exclusive structures for advisers to meet specific client needs.
As an example, one adviser had clients who lost significant assets in the tech bubble and wanted an investment with some upside but significant protection on the downside.
Blue Sky structured a basket of world equity markets according to the adviser’s asset allocation, offering geared upside to a cap and only losing 1 per cent for every 4 per cent fall.
On the retail side, Dickson says many competitors have stuck to basic FTSE 100 autocall structures, focusing on getting the headline return as high as possible.
But in current volatile conditions, he believes investors prefer an increased chance of decent performance rather than chasing hard to reach returns.
With that in mind, Blue Sky has used defensive autocall structures, offering high-single-digit performance even if the market is down by as much as 15 per cent.
Following the successful boutique model, Blue Sky has kept itself lean, with just six staff, outsourcing its plan management to bigger structured specialist Keydata.
Dickson believes this allows the firm to focus on where it adds value, primarily product design and after-sales service, including its comprehensive research. In recent months, much of this has focused on counterparty risk, with the structured product industry suffering serious damage from the credit crunch.
Most are backed by counterparties and many of these are the investment banks, including Lehmans for example, that have been so badly hit in the current situation.
Blue Sky has recently produced a guide to this risk and also gives access to its own research via the firm’s website, listing credit ratings and credit default swap data for major counterparties.
While certain structured product firms are tied to counterparties, Blue Sky is fully independent in this area and has used six across its products so far.
Looking forward, Dickson says the group’s longer-term aim is to continue bridging the gap between mutual funds and structured products.
“At present, many advisers feel this is basically an either/or choice while we believe both can add value in a portfolio, particularly as structured investment can be built to meet specific client needs,” he adds.