Actively Managed Certificates: A Comprehensive Guide

Investment products have come a long way over the last 100 years. Can you believe ETFs and retail CFDs were only created in the 1990s?

Banks and investors are always looking for new ways to increase returns, decrease risk, and enhance liquidity. While Barclays Bank issued the first ETN (Exchange Traded Note) in 2006, in recent years ETNs have evolved into what are now known as Actively Managed Certificates (AMCs).

According to KM Cube Asset Management, the AMC market exceeded USD 1 trillion in assets under management (AUM) as of the end of 2022. With this in mind, numerous individuals stand to benefit from this bespoke instrument, which is continually growing and taking a special place in the hearts – and portfolios – of thousands of investors every day. Let’s delve deeper into it.

What is an AMC?

The Actively Managed Certificate (AMC) functions as an investment instrument that merges the characteristics of structured products and actively managed funds. It serves as an encompassing framework for an investment strategy or specific underlying assets. AMCs combine some of the key qualities of ETFs, managed funds, and bonds, creating a unique investment vehicle.

Like bonds, managed funds, and ETFs, AMCs are financial instruments that can be bought and sold on public exchanges or private secondary markets. Similar to an ETF, an AMC tracks an underlying basket of assets and pays a percentage return equivalent to the return of the basket deducting the associated fees.

That said, unlike an ETF, with an AMC the provider isn't required to buy the actual assets. Instead, akin to many other financial products such as CFDs and futures, an AMC is linked to its assets by a contract, representing a synthetic security.

This makes it much easier to construct custom baskets of assets to suit the diverse needs of investors. The assets can be drawn from both public and private markets, encompassing anything from plain vanilla equity and bonds to more exotic financial assets and instruments.

The scope of an AMC is only limited by the issuer’s imagination. This grants investors access to realms that would normally not be available to them – a.k.a. markets that are currently only available to institutional investors and HNWIs.

Much like a managed fund and in contrast to passive ETFs, the underlying basket of assets linked to an AMC can be actively managed – a feature fitting to its name. This allows an AMC to better anticipate and react to developing opportunities and ever-changing market environment conditions. Nevertheless, AMCs differ from managed funds in that they often entail lower costs and fees.

The lifecycle of a traditional AMC

Actively Managed Certificates are categorized as derivative securities, distinguishing them from collective investment schemes. Unlike such schemes, AMCs represent securitized portfolios subject to dynamic adjustments made at the discretion of an investment manager. They can be issued as both on- or off-balance sheet certificates, available through private placements or listings on exchanges.

The AMC mechanism
Source: IA Engine

Stage 1: Initialization

Issuers, whether banks or Special Purpose Vehicles (SPVs), work with asset managers to create the AMC’s underlying basket of assets and investment guidelines.
Stage 2: Issuance

Once issued in a public or private market, the AMC is assigned an ISIN number.
Stage 3: Active management

Investment managers actively manage the underlying basket of assets based on available opportunities and the strategies in place.
Stage 4: Rebalancing and adjustments

Regular adjustments ensure that the AMC respects its guidelines.
Stage 5: Reporting and transparency

Investors receive regular insights into the management, rebalancing, and performance of their AMC.
Stage 6: Liquidity and redemption

Investors have the option to trade their AMCs on exchanges and secondary markets or redeem them directly with the issuer.
Stage 7: Payout

The AMC generates returns that mirror the performance of the underlying basket of assets minus any fees and costs.

The benefits of AMCs for investors

In recent years, there has been a growing integration of AMCs into Swiss investment portfolios. This trend isn't just due to increased supply from asset managers but also stems from the array of advantages these financial products offer.

1. Lower investment minimum

AMCs are commonly employed to provide investors with reduced investment thresholds across a diverse array of underlying assets. This encompasses private market investments, funds, blue-chip art, and various other opportunities.
2. Transparency

AMCs provide unparalleled transparency regarding portfolio compositions, a privilege typically reserved for high-tier, separately managed accounts. Through an ISIN number, investors can clearly identify assets, track their performance, and receive accurate transaction settlements. Ultimately, this transparency provides a clear understanding of the investment strategy's mechanics.
3. Diversification

AMCs are excellent for diversification, seeing as the underlying basket of assets can be drawn from a wide range of options across the investment universe without the need to confront the complexities that come with buying the actual assets.

While acquiring Chinese Class A shares or real estate in Monaco can be challenging, these assets can be easily replicated with an AMC. This widens the scope for investors seeking to diversify their portfolio and steer clear of over-reliance on a single asset.
4. Liquidity

Certain underlying assets within AMCs exhibit a long-term investment horizon and are considered illiquid. AMCs effectively mitigate this illiquidity risk, as they might be easily sold on the secondary market. As a result, neither investors nor managers face the pressure to liquidate the underlying assets or endure prolonged waiting periods, which can span a decade or more.

The benefits of AMCs for asset managers

The primary advantage of AMCs for asset managers is the streamlined management of investors' portfolios through a unified product. Among the array of benefits, some notable ones include:

1. Broad asset range

AMCs have the flexibility to incorporate diverse asset classes based on investment objectives and market opportunities, spanning equities, bonds, alternatives, digital assets like cryptocurrencies, and real estate. This adaptability enables banks and issuers to meet the evolving demands of investors, providing well-diversified investment options aligned with distinct risk appetites and market trends.
2. Customization for each investor segment

AMCs can be created and customized to align with specific strategies, risk profiles, and functions. This uniqueness makes it possible to satisfy the requirements and needs of different groups of investors and provide them with assets that suit their strategy, fostering enduring relationships in the process.
3. Operational efficiency

Given that each AMC represents a single security without holding the underlying basket of assets, they imply much less setup time, costs, and administration efforts compared to managed funds or ETFs. Moreover, the transaction costs associated with handling tangible assets are completely eliminated.
4. Focus on strategy not execution

Due to their operational and regulatory efficiency, AMCs make it easier for issuers and investment managers to focus on a strategy without getting entangled in the complexities of trade execution and endless regulatory requirements.

Future prospects

AMCs are still in their infancy and will continue to mature and develop as time goes on. Looking ahead, we believe that there are several exciting prospects for AMCs.

The range of assets incorporated into AMCs will continue to expand. At Moonshot, we anticipate a broader inclusion of emerging market assets and unconventional private assets, such as fine art and digital holdings, in both private and public markets.

What’s more, as innovation continues, AMCs may incorporate hybrid structures that blend elements from conventional mutual funds, offering investors a comprehensive investment solution that provides the best of public and private markets.

Technological advancements, particularly blockchain for real-time asset tracking and verification, also have the potential to increase transparency – making investments in AMCs even more appealing to a broad range of individuals.

The AMCs of the future will surely be adapted to meet the evolving demands of investors and address the challenges posed by climate change, providing avenues that are not only profitable but also purpose-driven.

Broadening the investment horizon with Moonshot

At Moonshot, we are always looking for new ways to provide our community members with the lowest possible entry thresholds, fees, and the highest diversification product structures for private market opportunities. That's why we've chosen AMCs as one of our product structures.

Our AMCs offer investors a diversified basket of assets from various sectors of the private market, including Blockchain (Web3), Pre-IPO, Fixed income, Private equity, Real estate, and Moonshot Cleantech. Beyond baskets of assets, our AMCs encompass individual companies or projects, including Schauplatzgasse 22, Bern, from our esteemed partner Le Bijou.

We see great benefit in using such a type of structure, for both our investors and for us. Therefore, we're committed to expanding our range of AMC baskets on the list of Moonshot’s products.

Conclusion

AMCs are anticipated to usher in an age of bespoke investments, tailored to the diverse needs of individual investors. They will also democratize the investment landscape by allowing investors to draw from the entire public and private investment universe. The only limits will be the imagination and willingness of issuers – and here at Moonshot, we accept this challenge.