Finding the right blend

Transcription

1 Finding the right blend Comparing active and passive fund performance This document is for the exclusive use of investors acting on their own account and categorised either as eligible counterparties or professional clients within the meaning of markets in financial instruments directive 2004/39/ce Active Passive Summary May 2017

2 Q&A Finding with the Arnaud right blend Llinas Finding the right blend Welcome 4 A new investment alphabet 5 The major results 6 How your money could have worked harder 7 The numbers in full 8 What s next? 9

3 3 Welcome Few active managers outperformed their benchmarks in 2016, with markets driven more by politics than economics and company fundamentals. This year promises more of the same should QE unwind, populism rise and national interests succeed globalisation. Choosing when and where to go passive or active could be more important than ever. Our annual study of the performance of 3,800+ European domiciled active funds vs. their benchmarks could help. Marlène Hassine Konqui Head of Lyxor ETF Research Summary In most cases, passive would have been the better choice Factor timing, and selection, hindered most active managers Alpha was easier to find in some less efficient markets Smart Beta benchmarks proved their worth again

4 Finding the right blend A new investment alphabet Portfolio construction means making choices. Many would have you believe those choices are binary, that passive wins out in efficient markets while active takes the lead in markets where information is harder to find. Those assumptions are false. As a pioneering beta provider, and an expert in manager selection, we have to lead the debate on active vs. passive fund performance. More particularly, we felt it was time for more robust and constructive thinking on behalf of investors everywhere. We have to lead the debate on active vs. passive fund performance. That s why, four years ago, we asked Marlène Hassine Konqui to launch our annual study of the performance of 3,800+ active funds domiciled in Europe. Together, these funds manage more than 1.3tn of assets. Suffice it to say, it wasn t an easy job. Our DNA enables us to take an objective view. Few other companies can say the same, especially those that manage a significant number of both active and passive funds. As relative outsiders, our analysis is as rigorous and fair as possible. We have nothing to be afraid of, nor do we have anything to hide, so the answers are the answers. Investors deserve nothing less.

5 5 Was it worth it? In a word, yes. We now know much more about active fund performance, and can now challenge some commonly held beliefs. For a start, active management hasn t actually outperformed over the long run! Yet it is still true that good active managers are worth every penny. Along the way we ve discovered active isn t the must many have assumed in niche or illiquid assets like high yield or emerging market debt. Nor does being a so-called efficient market preclude alpha generation. Even in blue chip areas like European Equities, results told us we had to dig deeper again. When 75% of active European equity funds outperformed in 2015, we knew we had to understand why. That meant comparing their performance to specific risk factors through the lens of smart beta benchmarks. When we discovered only 15% outperformed a minimum variance index it became our mission to isolate the contribution factors make to active fund performance. Since then we ve widened our analysis, enabling this year s publication (and our website) to dig deeper than ever before into what s driving returns. We can now break fund returns down into alpha, beta and factor beta - the start of a new investment alphabet but we won t stop there because it s our responsibility to help investors build better portfolios. Why? Because we believe the right combination of alpha and beta can give you the same performance for less money. Selecting the right active fund remains a critical and valuable part of investing but it s harder than ever before. This guide could help define when, where and how it s worth doing. Matthieu Mouly CEO of Lyxor UK Our DNA enables us to take an objective view. Few other companies can say the same. We believe the right combination of alpha and beta can give you the same performance for less money.

6 Finding the right blend How Europe s active funds performed in 2016 The major results: 1 Active fund performance was worse in 2016 than in % of active funds outperformed last year, which is well down on 2015 s 47%. Over 10 years, only 19% have outperformed. In most cases, the better choice would have been passive. 2 Success depended on chosing the right factors Once again, the best performers were overweight the best-performing factors. The worst simply got their factor allocations wrong. 3 Factor timing and stock picking were often detrimental Average alpha generation deteriorated and was negative overall as the fast-moving, unpredictable environment confounded many active managers. 4 Smart Beta benchmarks prevail again Last year s success for Smart Beta was no fluke. Smart Beta benchmarks outperformed 89% of active managers in our US, Europe and Japan universes in Active managers added real value in some less efficient markets 54% of managers beat their benchmark in small-cap equities and credit. Over 10 years, alpha generators have been at their best in European small-caps, China and UK equities. Source: Morningstar and Bloomberg data from 31/12/2006 to 31/12/2016. The figures relating to past performances refer to past periods and are not a reliable indicator for future results. This also applies to historical market data.

7 7 Highlights A less positive year for active managers % of outperformers % 47% 19% 28% 10Y 1Y 10Y 1Y Fixed income managers on the up Equity Fixed Income 54% 27% 27% 31% 24% 28% Source: Morningstar and Bloomberg data from 31/12/2006 to 31/12/2016. The figures relating to past performances refer to past periods and are not a reliable indicator for future results. This also applies to historical market data.

8 Finding the right blend How your money could have worked harder for you Guiding you through the investment landscape 1. Passive would have been the better choice in most cases Plotting a curse to some surprising destinations % of active managers outperforming Europe Equity World Equity US Equity 32% 19% 29% 21% 12% 13% EM Equity Japan Equity 26% 12% 14% 14% 2. Factor timing, and selection, were vital Best-, and worst-, performing factors over one year Europe Equity US Equity 4% 5% -8% Quality -6% Momentum Best Worst Japan Equity Best Worst EM Equity 18% 7% 0% Low Beta -2% Momentum Best Worst Value wins out... Best Worst Source: Morningstar and Bloomberg data from 31/12/2006 to 31/12/2016. The figures relating to past performances refer to past periods and are not a reliable indicator for future results. This also applies to historical market data

9 9 3. Alpha generators were more effective in (some) less efficient markets Size matters after all US Large & Mid Caps 32% FR Smid Caps Eur Small Caps 61% 56% Eur Corp Bonds 44% Japan Equity Did you know? Over 10 years, China equity is where active managers have added most value Surprisingly, UK equity is in second place, with 34% EMD 32% 26% 4. Smart Beta benchmarks prevailed once again Hard to beat over time for all but the very best % of active managers outperforming Europe Equity US Equity 13% 12% 0% EM Equity 72% 5% Japan Equity Did you know? Only 12% of managers outperformed passive EM benchmarks last year 0% 7% 0% Source: Morningstar and Bloomberg data from 31/12/2006 to 31/12/2016. The figures relating to past performances refer to past periods and are not a reliable indicator for future results. This also applies to historical market data

10 Finding the right blend The numbers in full Percentage of active funds outperforming over 1, 3, 5 and 10 years Universe Benchmark 1Y 3Y 5Y 10Y France Large Caps CAC 40 (CACR) 5% 8% 17% 19% France Small Caps CAC Mid & Small (CMSN) 61% 56% 31% UK Equity FTSE All Shares (FTPTTALL) 20% 29% 50% 34% Europe Large & Mid Caps MSCI Europe (M7EU) 19% 33% 36% 29% Europe Small Caps MSCI Europe Small Cap (NCEDE15) 56% 47% 25% 29% US Large & Mid Caps MSCI USA (NDDUUS) 32% 14% 12% 13% Japan Equity TOPIX Japan (TPXDDVD) 26% 16% 11% 14% World Equity MSCI World (NDDUW1) 21% 11% 12% 12% Value Equity MSCI World Value (NDUVWI) 17% 23% 23% 34% Global EM Equity MSCI Emerging Markets (NDUEEGF) 12% 3% 19% 14% China Equity MSCI China (NDEUCHF) 25% 35% 49% 37% Euro Govies EuroMTS Global Investment Grade (EMIEG5) 24% 14% 14% 1% Euro Corporate Barclays Capital Euro Corporate Bond (LECPTREU) 44% 33% 36% 26% Europe High Yield Barclays Pan-European High Yield (HUC0) 23% 23% 8% 3% Emerging Debt Emerging Markets Local Currency Bond (JGENVUEG) 32% 29% 25% 0% Average Equity % 25% 26% 23% Average Fixed Income % 25% 22% 11% Average % 25% 24% 19% Average % 34% 23% 20% Source: Bloomberg and Morningstar data from 31/12/2006 to 31/12/2016.

11 11 What s next? More fiscal support, and greater disparity between the programmes pursued by individual countries, could create better conditions but also more risks for active managers for the rest of this year. Some potentially seismic political events along the way complicate the picture again. We do expect to see more opportunities arising among sectors, themes and risk factors, which should favour the active managers best able to capture them. The more granular and thematic approach ETFs can offer will also be in demand. At the regional level: The environment seems most supportive in the US Alpha generation should be simpler in Europe as political risk eases Catalysts are harder to find in Japan High correlations and less dispersion favour ETFs in emerging markets For the full story, visit

12 Finding the right blend Read more For an insight into what Smart Beta has to offer, read our guide to our range and our deep dive into the minimum variance indices that matter. Discover Smart Beta Taking indexing further than ever before. Reduce Risk Take a more confident step into the markets. This document is for the exclusive use of investors acting on their own account and categorised either as eligible counterparties or professional clients within the meaning of markets in financial instruments directive 2004/39/ce Smart Beta Ref: October 2016 Smart Beta December 2016 This document is for the exclusive use of investors acting on their own account and categorised either as eligible counterparties or professional clients within the meaning of markets in financial instruments directive 2004/39/ce

13 13 Discover a safer path Reduce risk by up to 30%*. Our low volatility ETFs hold twice as many stocks as other leading providers. So now you can step more confidently into the markets, knowing you are better prepared for what lies ahead. The original pioneers lyxoretf.co.uk *Source: Lyxor International Asset Management, Bloomberg. Data from 30/12/05 to 31/08/16. Past performance is not a reliable indicator of future returns. THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY AND IS NOT DIRECTED AT RETAIL CLIENTS. This document is for the exclusive use of investors acting on their own account and categorised either as Eligible Counterparties or Professional Clients within the meaning of Markets In Financial Instruments Directive 2004/39/EC. These products comply with the UCITS Directive (2009/65/EC). Lyxor International Asset Management (LIAM) recommends that investors read carefully the investment risks section of the product s documentation (prospectus and KIID). The prospectus and KIID in English are available free of charge on and upon request to client-services-etf@lyxor.com. Lyxor International Asset Management (LIAM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, Puteaux (France), RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). LIAM is represented in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by the Financial Conduct Authority in the UK under Registration Number

14 Finding the right blend Knowing your risk It is important for potential investors to evaluate the risks described below and in the fund prospectus on our website Capital at risk ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying index. Investors capital is fully at risk and investors may not get back the amount originally invested Replication risk The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication. Counterparty risk investors are exposed to risks resulting from the use of an OTC swap with Société Générale. In-line with UCITs guidelines, the exposure to Société Générale cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk resulting from the use of a securities lending programme. Concentration Risk Smart Beta ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark. Underlying risk The Underlying index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks. Currency risk ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns. Liquidity risk Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Société Générale. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.

15 15 Important information This document is for the exclusive use of investors acting on their own account and categorized either as eligible counterparties or professional clients within the meaning of Markets in Financial Instruments Directive 2004/39/ EC. It is not directed at retail clients. In Switzerland, it is directed exclusively at qualified investors. In accordance with MiFID as implemented in France, this publication should be treated as a marketing communication providing general investment recommendations. This document has not been prepared in accordance with regulatory provisions designed to promote the independence of investment research. This document is of a commercial nature. It is each investor s responsibility to ascertain that they are authorised to subscribe, or invest into this product. Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. 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