Protect your yield. Specific answers to specific problems

Transcription

1 Protect your yield Specific answers to specific problems 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 Index Insights September 2017

2 Lyxor ETF Yield protectors Specific answers to specific problems Protecting your yield 4 US yield protectors 6 European yield protectors 8 UK yield protectors 10 Our product range 12 Knowing your risk 14 Lyxor International Asset Management ( LIAM ) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website

3 3 Welcome Sometimes, holding on to what you have is all that matters. We re all vulnerable to the stresses and strains of modern life, especially when change is in the air. Planning a getaway to a bolthole a place where the world can just carry on without you is what keeps us on the straight and narrow. Our range of yield protectors provides specific answers to specific problems like rising rates or inflation, giving you the peace of mind to continue when all around us is changing. And, as they are ETFs, they come a whole lot cheaper. Inflation is creeping up OECD Countries Inflation while rate hikes are looming US Federal Funds Target Rate (mid-range) Taylor rule (breakeven 5Y 2% real rate) Median Fed Dots Shadow Rate Source: Lyxor Cross Asset Research, July 2017.

4 Lyxor ETF Yield protectors Protecting your yield We offer US, European and UK-centric strategies to counter the effects of inflation and rising rates. Protect against rising inflation Keep up with inflation linked ETFs Protect against imminent rate hikes Presrve your income with floating rates note ETFs Counter rising inflation and rate hikes Dual protect using inflation expectation ETFs US If Trump s fiscal push takes off, expect inflation and further rate rises to follow. Protect against future rate hikes Reduce sensitivity with short dated bond ETFs

5 5 UK UK inflation has repeatedly exceeded its target of late. A rate hike from the BoE may not be too far off. Europe The ECB is set to maintain its accommodative stance to try to hit its inflation target of c.2%. Expect a slow normalisation in 2018, with rates drifting higher.

6 Lyxor ETF Yield protectors US yield protectors Inflation linkers The Bloomberg Barclays US Inflation Linked Bonds TR index provides exposure to the US Treasury Inflation Protected Securities (TIPS) market The index is diversified across the maturity spectrum (1-25 years) Inflation expectations The Markit iboxx USD Breakeven 10-Year Inflation Index combines a long 10-year TIPS position with a short basket of nominal bonds of the same duration to mimic the performance of the US breakeven rate 1 It effectively aims to offer exposure to US TIPS without the interest rate risk Floating rate notes The Bloomberg Barclays US Corporate FRN 2-7 Year Total Return Index offers exposure to USDdenominated, investment-grade floating rate notes from industrials, utilities and financial issuers The bonds in the index have a variable coupon tied to changes in the 3m LIBOR, meaning your income should be protected if rates go up Short dated bonds The Markit iboxx USD Treasuries 1-3 Mid Price TCA TR index tracks short dated Treasuries with maturities ranging from 1 to 3 years Did you know? Investors have allocated billions of euros towards floating rate note ETFs in 2017, largely because they: Help hedge bond portfolios against rate hikes Provide a low volatility alternative to cash with an attractive yield pick-up You can't get cheaper than Lyxor for USD Floating Rate Note ETFs. 2 1 This strategy is a proxy for inflation breakeven rate; performance will generally deviate from the true breakeven rate. 2 Total Expense Ratio of the Lyxor $ Floating Rate Note UCITS ETF is 0.10% as at August Statement on cost is in relation to the European ETF market.

7 7 The numbers that matter US yield protectors Index Number of bonds Average credit quality Duration Yield to maturity 1Y return 5Y return 1Y annual. vol 5Y annual. vol Bloomberg Barclays US Inflation Linked Bonds TR 38 AAA 0.60% % -0.14% 4.16% 5.11% Markit iboxx USD Breakeven 10- Year Inflation Index Nominal_TRI 13 AAA -0.12% % -9.67% 3.28% 3.80% Bloomberg Barclays US Corporate FRN 2-7 Year Total Return Index Unhedged USD 150 A 2.48% % 10.20% 1.11% 0.84% Markit iboxx USD Treasuries 1-3 Mid Price TCA TRI 95 AA 1.37% % 3.05% 0.77% 0.76% Source: Lyxor International Asset Management, Bloomberg. Data as at 31/07/2017. Past performance is not a reliable indicator of future results. Our chosen $ FRN index has outperformed the Fed Funds rate and indices* Aug-2013 Oct-2013 Dec-2013 Feb-2014 Apr-2014 Jun-2014 Aug-2014 Oct-2014 Dec-2014 Feb-2015 Apr-2015 Jun-2015 Aug-2015 Oct-2015 Dec-2015 Feb-2016 Apr-2016 Jun-2016 Aug-2016 Oct-2016 Dec-2016 Feb-2017 Apr-2017 Jun-2017 Fed funds rate $ FRN index used by Lyxor Competing $ FRN index 1 Competing $ FRN index 2 *Source: Lyxor International Asset Management, Bloomberg. Data period 30/08/2013 to 31/07/2017. Past performance is not a reliable indicator of future results. Fed funds rate represented by Solactive Fed Funds Effective Rate Total Return Index, $ FRN index used by Lyxor represented by Bloomberg Barclays US Corporate FRN 2-7 Year Total Return Index Unhedged USD, Competing $ FRN index 1 represented by Markit iboxx USD Liquid FRN Investment Grade Corporates 100 TR index, and Competing $ FRN index 2 represented by Bloomberg Barclays US FRN < 5 yrs Total Return Index Value Unhedged USD. Why Lyxor for US yield protectors? Unique The first and only ETF for US inflation expectations* #1 #1 Low cost Cheapest Treasuries ETF in Europe* $1bn Accomplished Over $1bn in AuM across US inflationlinked ETFs* *Source: Lyxor International Asset Management, Bloomberg, as at 07/08/2017. First and only ETF for US inflation expectations is in relation to the European ETF market.

8 Lyxor ETF Yield protectors European yield protectors Inflation linkers The FTSE MTS Eurozone Inflation-Linked Bond IG (Mid Price) Index tracks the eurozone s largest, most widelytraded inflation-linked government bonds. They must have at least two investment-grade ratings from the three main credit ratings agencies The index spans the maturity spectrum (1-25 years) Inflation expectations The Markit iboxx EUR Breakeven Euro-Inflation France & Germany Index combines a long 2-10yr French and German inflation-linked bonds position with a short basket of nominal bonds of the same duration This should help it mirror the performance of the European breakeven rate of inflation, giving investors access to inflation-linked eurozone government bonds without the interest rate risk 1 Floating rate notes The Barclays Euro Corporate FRN 0-7Y Enhanced Duration index represents the performance of EURdenominated investment-grade corporate floating rate notes with maturities ranging from one month to seven years Coupons are linked to 3-month Euribor, meaning income is adjusted as rates rise Short dated bonds The MTS Mid Price InvG Ex-CNO Etrix 1-3 (EUR) index offers exposure to the largest eurozone government bonds with maturities spanning 1 to 3 years If you wish to focus on issuers with the highest ratings and healthier macroeconomic indicators, consider the MTS Mid Price Highest Rated Macro-Weighted 1-3 (EUR) index Using inflation expectations strategies in your bond portfolio As multi-purpose tools, inflation expectations ETFs can help: Hedge your portfolio, without adding to your costs Decorrelate your holdings by accessing inflation as its own asset class Adjust the duration of your existing inflation linked bond portfolio 1 This strategy is a proxy for inflation breakeven rate; performance will generally deviate from the true breakeven rate.

9 9 The numbers that matter European yield protectors Index Number of bonds Top 3 countries Average credit quality Yield to maturity Duration 1Y return 5Y return 1Y annual. vol 5Y annual. vol FTSE MTS Eurozone Inflation-Linked Bond IG (Mid Price) Index 36 France 44.9% Italy 32.7% Germany 13.8% A -0.06% % 21.83% 4.21% 4.36% Markit iboxx EUR Breakeven Euro-Inflation France & Germany Index 18 France 55.1% Germany 44.9% AA 0.20% % -9.63% 1.68% 2.40% Barclays Euro Corporate FRN 0-7Y Enhanced Duration Index 75 US 33.6% France 18.8% UK 11.9% A -0.04% % N/A 0.15% N/A MTS Mid Price InvG Ex- CNO Etrix 1-3 (EUR) index 18 Italy 25% France 24.7% Germany 19.1% A -0.46% % 6.77% 0.51% 0.78% MTS Mid Price Highest Rated Macro-Weighted 1-3 (EUR) 36 Germany 51.1% France 29.5% Netherlands 11% AAA -0.60% % % 0.58% Source: Lyxor International Asset Management, Bloomberg. Data as at 31/07/2017. Past performance is not a reliable indicator of future results. Attractive diversification benefits correlation of inflation-linked bonds with other asset classes* 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% UK US Euro *Source: The correlation is calculated over a 3-year period using weekly observations of total return indices (euro) and EWMA methodology. For calculating the correlation, 25 financial instruments across various asset classes have been considered. Source: Datastream, Barclays, SG Cross Asset Research/Global Asset Allocation, data from 01/01/05 to 31/08/16. Past performance is not a reliable indicator of future results. Why Lyxor for European yield protectors? Unique The first and only ETF for European inflation expectations* #1 #1 Low cost Cheapest euro inflation ETF in Europe* $1.8bn Accomplished Over $1.8bn in AuM across European inflation-linked ETFs* *Source: Lyxor International Asset Management, Bloomberg, as at 07/08/2017. First and only ETF for European inflation expectations is in relation to the European ETF market.

10 Lyxor ETF Yield protectors UK yield protectors Inflation linkers Faster-than-expected price rises mean inflation-linked gilt ETFs may be worth considering The FTSE Actuaries Govt Securities UK Index Linked TR All Stocks index provides exposure to sterlingdenominated, inflation-linked bonds issued by the UK government The index is diversified across the maturity spectrum (1-25 years) Inflation expectations The BoE may be closing in on a rate hike. UK inflation expectations ETFs could help protect against rising inflation and rising rates The Markit iboxx GBP Breakeven 10-year Inflation Index offers long exposure to UK inflation-linked gilts with durations closest to 10 years and short exposure to nominal bonds with similar duration The strategy is designed to mimic the performance of the UK breakeven rate of inflation as closely as possible, as well as to mitigate interest rate risk 1 Short dated bonds The FTSE Actuaries Govt Securities UK Gilts TR under 5 Yr index tracks the performance of UK government bonds with maturities up to 5 years UK interest rates are low, but for how long? The implied probability of the Bank of England hiking rates in their September 2017 meeting is just 3.1% 2 However, the likelihood of a hike by February 2018 currently sits at 34.3% 2 Looking further down the line, the market consensus for a rate hike by December 2018 is 55.8% 2 1 This strategy is a proxy for inflation breakeven rate; performance will generally deviate from the true breakeven rate. 2 Source: Bloomberg, as at 10/08/2017.

11 11 The numbers that matter UK yield protectors Index Number of bonds Average credit quality Duration Yield to maturity 1Y return 5Y return 1Y annual. vol 5Y annual. vol FTSE Actuaries Govt Securities UK Index Linked TR All Stocks index 28 AA -1.50% % 46.83% 13.29% 10.45% Markit iboxx GBP Breakeven 10-year Inflation Index 17 AA 0.52% % -0.11% 4.71% 4.83% FTSE Actuaries Govt Securities UK Gilts TR under 5 Yr index 15 AA 0.36% % 5.63% 1.10% 1.39% Source: Lyxor International Asset Management, Bloomberg. Data as at 31/07/2017. Past performance is not a reliable indicator of future results. Checking the inflation basket RPI tends to be higher and more volatile than CPI Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 CPI (% change over 12 months) RPI All Items (% change over 12 months) Inflation-linked gilts are benchmarked to the Retail Price Index (RPI), which in addition to the basket of goods and services included in the Consumer Price Index (CPI), also includes housing costs such as mortgage interest payments and council tax. Souce: ONS website. Monthly data over period January 2006 to June Past performance is not a reliable indicator of future results. Why Lyxor for UK yield protectors? Unique #1 The first and only ETF for UK inflation expectations* #1 Low cost Cheapest UK inflation ETF in Europe* 6yrs Accomplished Lengthy track record for our UK inflationlinked gilts ETF* *Source: Lyxor International Asset Management, as at 08/08/2017. First and only ETF for UK inflation expectations is in relation to the European ETF market.

12 Lyxor ETF Yield protectors Product Snapshot ETF Name ISIN Main Ticker TER (bp) Income treatment Trading currency Index currency Benchmark ticker AuM ( M)* Europe Lyxor EuroMTS Inflation- Linked IG (DR) UCITS ETF FR EMI IM MTIX LN 20 Capitalising EUR GBP EUR FMMPIIG5 746 Lyxor EUR 2-10Y Inflation Expectations UCITS ETF LU INFL IM INFL LN 25 Capitalising EUR GBP EUR IBXXEBF1 823 Lyxor Barclays Floating Rate Euro 0-7Y UCITS ETF Lyxor EuroMTS 1-3Y Investment Grade (DR) UCITS ETF Lyxor EuroMTS Highest Rated Macro-Weighted Govt Bond 1-3Y (DR) UCITS ETF FR FLOT IM 15 Capitalising EUR EUR BFRDTREU 670 FR EM13 IM 16.5 Capitalising EUR EUR FMMPIEA5 802 FR AAA13 IM 16.5 Capitalising EUR EUR FMMPHRA5 42 US Lyxor US TIPS (DR) UCITS ETF LU TIPU IM TIPU LN TIPG LN 9 Distributing EUR USD GBP USD BCIT1T 301 Lyxor US$ 10Y Inflation Expectations UCITS ETF LU INFU IM INFU LN INFG LN 25 Capitalising EUR USD GBP USD IBXXUBF1 570 Lyxor $ Floating Rate Note UCITS ETF LU BUOY LN SWIM LN 10 Distributing USD GBP USD BF27TRUU 100 Lyxor $ Floating Rate Note EUR Monthly Hedged UCITS ETF LU FLOTH IM 15 Distributing EUR EUR BF27TREH Lyxor iboxx $ Treasuries 1-3Y (DR) UCITS ETF LU US13 IM US13 LN U13G LN 7 Distributing EUR USD GBP USD IBXXABXL 115 Lyxor iboxx $ Treasuries 1-3Y (DR) EUR Monthly Hedged UCITS ETF LU U13H IM 15 Distributing EUR EUR IBXXTRX UK Lyxor UK 10Y Inflation Expectations UCITS ETF LU UKBE LN 25 Capitalising GBP GBP IBXXBKN1 47 *Source: Lyxor International Asset Management, as at 07 August 2017.

13 Venture further for yield Discover 25 ways to capture income With rate rises and tapering top of mind, income seekers could be in for a bumpy ride. We ve gone further than most to find the world s best equity and fixed income opportunities. Come and explore our range if you want to avoid the turbulence. Follow our lead. The original pioneers. lyxoretf.co.uk This communication is for professional clients only. 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 (Lyxor ETF) 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 (Lyxor AM), 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). Lyxor ETF 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 Lyxor ETF Yield protectors 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 Important information This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/EC Directive on markets in financial instruments acting for their own account and categorised as eligible counterparties or professional clients. This communication is not directed at retail clients. This document is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number Some of the funds described in this brochure are investment companies with Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the official list of Undertakings for Collective Investment, authorised under Part I of the Luxembourg Law of 17th December 2010 (the 2010 Law ) on Undertakings for Collective Investment in accordance with provisions of the Directive 2009/65/EC (the 2009 Directive ) and subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF). These funds are sub-funds of either Multi Units Luxembourg or Lyxor Index Fund and have been approved by the CSSF. Alternatively, some of the funds described in this document are sub-funds of Multi Units France a French SICAV incorporated under the French Law and approved by the French Autorité des marchés financiers. Each fund complies with the UCITS Directive (2009/65/CE), and has been approved by the French Autorité des marchés financiers. Société Générale and Lyxor AM recommend that investors read carefully the risk factors section of the product s prospectus and Key Investor Information Document (KIID). The prospectus and the KIID are available in French on the website of the AMF ( The prospectus in English and the KIID in the relevant local language (for all the countries referred to, in this document as a country in which a public offer of the product is authorised) are available free of charge on lyxoretf.com or upon request to client-services-etf@lyxor.com The products are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on NYSE Euronext Paris, Deutsche Boerse (Xetra) and the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product s investment portfolio is available on www. lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed. Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document together with the prospectus and/or more generally any information or documents with respect to or in connection with the Fund does not constitute an offer for sale or solicitation of an offer for sale in any jurisdiction (i) in which such offer or solicitation is not authorized, (ii) in which the person making such offer or solicitation is not qualified to do so, or (iii) to any person to whom it is unlawful to make such offer or solicitation. In addition, the shares are not registered under the U.S Securities Act of 1933 and may not be directly or indirectly offered or sold in the United States (including its territories or possessions) or to or for the benefit of a U.S Person (being a United State Person within the meaning of Regulation S under the Securities Act of 1933 of the United States, as amended, and/or any person not included in the definition of Non-United States Person within the meaning of Section 4.7 (a) (1) (iv) of the rules of the U.S. Commodity Futures Trading Commission). No U.S federal or state securities commission has reviewed or approved this document and more generally any documents with respect to or in connection with the fund. Any representation to the contrary is a criminal offence. This document is of a commercial nature and not of a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein. These funds include a risk of capital loss. The redemption value of this fund may be less than the amount initially invested. The value of this fund can go down as well as up and the return upon the investment will therefore necessarily be variable. In a worst case scenario, investors could sustain the loss of their entire investment. This document is confidential and may be neither communicated to any third party (with the exception of external advisors on the condition that they themselves respect this confidentiality undertaking) nor copied in whole or in part, without the prior written consent of Lyxor AM or Société Générale. The obtaining of the tax advantages or treatments defined in this document (as the case may be) depends on each investor s particular tax status, the jurisdiction from which it invests as well as applicable laws. This tax treatment can be modified at any time. We recommend to investors who wish to obtain further information on their tax status that they seek assistance from their tax advisor. The attention of the investor is drawn to the fact that the net asset value stated in this document (as the case may be) cannot be used as a basis for subscriptions and/or redemptions. The market information displayed in this document is based on data at a given moment and may change from time to time. Authorizations: Lyxor International Asset Management (Lyxor AM) is a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2009/65/EC) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority. CONFLICTS OF INTEREST This research contains the views, opinions and recommendations of Lyxor International Asset Management ( LIAM ) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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