Reduce Risk. Take a more confident step into the markets.

Transcription

1 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 December 2016

2 Lyxor ETF Smart Beta Reduce risk 3 Take a more confident step Extraordinary monetary policy has forced many investors into equity markets for yield, capital return or long-term inflation protection - who are not naturally comfortable with volatility. Yet volatility is here to stay, and valuations are stretched, so discomfort could soon turn to something far worse. Stepping into the unknown can be unnerving, even for the most experienced investors. When things get rough, you need a portfolio that can handle the pressure and allow you to identify the risks that really are worth taking. That s where Smart Beta comes in. Smart Beta products won t eliminate the possibility of loss, but they can help dampen volatility and smooth returns, allowing you to step more confidently into new equity markets. Francois Millet Head of ETF and Index Product Development Navigating a safer path 4 Adding a new dimension 6 Comparing the indices 9 Does it work? 10 Discover our range 12 Why Lyxor for Smart Beta? 13 Knowing your risk 14

3 5 Navigating a safer path Strategies aimed at reducing volatility have proliferated in recent years. Some, like factor-based low volatility strategies, tilt more towards performance than reducing risk, while standard minimum variance strategies focus more overtly on risk reduction. Albeit superficially similar their approaches are in fact very different, yet in our view equally flawed. Our approach We work unceasingly to determine the indices most capable of providing solutions for the problems you face today. When it came to reducing risk, we chose the FTSE Minimum Variance indices because we believed they could deliver the best outcome for you. Traditional low volatility strategies tend to hold only the least volatile stocks, or re-weight an existing index around its less volatile performers. Standard minimum variance strategies consider not just volatility, but correlations too. Yet both routes point to so few stocks, countries or sectors that overcrowding, or concentration risk can become an issue. Don t concentrate too hard Some countries and sectors are naturally less volatile than others, but limiting yourself to these areas poses unintended risks, especially with the investment world as it is today. Since the financial crisis, investors have favoured a relatively small number of high quality, low volatility stocks. Such crowding leaves them poorly diversified and vulnerable to a change in sentiment. More effective diversification is vitally important given more markets and sectors are moving in the same direction at the same time. Volatility Correlations Diversification FTSE Minimum Variance indices can reduce risk by up to 30% 1 1 Source: Lyxor IAM, Bloomberg. Data from 30/12/05 to 31/08/16. Past performance is not a reliable indicator of future returns.

4 Lyxor ETF Smart Beta Reduce Risk 7 Adding a new dimension Unlike conventional strategies, our diversified minimum variance ETFs take a truly multi-dimensional approach to reducing risk. Reducing volatility shouldn t have to come at the cost of greater concentration and less agility. We d rather prepare for any eventuality by spreading risk wider and distributing it more evenly. 1. Optimised portfolio 3. Balanced targets We believe it s smarter to build an optimised portfolio that factors in stock volatilities and correlations to minimise index risk. Measurements are based on FTSE s research over rolling 24-month periods. The result is a more stable portfolio of stocks that are less volatile and move relatively independently. Setting global diversification targets helps us to prevent stock specific risks, avoid herding into the most crowded trades and smooth portfolio returns. We limit the weight of any individual stock to a maximum of 1.5%, and ensure that no sector accounts for more than 20% of the portfolio. This helps to prevent any extreme weighting in our portfolios. This works in conjunction with the index level diversification targets to ensure the indices have diversified stock names as well as diversified stock weightings. 2. More is more We operate some of the strictest diversification targets in the industry. Our ETFs tend to hold between two and four times as many stocks as other strategies (up to 400 more for the FTSE USA Minimum Variance example). This means that your risk is spread over more than twice as many stocks as similar minimum variance strategies1. The result The resulting indices strike a balance between volatility reduction and diversification. This added dimension of diversity creates more robust portfolios. Over time, these indices have shown they can reduce risk by between 20% and 30%2. They have also shown they can outperform their parent indices, like the FTSE Europe for example. 1 Source: Lyxor IAM, September Comparison drawn between all four of our FTSE Minimum Variance indices and other leading products in the European ETF market. 2 Source: Lyxor IAM, Bloomberg. Data from 30/12/05 to 31/08/16. Past performance is not a reliable indicator of future returns.

5 9 Building a smarter minimum variance index Comparing the indices Starting universe Starting universe 500+ stocks in FTSE Developed Europe Index The table below highlights how the design of a diversified minimum variance index differs naturally from the original universe. As you can see, it has less exposure to traditionally more volatile sectors like banks, technology and oil & gas. But retaining most of the original index still allows you to invest almost as if you were still buying your chosen market. FTSE All-World Minimum Variance FTSE All-World ICB Supersector No. of Cons Wgt% No. of Cons Wgt% Diff% Selection Process Real Estate Utilities Food & Beverage Banks Oil & Gas Technology Selection Process Assess daily volatility Factor in correlations Follow diversification rules Impose maximum weights Index characteristics We are pragmatic replicators Final Portfolio Attributes FTSE All-World Minimum Variance FTSE All-World Number of constituents Constituents (Wgt %) Average Largest Median When it comes to how we replicate, we re pragmatic. We simply do what we believe is best for you in any given market. Smart Beta indices rebalance more often, and on a larger scale, than conventional indices, so we believe synthetic replication is the most efficient way to track them. It reduces the need to make regular changes to the holdings and can improve tracking. Top 10 Holdings (Wgt %) Final Portfolio c.350 stocks

6 11 Does it work? The table below shows how the FTSE Minimum Variance indices have reduced volatility by, on average, over 25%. It also shows they have generated a consistent pattern of excess returns over the past ten years, all the while being very diversified indeed. Wherever possible, we retain at least 60% of the original indices. From 30/12/2005 to 31/08/2016 Excess Annualised Return Volatility Reduction % of original universe FTSE Russell All World Minimum Variance Index 3.5% 27.5% 63.6% FTSE Russell Europe Minimum Variance Index 3.1% 25.7% 67.1% FTSE Russell USA Minimum Variance Index 2.7% 21.3% 66.8% FTSE Russell Emerging Minimum Variance Index 7.7% 29.6% 57.0% Source: Illustrated data from Lyxor International Asset Management, Bloomberg. Data from 30/12/05 to 31/08/15 The figures relating to simulated past performances refer or relate to past periods and are not a reliable indicator of future results. This also applies to historical market data. The potential return may be reduced by the effect of commissions, fees, taxes or other charges borne by the investor. It s hard to outperform Smart Beta 1. Over the last 10 years, minimum variance products have shown they can reduce volatility while also enhancing returns. Very few of the 3,700+ active managers we researched outperformed these indices last year, so it s no wonder they are increasingly being adopted as core portfolio holdings rather than short-term defence mechanisms. Comparing the performance of active managers to our diversified minimum variance indices delivered some striking results. 8 % Just 8% have outperformed over the last 10 years 1 72 % 72% of active funds in the Europe category outperformed a traditional benchmark in FTSE Developed Europe Min Var 355 Stoxx 600 Min Var 148 Stocks held Gain more, lose less. There s been plenty of volatility over the last decade, but diversified minimum variance strategies have demonstrated just how they can provide some protection when times are hard and markets are stressed. Take the last year in Europe despite the frequent ups and downs, the table below highlights the FTSE Developed Europe Minimum Variance Index still cut drawdowns by 28% and delivered higher returns. The other indices achieved similar results. On average, as the table shows, they cut drawdowns by over quarter.* 14 % Only 14% outperformed the FTSE Developed Europe Minimum Variance index 1 MSCI Europe Min Var 140 All World Europe US Emerging Min Var Market Cap Min Var Market Cap Min Var Market Cap Min Var Market Cap 1 year Drawdown % % % % -8.70% % % % Drawdown Reduction 23% 28% 35% 21% Source for * and table above: FTSE Russell, data as at 30 September Past performance is no guide to future returns. istoxx 600 Min Var 81 All data: Lyxor/Bloomberg. Data from 30/12/05 to 31/08/16. 1 Source: Morningstar data in EUR from 31/12/2005 to 31/12/2015. For France Smid Caps, the % of active funds is over 5Y. 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 13 Discover our range Why Lyxor for Smart Beta? ETF Currency Ticker TER Lyxor FTSE All World Minimum Variance UCITS ETF EUR, USD MVAW 0.30% Lyxor FTSE Europe Minimum Variance UCITS ETF EUR, GBP, USD MVAE 0.20% Lyxor FTSE USA Minimum Variance UCITS ETF EUR, GBP, USD MVAU 0.20% Lyxor FTSE Emerging Minimum Variance UCITS ETF EUR, GBP, USD MVAM 0.40% Source Lyxor IAM, as at 1 December These products comply with the UCITS Directive (2009/65/EC). We recommend reading the investment risks section of their documentation (prospectus and KIID) carefully. Both are available in English, free of charge, at and on request from client-services-etf@lyxor.com. Key Benefits of ETFs True to our heritage as pioneers, Lyxor was one of the first and remain one of the largest providers of Smart Beta ETFs in Europe. We now run over EUR 2bn 1 in Smart Beta strategies, including one of Europe s biggest quality income ETFs. These strategies were refined and developed by acknowledged leaders in the field of quantitative finance. As advocates of open architecture, we always do what we believe is best for our clients. That s why, as well as using our own quality income index, we partnered with the world s leading index providers including FTSE Russell and J.P. Morgan to build some of our Smart Beta indices. Liquidity Live intraday bid/ offer pricing on public exchanges. Our portfolio managers are experts in dealing with the specific trading constraints of Smart Beta ETFs. We also have unfettered access to the authors of the original models underpinning our indexconstruction methodologies. Transparent Open architecture Cost Efficiency Low Total Expense Ratio (TER) 1 comprises of management fee and structural costs. Each Smart Beta ETF adheres to our quality charter, ensuring each is managed to the same meticulous standards. Lxyor ETF Smart Beta Quality Managed to meticulous standards Heritage One of the first Smart Beta ETF providers Transparency All documents, counterparty information and fund holdings are available on the website. 1 Source: The Total Expense Ratio (TER) covers all costs incurred by the Management Company to manage the underlying assets. It comprises of the Management Fee and Structural Cost described as follows. The Management Fee represents the compensation for the Management Company services. The Structural Costs represent the custodian fee, the administrative fee, the audit fee and all other operating costs that will be paid by the Management Company to operate the funds. 1 Source: Lyxor IAM, September 2016

8 15 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. 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.

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