Q3 2017: A poor quarter for active managers

For professional clients only* 1 Informed Investor: Manager Monitor 2017 2017: A poor quarter for active managers By Marlène Hassine Konqui, Head of Research and Clément Chaulot, Fund Analyst 2017 Average % of active funds outperforming their benchmark 20 % 15% on of fixed income active managers outperformed. Euro high yield and euro government bond managers fared worst 32 % 23% on of all active managers outperformed their benchmark vs 28% in 2016 37 % 26% on of active equity managers outperformed. European and Global managers enjoyed some notable improvements, as did those focused on value 2016 10 years 31 % 28 % 27 % 8 % 17 % 20 % summary Less favourable conditions for active managers Stable macro environment, few new catalysts and low volatility limit alpha opportunities for equity managers Declining rate environment again impedes fixed income managers Fixed Income Equity Average Source: Morningstar and Bloomberg data from 30 June 2007 to 30 June 2017. 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.

2 Manager Monitor Highlights 32 % 1. 2017: A poor quarter for active managers Just 32% of active managers outperformed their benchmark in 2017. That s only slightly above last year s 28% and sharply below the 52% and 55% we saw in Q1 and respectively. 37% of equity managers outperformed vs. 27% in 2016. Only 2 of fixed income managers outperformed (vs. 31% in 2016). Longer-term results show only 1 in 4 equity, and 1 in 10 fixed income, managers outperform over 10 years. 37 % 2. Equity managers struggle for performance Macroeconomic stability, few new catalysts and low volatility made alpha generation difficult in. Risk factor outperformance vs. benchmarks were very limited (as p4 shows) outside of Europe, where value and momentum did well. In Japan, the US, EM and Europe, most active managers increased or maintained their exposures to defensive areas like low beta and quality over the period. In Europe however we did see a move to greater cyclicality, with value weightings being increased as managers grew more confident in the prospects for recovery. Little wonder then that European equity managers stood out, with 55% of them outperforming as value outperformed. 20 % 3. Fixed income managers found the environment difficult again Only 26% of euro government bond and 9% of high yield debt active managers outperformed in the still-stable rate environment. High yield managers were again hindered by credit spreads rallying on the back of more defensive positioning. Just 22% of corporate bond managers outperformed. Emerging market debt is the only area where there was some improvement, with 32% of managers outdoing their index vs 24% in 2017. 84bn 4. Fixed income active fund flows start declining in 2017 Overall European-domiciled active fund flows declined by 4% in to EUR84bn. This is mainly down to a 16% decrease in flows into fixed income (to EUR63bn), which is understandable given the very poor results we observed in this asset class. Flows into equities increase from EUR13bn in to EUR21bn in however, despite the performance difficulties described above. Year-to-date, equity fund flows are still above those of equity active funds at EUR46bn vs. EUR39bn respectively. The passive perspective Choosing an active manager is still a risky business Poor performance was widespread. Choosing an active manager remains a risky business Over the last 10 years, many World and US equity investors have been disappointed In fact, the average active equity manager trailed their benchmark by 0.7% in In that time, the average active manager trailed their benchmark by 1.8% and less than 1 in 5 has outperformed Source: Morningstar and Bloomberg data from 31/12/2015 to 30/06/2017.

3 % of outperforming the Benchmark and their performance difference 2017 2017 Q1 2017 10Y Universe % of funds outperforming the benchmark Performance difference % of funds outperforming the benchmark Performance difference % of funds outperforming the benchmark Performance difference % of funds outperforming the benchmark Performance difference Europe Large & Mid Caps Europe Small Caps France Large Caps France Smid Caps 53% -0.1% 71% 0.7% 44% -0.2% 22% -1.3% 44% 0.1% 87% 2.4% 77% 1.1% 22% -1.8% 22% -0.5% 65% 0.8% 43% 19% -1.2% 23% -0.9% 52% -0.5% 36% -0.3% UK Equity 24% -0.8% 73% 0.6% 4-0.2% 23% -1.1% US Large & Mid Caps 31% -0.5% 44% 0.1% 32% -0.2% 1-1.8% Japan Equity 44% -0.2% 32% -0.3% 51% 16% -1.6% World Equity 57% 0.1% 73% 1. 45% 0.1% 1% -4.9% Value Equity 6-0.4% 82% 1.6% 83% 1.4% 31% -0.9% Global EM Equity 35% -0.7% 85% 1.3% 8 1.1% 2-1.3% China Equity 12% -4.2% 26% -1.3% 38% 37% -0.3% Euro Govies 16% -0.2% 33% -0.2% 6 0.1% 11% -1.4% Euro Corporate 22% -0.2% 67% 0.3% 5 0.2% 17% -1.7% Euro High Yield 9% -1. 16% -0.5% 37% -0.3% -3.9% Emerging Debt 32% -0.4% 24% -0.4% 66% 0.2% 4% -2.3% Average Equity 37% -0.7% 63% 0.6% 52% 0.3% 2-1.6% Average Fixed Income 2-0.5% 35% -0.2% 53% 0.1% 8% -2.3% Average 32% -0.7% 55% 0.4% 52% 0.2% 17% -1.8% Source: Morningstar and Bloomberg data from 30/09/2007 to 30/09/2017.

4 Special focus on fund performance Factor analysis Developed by Lyxor s quantitative research team, our new tool has enabled us to analyse active fund risk factor* biases for each quarter and each universe (left hand side graphs). This helps us explain active fund performance when it is allied to risk factor performance vs relevant benchmarks. See the results in the graphs below. US Graph 1: US active funds factors over/under weights vs. benchmark 8 4 (40)% 39% 8% (58)% 12% (25)% (80)% Market Small Value Momentum Low Beta Quality Graph 2: Factors out/underperformance vs. benchmark 2% (2)% (4)% (6)% (5.1)% 0.4% 0.1% (2.8)% 0.8% (0.8)% (2.8)% (0.1)% (0.0)% (8)% Small Value Momentum Low Beta Quality 0.3% Europe Graph 3: Euro active funds factors over/under weights vs. benchmark 5 25% (25)% 6% 16% 7% 9% (38)% 11% 7% 9% (33)% (50)% Market Small Value Momentum Low Beta Quality Graph 4: Factors out/underperformance vs. benchmark 5. 3.3% 2.5% 2.2% 1. 1.8% (0.7)% (0.4)% (0.6)% (2.5)% (1.5)% (2.1)% (3.6)% (5.0)% Small Value Momentum Low Beta Quality Japan Graph 5: Japan active funds factors over/under weights vs. benchmark 5 25% (25)% 11% 14% 19% 11% (33)% (33)% (50)% Market Small Value Momentum Low Beta Quality Graph 6: Factors out/underperformance vs. benchmark 5. 2.5% (2.5)% (2.4)% 0.7% (0.5)% (1.6)% 0.2% (0.3)% (0.8)% (0.3)% (1.4)% (5.0)% Small Value Momentum Low Beta Quality 3.4% EM Equity Graph 7: EM Equity active funds factors over/under weights vs. benchmark 10 5 (50)% 2 24% (66)% (100)% Market Small Value Momentum Low Beta Quality 13% 39% (77)% Graph 8: Factors out/underperformance vs. benchmark 2% 1% (1)% (2)% (1.2)% 0.2% 0.3% (1.8)% (0.8)% (1.4)% (1.7)% 1.3% 0.7% (0.3)% (3)% Small Value Momentum Low Beta Quality Source: Lyxor and Morningstar data from 31/03/2017 to 30/09/2017. *The following five J.P. Morgan Risk Factors Indexes were used for each universe: J.P. Morgan Equity Risk Premia MOMENTUM FACTOR Long Only Index, J.P. Morgan Equity Risk Premia LOW BETA FACTOR Long Only Index, J.P. Morgan Equity Risk Premia LOW SIZE FACTOR Long Only Index, J.P. Morgan Equity Risk Premia VALUE FACTOR Long Only Index, J.P. Morgan Equity Risk Premia QUALITY FACTOR Long Only Index.

5 Special focus on fund performance 2017: Better than trying to find a needle in a haystack... but only just Equities Finding an active manager worth his or her salt wasn t easy in. In two-thirds of cases, you d have been better off going passive especially when it came to single country strategies in the developed and developing worlds. UK equity fund results dropped furthest, after managers were hurt by their reliance on domestic-focused stocks as they underperformed in. The worst results were however found in China, where most managers were impeded by their structural underweights to the technology sector. Tech now represents around 4 of the benchmark, and has performed strongly in recent months. There were some positive standouts at the regional level however. Large- and mid-cap European Equity funds performed creditably, with 53% of managers outperforming, which is well above the long-term average but below the results. In a period in which higher beta stocks outperformed, the relative performance of our peer group became less correlated to the low beta factor (Graph 9). Those active managers who had been defensively positioned (through biases to low beta, growth and quality stocks), seem to have become more pragmatic recently and added some more cyclicality to their portfolios capturing the good momentum on higher beta stocks as a result. Global Equity managers also continued their decent run, with 57% of funds outperforming their benchmark. Most did so because of their overall underweight US positioning (vs. overweights to Europe and Japan), and because they generally don t hedge FX risk, so they continued to enjoy the benefits of a positive EUR/USD effect as the dollar continued its decline. The relative performance of our peer group is still very correlated to the EUR/USD exchange rate. Graph 9: Peer group vs benchmark relative performance (Left) compared to EUR/USD exchange rate (Right) Global Equity Sep 2016-Sep 2017 0.5% (0.5)% (1.0)% (1.5)% (2.0)% (2.5)% 1.22 1.20 1.18 1.16 1.14 1.12 1.10 1.08 1.06 1.04 (3.0)% 1.02 Oct-2016 Dec-2016 Feb-2017 May-2017 Jul-2017 Sep-2017 Peer Group vs. MSCI World EUR NR (LHS) EUR/USD (RHS) Source: Morningstar and Bloomberg data from 30/09/2016 to 30/09/2017.

6 Special focus on fund performance Bonds Just 1 in 5 fixed income managers outperformed in. Investment-grade bond managers struggled in a decreasing interest rate environment. In fact, the relative performance of our peer groups proved highly correlated to the moves in rates (Graph 10a and 10b). Despite German rates having remained stable throughout the period (the 10Y German rate slightly declined from 47 bps on 01/07 to 46 bps on 30/09), active fixed income managers weren t able to exploit their overall underweight duration positioning. Only 16% of Euro Government Bond managers and 22% of Euro Investment-Grade Credit funds managed to outperform their respective benchmarks in. Graph 10a: Peer group vs benchmark relative performance (Left) compared to 10Y German Yield (Right) Euro Govies YTD as of 30/09/2017 0.6% 0.7% 0.4% 0.2% (0.2)% (0.4)% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% (0.6)% Dec-2016 Feb-2017 Mar-2017 Apr-2017 May-2017 Jun-2017 Jul-2017 Aug-2017 Sep-2017 Peer Group vs. Bench Euro Govies (LHS) 10Y German Yield (RHS) Source: Morningstar and Bloomberg data from 30/09/2016 to 30/09/2017. Graph 10b: Peer group vs benchmark relative performance (Left) compared to 10Y German Yield (Right) Euro Credit YTD as of 30/09/2017 0.4% 0.7% 0.3% 0.2% 0.1% (0.1)% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% (0.2)% Dec-2016 Feb-2017 Mar-2017 Apr-2017 May-2017 Jun-2017 Jul-2017 Aug-2017 Sep-2017 Peer Group vs. Bench Euro Credit (LHS) 10Y German Yield (RHS) Source: Morningstar and Bloomberg data from 31/12/2016 to 30/09/2017.

7 Special focus on fund flows Is the money going to the right place? As we ve shown previously, a huge increase in fund flows towards active managers accompanied their improved performance in the first half of the year. In however that trend started to reverse, much like the performance of the managers themselves. Overall, flows into European domiciled active funds declined by 4% in at EUR84bn. This is mainly explained by the 16% decline in fixed income flows as we ve said. Equities did better. Year-to-date, active and passive flows have both increased significantly, to EUR243bn and EUR72bn respectively. Fixed income represents 83% of active fund flows. Equity fund flows are still above those of their active counterparts at EUR46bn vs. EUR39bn. Quarterly Global Europe funds and flows Quarterly Europe funds and flows by Category 100,000 100,000 80,000 80,000 60,000 60,000 40,000 40,000 20,000 20,000 0 0 (20,000) Q4 2016 Q1 2017 2017 2017 (20,000) Q4 2016 Q1 2017 2017 2017 Commodities Equity Fixed Income Yearly Global Europe funds and flows Yearly Europe funds and flows by Category 300,000 300,000 250,000 200,000 250,000 200,000 150,000 150,000 100,000 100,000 50,000 50,000 0 (50,000) 0 2014 2015 2016 2017 (100,000) 2014 2015 2016 2017 Commodities Equity Fixed Income Source: Lyxor and Morningstar data in EURM from 01/01/2014 to 30/09/2017.

Universe description 8 Benchmark Selection Criteria Start Date Index Nb Of Aum As Of 30.09.2017 (M ) Eur Large + Mid Caps Europe Small Caps MSCI Europe (M7EU) MSCI Europe Small Cap (NCEDE15) Global Category Europe Equity Large Cap 1998 3,608 449,667,740,341 Morningstar Category is Europe Small-Cap Equity 2000 260 25,017,984,945 France Large Caps CAC 40 (CACR) Morningstar Category France Large Cap Equity 1987 298 32,950,179,852 France Smid Caps CAC Mid & Small (CMSN) Morningstar Category France Small/Mid Cap Equity 2008 145 12,509,472,224 UK Equity Eur Large + Mid Caps Europe Small Caps FTSE All Shares (FTPTTALL) MSCI Europe (M7EU) MSCI Europe Small Cap (NCEDE15) Morningstar Category UK Large Cap Blend Equity 1985 447 83,906,545,631 Global Category Europe Equity Large Cap 1998 3,608 449,667,740,341 Morningstar Category is Europe Small-Cap Equity 2000 260 25,017,984,945 US Large + Mid Caps MSCI USA (NDDUUS) Morningstar Category US Large Cap Equity (Blend+Value+Growth) 1969 1,452 235,748,094,519 Japan Equity World Equity TOPIX Japan (TPXDDVD) MSCI World (NDDUWI) Morningstar Category Japan Equity 1989 784 71,590,206,697 Benchmarked by the MSCI World 1969 3,287 485,456,678,163 Value Equity MSCI World Value (NDUVWI) Morningstar Category Global Large Cap Value Equity 1974 401 59,867,220,275 Global EM Equity China Equity EUR Govies EUR Corporate EUR High Yield MSCI Emerging Markets (NDUEEGF) MSCI China (NDEUCHF) EuroMTS Global Investment Grade (EMIEG5) Barclays Capital Euro Corporate Bond (LECPTREU)* BofA Merrill Lynch Euro High Yield (HE00) Benchmarked by the MSCI Emerging Markets 1998 552 182,673,884,667 Morninstar Category EUR China Equity 1998 148 24,503,533,062 Morninstar Category EUR Governments Bonds 2004 608 63,352,765,839 Morninstar Category EUR Corporate Bonds 1998 555 120,873,738,243 Morninstar Category EUR High Yield Bonds 2006 260 44,024,044,407 Emerging Debt Emerging Markets Local Currency Bond (JGENVUEG) Morninstar Category Global Emerging Markets Bond - Local Currency 2002 187 70,986,182,750 Total 12,992 1,963,128,271,615 Source: Morningstar data in EUR from 30/09/2007 to 30/09/2017. 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.

Source: Morningstar and Bloomberg data from 30 June 2007 to 30 June 2017. *1 Year rolling from 30 June 2016 to 30 June 2017. 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. Source: Montly data in EURM from10/09/2016 to 31/08/2017, Bloomberg, Lyxor. The figures relating to past performances refer to past periods and are not a reliable indicator for future results. Contributors 9 Marlène Hassine Konqui Head of Research - Lyxor +33 1 42 13 59 56 marlene.hassine@lyxor.com Kristo Durbaku Research Analyst - Lyxor +33 1 57 29 25 96 kristo.durbaku@lyxor.com Clément Chaulot Fund Analyst Lyxor +33 1 42 13 61 45 clement.chaulot@lyxor.com Check out the 2017 Informed Investor Manager Monitor Read More Read the full 2016 analysis on active and passive performance Read More Find out whether the money is going to the right place with our Manager Monitor Read More For professional clients only* 1 For professional clients only* 1 Informed Investor: Manager Monitor 2017 by Marlène Hassine Konqui, Head of Research and Clément Chaulot, Fund Analyst- Lyxor AM Performance improves in 2017 2017 Average % of active funds outperforming their benchmark 2016 10 years 31 % 28 % 27 % 10 % 22 % 27 % 35 % 18% on Q1 of fixed income managers outperformed. Government bond and emerging market bond managers were the major culprits 55 % 3% on Q1 of all active managers outperformed their benchmark vs 28% in 2016 63 % 11% on Q1 of equity managers outperformed. UK, Global and European managers enjoyed the most notable improvements summary Improving results for active managers throughout 2017 so far Fixed income managers have struggled with the interest rate environment Equity fund managers are back on track Despite that, equity s gathered more inflows than active funds in H1 2017 Blending active and passive funds: Comparing 2016 performances and 2017 outlook Informed Investor: Money Monitor September 2017 From Lyxor s Research Team flows on track for a record year Each month, we ll give you the latest news on where the money s going in Europe s market, and where it s coming from. We ll also dive deeper into the trends that really matter. What happened last month? flows more than doubled in Sept with inflows EUR6.8bn vs EUR3.2bn last month A record year still looks likely Equity flows rebounded strongly 6.0bn Commodities enjoyed a slightly better month 0.2bn 6.8bn Fixed income flows were at their lowest this year 0.7bn Solid month for Smart Beta, notably momentum factor 0.3m Fixed Income Equity Average Contact us.research@lyxor.com +33 (0)1 42 13 59 56

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