Next-Finance: When Lyxor has decided to launch "Smart Beta" indices? Did you get a strong demand from institutional investors at that time?
François Millet: Our first work have begun in 2008, leading to the publication of research articles in the review "Journal of Portfolio Management." In 2009, we decided to launch our "Smart Beta" indices; Lyxor AM has obtained its first mandate in May 2010 for institutional clients, due to their strong interest in such indices.
How do you build these “Smart Beta” indices and what are their benefits compared to traditional indices?
"Smart Beta" indices are indices whose constituents are not weighted by market capitalization. To build them, we therefore focus on specific sub-assemblies of securities, such as companies with a low level of PER ("Price Earnings Ratio") or volatility for example. The advantage is to avoid the effects of concentration and over-representation of larger market capitalizations, that we see in most traditional indices. Clearly, it is based on a more equal risk budget allocation, without leading to a portfolio limited in terms of securities and sector diversification.
Institutional clients is undoubtedly the most sensitive to our offer today, although private banks, pension funds are also part of our customers.
François Millet, Product Line Manager ETF & Indexing, Lyxor Asset Management
Where are allocated "Smart Beta" indices on the institutional side? Is it considered as active asset management or as a complement their passive asset management?
"Smart Beta" is intended to be located in the core portfolio of institutional investors, weighing generally between 10% and 40% of their passive management. In some Dutch pension funds, sometimes these "new generation" indices exceed 40% of their core portfolio. By cons, for more "traditional" investors, this type of strategy is only allocated to their active asset management.
What are your differences compared to its competitors and how your “Smart Bêta” offer is broken down? What are the most sensitive customers?
Righ now, we are offering a range of "Smart Beta" indices, including risk-based indices, such as ERC ("Equal Risk Contribution") that provide a maximum diversification in terms of risk or risk weighted. For this strategy, stocks are chosen among those, showing the lowest volatilities of the benchmark.
Three examples of Lyxor "Smart Beta" indices, currently sold through ETFs ("Exchange Traded Funds"), illustrate this point:
The Sovereign Bonds ETF composed of debt securities whose weighting takes into account the GDP of each country issuers and not the amount of the debt issued, as traditionally
The ETF-SG Global Quality Income, equities are selected on their financial strength and their dividend level
The risk-based ETFs like ERC ETF, having an underlying on the Euro STOXX 50 ETF and the MSCI World Risk Weighted.
Institutional clients is undoubtedly the most sensitive to our offer today, although private banks, pension funds are also part of our customers. I must say that the "Smart Beta" indices are able to outperform conventional indices over a full cycle of investment, which appeals a increasing number of investors.
What are your current "Smart Beta" outstanding assets and what are your outlook for the medium term?
Today at Lyxor AM, our outstanding "Smart Beta" assets amount 1.5 billion euros, including 900 million through ETFs. We believe that the outlook is positive, in the medium term, given the growing interest of investors for this type of indices.
