Lyxor invests in eurogovies
Lyxor’s reorganised absolute return team has launched an active smart beta strategy for European debt.
Lyxor reshuffled its absolute return team in November 2014. Five years after its launch, changes come naturally according to Guillaume Lasserre, head of Absolute Return and Solutions at Lyxor, as absolute return has “emerged as a strong expertise” of the firm.
Lyxor’s Absolute Return and Solutions division manages €28.3bn of assets as at 31 March 2015, of which €8bn are invested in active smart beta
fixed income and equities strategies.
Other absolute return strategies run by Lyxor – active risk parity on multi-asset classes, trend following and credit loans – account for €2bn.
“Our size is quite reasonable, but we haven’t reached our full capacity yet. Our goal is to develop our open ended funds as by essence, we manage a lot of mandates,” Lasserre says.
Lyxor decided last February to launch an active smart beta strategy on euro bonds with the Lyxor EuroGovies Risk-Balanced fund.
The product was initially designed to meet the needs of banks for liquidity buffers in order to fulfil requirements of Basel III. But it also fit the needs of other institutional clients such as pension funds and insurers.
The pressure the market put on yields and a “no more efficient” buy and hold position have raised institutional investors’ appetite for alternative solutions in fixed income.
“Fixed income is a world where you normally buy and hold positions until maturity. Any strategy promising alpha from actively managing the portfolio was suspected of being inefficient due to accounting issues.
“But now, things are seen differently. Alpha through flexibility becomes vital for fixed income portfolios today,” Lasserre asserts.
According to him, a buy and hold strategy on two or three year euro sovereign bonds will lose money in view of the rates’ level, yields being negative.
Lasserre sees two ways of finding yield on fixed income. Downgrading the quality of ratings is one “but there is still a spread tightening on high yield bonds.”
“At Lyxor, we propose senior secured loans, to get floating incomes from high yield issuers, as well as long term sovereign bonds.”
The other way is betting on well rated sovereign bonds with a low default risk. “We have excluded Portugal and Greece from our strategy as our investors ask us to stay on investment grade issues,” Lasserre adds.
In addition to smart beta, the firm uses active overlays to manage its eurogovies fund. An active smart beta strategy has been favoured because in some market conditions, “discretionary management is useful,” Lasserre says.
Equities were first considered for smart beta by Lyxor before the firm extended this approach to bonds in 2013.
“We were pioneers on equities smart beta but investments are only arriving now as this is a segment in which there are a lot of participants – banks, index providers, asset managers. Most of them run smart beta as it is a way to do low cost active management.
“But we recently gained a call for tender for a pension fund based in the UK that was not reflecting this state of mind.
“The firm didn’t want a simple replication of an index by a manager, it wanted a manager that would be responsible of its strategy,” he says.
Lasserre estimates that on the smart beta bond segment, Lyxor finds itself “in an advanced phase” in comparison with other firms. “There are fewer players as data is less accessible and research must be subtle,” he argues.
Among its projects, Lyxor’s absolute return team has plans for launching fixed income portfolios on larger universes – multi credit. It might also use Basel III to launch direct lending funds.