exane asset management a conviction-based equity market ... · foreign exchange risk to a limited extent, the sub-fund is exposed to foreign exchange risk relating to assets held

exane asset management

a conviction-based equity market neutral approach

CAIA France educational event on “fundamental and quantitative equity long/short strategies”

June 17th 2015

E. Lauri

exane asset management in a few numbers

an asset management firm created in 2001, a specialist in European equities

an investment know-how combining bottom-up stock-picking and risk management

(*) data as of May 29th 2015

2

14 years*

track record in fundmanagement

44* staff

including 11 specialized fundmanagers and

financial analysts

3,7 Mds € * under

management as of end of May

2015


expertise, solutions

3

specialisation

of fund managers/ financial analysts on specific investment

universes

equity,

with stock-picking as core source of alpha

generation

absolute return funds

directional funds

a strategic choice

our scope

our solutions

an efficient alpha source

4

average annual net over performance

source : analysis developped by A. Petajisto « Active Share and Mutual fund performance » January 2013 on a sample of 1380 US equity funds from1990-2009

fund managers that focus on stock-picking over-perform in absolute and relative terms

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

stocks-pickers concentrated factor bets moderately active closet indexers

exane asset management historical choice

a market neutral approach

2 key notions:

gross exposure (long + short)

net exposure (long – short) : limited and controlled net equity market exposure (prospectus)

a philosophy: investing in the capacity of the team to choose “winners” and “losers” stocks

5

50

100

150

200

250

300

350

400

450

déc.-08 déc.-09 déc.-10 déc.-11 déc.-12 déc.-13 déc.-14

long

portfolio

short

portfolio

long/ short

portfolio

the long / short investment approach

long

portfolio

L

short

portfolio

S

performance (L/S) = eonia + performance (L) – performance (S)

the L/S market neutral performance

three examples of strategies deployed by the exane asset management portfolio managers:

long hedged : long portfolio, fundamental, hedged using sector or market indices,

pair trade : within the same sector, a long stock position vs a short stock play, e.g. Volkswagen vs BMW,

sector arbitrage : a long sector vs a short sector, e.g. pharmacy vs automotive.

collective funds : a combination of multiple management styles

6

The data presented does not constitute a guarantee and may change over time

(*) full look-through to the underlying assets

telecoms/utilities/

technology

>70%* ofpair-trades

relative value

regulated sectors

high concentration of bids

consumer/services

stock-picking with index hedges

structural net exposure

emerging countries bias

progressing gross exposure

chemicals/ healthcare

identification of investment themes (restructurings, M&A, new treatments) for stock selection

Europe/US

financials/basic

resources

4 strategies :

fundamental stock picking

mean reversion

thematic arbitrage

trading

industry/ equipment

cyclical dominant universe

bets at the sub-sector level

mosaic theory

European large caps

sector arbitrage

universe divided in 3 families : cyclical/defensive/ financialinput : top-down/ fundamental bottom-up

market cap> € 1,5bn

stable strategic allocation integrating :

experience and track record of sector experts

level of risk incurred by the investment universe

mainly value quality balancedrelative value momentummainly value

formalised gross exposure management*

portfolios with low correlation

7

source : exane am. data as of 1 April 2015 – volatility and correlation calculated over 104 weeks on a weekly basis

telecoms/

utilities/

technology

consumer /

services

sector

allocation

large caps

Europe

financials /

basic resources

industry /

capital

goods

chemicals /

healthcare

telecoms/ utilities/

technology 100%

consumer / services 13% 100%

sector allocation

large caps

Europe

19% 25% 100%

financials / basic

resources 7% 15% 31% 100%

industry / capital goods 1% 27% -3% 16% 100%

chemicals / healthcare 13% 15% 26% 1% 25% 100%

2 levels of risk monitoring

positions are monitored on a look-through basis*, coupled with extreme risk management

daily analysis of portfolio structure

breakdown of gross / sector / market exposure

control of symmetries between long and short positions (beta, capitalisation, implied volatility)

independent investment monitoring :

daily and weekly frequency : risk department

bimonthly frequency : risk committee

8

(*) full look-through to the underlying assets

source : exane asset management. The data presented does not constitute a guarantee and may change over time.


9

capital preservation*

regular performance

high Sharpe ratio

an investment team focussed on one mission: alpha generation

(*) the capital is not guaranteed

10

appendices

the portfolio manager : Eric Lauri

11

as of March 31 st, 2015

more information available on www.exane-am.com

professional experience

16 years experience in investments, including the responsibility of the Exane Group equity proprietary trading

joined exane asset management in 2012

his expertise combines fundamental knowledge of listed corporations and quantitative strategies know-how

fund manager of exane asset management collective funds

12

risk factors

The principal risks linked to investment management are :

capital risk

the fund does not offer any guarantee on the capital invested. It is possible that investors may get back less than they originally invested.

risks associated with small and mid cap companies

the sub-fund may invest part of its assets in securities of small and mid cap companies, thereby exposing itself to greater risks than if it had invested in the securities of larger or longer established companies. Securities of small and mid cap companies may be significantly less liquid and more volatile than those of companies with a larger market capitalisation risk relating to the equities market

risks associated with the arbitrage technique

the sub-fund's investment strategies generate certain risks specific to, for example, exposure to a fall in the price of certain securities. These risks may result in a fall in the value of the assets under management if these securities outperform the long portfolio. In addition, the arbitrage technique implemented may also generate significant portfolio rotation.

credit risk

the sub-fund is exposed to credit risk through investments made in debt securities of private issuers in order to manage the money market portfolio. Credit risk is the risk whereby an issuer cannot meet its liabilities. The probability of such an event is, however, very low as the sub-fund invests only in securities of leading issuers with maturities of less than three months.

counterparty risk

the Sub-fund may incur losses through its commitments vis-à-vis a counterparty under their swap, CFD, forward, repurchase or reverse repurchase transactions in the event of the counterparty’s default or its inability to fulfil its contractual obligations.

foreign exchange risk

to a limited extent, the sub-fund is exposed to foreign exchange risk relating to assets held in currencies other than its reference currency in spite of hedging transactions designed to protect the subfund against this risk.

Please refer to the fund’s prospectus for further information about risks.

13

warning

This document is published purely for the purposes of information. It is not a confirmation of any transaction, and it does not comprise investment advice.

The information contained in this document is simplified and is consequently of an incomplete nature. It is possible that the information contained in this document is of a

subjective nature and may be modified without prior notice. All data has been collated in good faith based on accounting information or market information. Not all of the

accounting data has been audited by the Statutory auditor.

Past performances are not a guarantee of future performances.

Exane asset management can not be held responsible for any decision taken which is based on this information. Any subscription to the Mutual fund can only be carried out

on the basis of the full prospectus and based on the review of the KIID. Before subscribing to any UCIT, investors must consult the fund prospectus which is available upon

request.

The contents of this document may not be partially or fully reproduced unless prior written agreement is given by exane asset management.

Exane asset management invites persons or parties in possession of this document to consult and respect all applicable laws and rulings relative to the possession or

distribution of this type of information document.In particular, this Mutual funds cannot be offered or sold, directly or indirectly, in the United States in the profit or for one US

PERSON, according to the definition of the " regulation S ".

Exane Asset Management – 16 avenue Matignon 75008 Paris

Authorised portfolio management company registered with the French financial market regulator (Autorité des Marchés Financiers) under number GP 01-015

Exane Asset Management is a “société par actions simplifiée” with capital of 3 000 000 Euros

R.C.S. PARIS B 434 692 828

SYSTEMATIC LONG SHORT EQUITY

INVESTMENT PHILOSOPHY

CONFERENCE CAIA JUNE, THE 17TH 2015

Document intended exclusively for Professional Investors

2Document intended exclusively for Professional Investors

PRESENTATION

NOT AVAILABLE

Long/Short EquityWhat we used to do,

what we currently do,

what we will do … maybe

CAIA France

This document does not constitute any recommendation or investment proposal. It was issued for information purposes only. It has no contractual value and may contain errors and/or omissions. Please refer to page 2 for full disclaimer.

«All models are wrong; some models are useful »

George E.P. Box (1919-2013)

2

This document does not constitute a recommendation or investment proposal. It was issued for information purposes only.

It has no contractual value and may contain errors and/or omissions. Nothing contained herein shall in any way constitute an

offer by Finaltis to provide any service or product, or an offer or solicitation of an offer to buy or sell any securities or other

investment product.

Important Information

Finaltis will not be liable for the content of these pages, nor for any use thereof or reliance placed thereupon by any person.

Product(s) described herein is/are not available to all persons in all geographic locations. It is/ they are of a speculative

nature so that its/their success may be affected by a fall in assets value as well as a total loss.

It/they may invest in OTC instruments which can be volatile and render difficult to predict or anticipate any fluctuation. The

institutions with which it/they will contract may encounter financial difficulties impairing the value of the product(s). There

is no guarantee of capital preservation and minimum return. There can be no assurance that the investment objectives

shown are achieved.

Disclaimer

3This document does not constitute any recommendation or investment proposal. It was issued for information purposes only. It has no

contractual value and may contain errors and/or omissions. Please refer to page 2 for full disclaimer.Presentation

CAIA June 17, 2015

At a glance…

Tomorrow• Combining strategies catering from different anomalies

• Studying interactions; aiming for optimal diversificationPage 9

Today

• Research focused on the identification of sustainable

anomalies regardless of the market environment

• Example: the so-called « low-volatility anomaly »

Page 7

Yesterday

• Systematic intra-sector mean-reversion strategy

• Investment universe of more than 600 European equities

• Short exposure = long exposure (Market/Delta Neutral)

Page 5

Finaltis

• An entrepreneurial company established in 2001

• Quantitative Asset manager since 2002

• Quantitative equities since 2005

Page 4



CAIA June 17, 2015

Finaltis

1.1. Finaltis: Quick overview

Today

Finaltis

Yesterday

Tomorrow

Yesterday

• Asset Management

• Proprietary Databases

• Real-time monitoring

tools

• Risk control

• Focus on Equity

Arbitrage

Today

• Asset Management

• Proprietary Databases

• Real-time monitoring

tools

• Risk Control

• Focus on Smart Beta

● Finaltis is an independent asset management company established in 2001.

● It focuses on quantitative, systematic strategies.

● In 2013, Finaltis redefined its offering towards SmartBeta strategies.



CAIA June 17, 2015

Yesterday: Back to the Mean

2.1. General principles

● The Mean Reversion takes advantage of the oscillation of spreads between

stocks pertaining to the same sector.

● Position sizing is determined by the widening (exposure increased) and

tightening (exposure decreased) of spreads.

● Strategy implemented between 2005 and 2014 at Finaltis on a liquid

universe of largest European Equities

● Quantitative, systematic and Market Neutral strategy: short exposures

always match long exposures

Source: Finaltis

Today

Finaltis

Yesterday

Tomorrow

100

110

120

130

140

100

110

120

130

140

0 10 20 30 40 50 60 70 80 90

Rat

io A

/ B

Rat

io A

/ B

Days

Example : Relative change over 100 days between

two stocks A & B (same sector)

moving average of ratio Ratio A / B

Sale of A/B =

Sale of A + Sale of B

Purchase of A/B =

Purchasee of A + Purchase of B



CAIA June 17, 2015

Yesterday: Back to the Mean

2.2. Return stream

(*) Annualized 2015 Returns (pro forma) Source: Finaltis

● Strategy is discontinued because of an unfavourable environment, with

major headwinds:

1) Very low interest rates (cf. Appendix 1)

2) A very low volatility (of the spreads) (cf. Appendix 2)

3) A significant increase in passive investments (e.g. ETF, ETP, …), less

conducive to the strategy than stock-picking flows (cf. Appendix 3)

● Significant decrease in profitability for the strategy since 2010.

● Since 2013, already low earnings are further offset by the high transaction

costs due to turnover of the strategy.

Today

Finaltis

Yesterday

Tomorrow

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Evolution of the simulated performance of Mean Reversion (with and without transaction costs)

Mean Reversion (Net) Mean Reversion (Gross)



CAIA June 17, 2015

Today: Low-volatility Anomaly

3.1. General principles

● Our research highlighted the resilience of the low volatility anomaly over

time; it is characterized by an outperformance of the less volatile equities

compared to the more volatile ones.

● This anomaly can be exhibited over the past 15 years, in a large majority of

market conditions.

● Implementation since late 2013, on a liquid universe made of the largest

Eurozone shares.

● Systematic and quantitative strategy

Finaltis

Tomorrow

(1) Net simulated results from Finaltis Research Source: Finaltis

Today

Yesterday

0

100

200

300

400

500

0

100

200

300

400

500

Evolution of a Minimum Variance(1) portfolio (stocks €) and the index (iso-volatility)

Minimum Variance Portfolio (€) Euro Stoxx Net Return



CAIA June 17, 2015

Today: Low-volatility Anomaly

3.2. « Single-factor » long/short strategy implementation

● The long exposure is calibrated based on the index volatility, as an output of

a Minimum Variance algorithm.

● Parameter estimations come from proprietary methods to offer better

definition of the universe and avoid overly concentrated portfolios.

● The short side replicates the index to offset the Beta of the portfolio.

● Annualized performance over the period: +7.0%

● Annualized volatility over the period: 9.3%

Source: Finaltis

Today

Finaltis

Yesterday

Tomorrow

50

100

150

200

250

300

50

100

150

200

250

300

Evolution of a Beta Neutral portfolio (stocks €), taking advantage of the low volatility anomaly

-10.8% -8.7%

29.1%7.3%

16.1%3.1%

-4.9%

4.8%12.8%

5.8%6.0%

8.2%15.7%

13.0%



CAIA June 17, 2015

Tomorrow: Risk Premium Allocation

4.1. Risk Premium allocation between « single-factor » strategies

● The low volatility anomaly, though persistant, is not deprived from deep

cumulative losses.

● Our research singled out other market anomalies, which can mitigate this

risk.

● Each of these strategies implement a Long/Short portfolio

● Example for the Quality risk premium: Long Quality stocks + market hedge

Today

Finaltis

Yesterday

Tomorrow

Style Annualized Returns Annualized Volatility Maximum Cumulated Losses

Size 1.2% 4.4% -13.9%

Value 2.3% 5.2% -17.2%

Momentum 2.8% 7.6% -22.8%

Trend 3.8% 6.1% -11.7%

LowVol 7.0% 9.3% -19.6%

Quality 1.6% 4.2% -13.0%

Blend 6.8% 5.0% -7.1%

Source: Finaltis



CAIA June 17, 2015

Tomorrow: Risk Premium Allocation

4.2. Diversification between « single-factor » strategies

● These strategies have low correlations.

● A very diversified Long/Short Equity portfolio can be built with them.

Size Value Momentum Trend LowVol Quality Blend

Size 1.0 0.5 -0.1 -0.1 0.0 -0.5 0.3

Value 1.0 -0.3 0.1 -0.3 -0.5 0.2

Momentum 1.0 0.2 0.2 0.2 0.5

Trend 1.0 0.0 0.0 0.5

LowVol 1.0 0.3 0.4

Quality 1.0 0.1

Blend 1.0

● The low correlation makes it worthwhile to use simple allocation methods

(e.g. 1/volatility).

● It is therefore possible to offer simple and easy-to-grasp investable products.

Today

Finaltis

Yesterday

Tomorrow

Source: Finaltis



CAIA June 17, 2015

Conclusions

Tomorrow

• Combination of several sustainable anomalies

• Risk premium allocation between anomalies for maximum

diversification

Today• Clearcut sustainable anomalies; quantitative harvesting

• Smart Beta approach = sustainable (even if unsteady)

Yesterday• Broad statistical strategies; empirical validation

• Arbritrage approach = risk of being arbitrated

This document does not constitute any recommendation or investment proposal. It was issued for information purposes only. It has no contractual value and may contain errors and/or omissions. Please refer to page 2 for full disclaimer. 12

Presentation

CAIA June 17, 2015

1. Euro rates (Eonia and Germany) 13

2. Illustration of decreasing volatility 14

3. ETFs industry evolution in Europe 15

Appendices

Today

Finaltis

Yesterday

Tomorrow



CAIA June 17, 2015

Appendices

Appendix1: Euro rates (Eonia and Germany)

● Decreasing performance of Mean Reversion: very low rates

Source : Bloomberg

Today

Finaltis

Yesterdday

Tomorrow

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-1%

0%

1%

2%

3%

4%

5%

6%

7%Evolution of Euro rates since 2000

EONIA 3 Months (ALL) 5 Years (ALL) 10 Years (ALL)

EONIA 3 Months 5 Years 10 years31/12/1999 Late 1999 3.8% 4.9% 5.5%31/12/2007 Late 2007 3.9% 3.7% 4.1% 4.3%31/12/2010 Late 2010 0.8% 0.3% 1.8% 2.9%30/12/2011 Late 2011 0.6% 0.0% 0.8% 1.9%31/12/2014 Late 2014 0.1% -0.2% 0.0% 0.5%12/06/2015 June '15 -0.1% -0.3% 0.2% 0.8%



CAIA June 17, 2015

Appendices

Appendix2: Illustration of decreasing volatility

Source: Finaltis

● Decreasing returns: Lower volatility + increased arbitrage spread correlation

Average equity

volatility has

decreased

BUT

These Levels have

already been

reached in the past

Decreasing

average volatility

of the spreads

+

Increasing

correlation

=

Fewer

opportunities

Today

Finaltis

Yesterday

Tomorrow

10%

20%

30%

40%

50%

60%

70%

10%

20%

30%

40%

50%

60%

70%Average volatilities of the universe

10%

20%

30%

40%

50%

10%

15%

20%

25%

30%

Average spread volatilities and correlations of the universe

Spread vol (left) Correlation (right)



CAIA June 17, 2015

Appendices

Appendix3: Evolution of the ETFs industry in Europe

Source: BlackRock, ETP landscape

● Decreasing returns: significant flows on the ETFs in Europe

● By construction, ETFs buy all the equities of a predefined style (large

capitalization, index composants, …)

● These flows do not generate opportunities because there are no stock-

picking (manager’s decisions to favor action at the expense of another)

Today

Finaltis

Yesterday

Tomorrow



CAIA June 17, 2015

Speaker

63, Avenue des Champs Elysées

75008 Paris – France

www.finaltis.com

Denis Beaudoin, Founder & CEO - Finaltis

• Founder & CEO, Finaltis since June 2001

• Lecturer at Graduate & Post Graduate level

in Quantitative Asset management at

Dauphine University, Paris since 2010

• Former tenures include :

• 1999-2001: Dexia Asset

Management France, Head of

Institutional Clients Mandates

• 1998-1999: Paribas Asset

Management: Institutional Client

Relationship Manager

• 1997-1998: Paribas (1997 - 1998),

Project Manager

• 1993-1996: Accenture (formerly

Andersen Consulting), Consultant

• HEC, Paris (1993)

Documents

exane asset management a conviction-based equity market ... · foreign exchange risk to a limited extent, the sub-fund is exposed to foreign exchange risk relating to assets held