Investec Structured Products is gearing up to expand its range of passive funds in the UK retail market with the launch of a European version of its Investec Qtrac UK Controlled Volatility Fund.

The new passive fund – which is set to launch in the first quarter of next year – will track the Euro70 index, a proprietary index recently created by Investec. The Euro70 index is comprised of the 70 least volatile stocks from 300 of the largest companies in 15 developed European companies, equally weighted and rebalanced monthly.

Gary Dale, head of intermediary sales at Investec Structured Products, told SRP that the new Euro70 index is an example of the development of the bank's equity derivatives capabilities which started with the launch of the EVEN30 index in 2009.

"As part of this push we are working on the potential launch of a European version of the UK Controlled Volatility Fund which we may look to launch in the first quarter of next year," he said. "This index currently has two versions: one including the UK and one excluding the UK."

EVEN 30
Dale said that as a provider of mainly single-index (FTSE100) vanilla solutions the aim of the new fund would be to extract the beta value of the index in a more efficient way by focusing on volatility.

The EVEN30 index, said Dale, was launched to enable Investec to buy cheaper call options and offer better participation with its structured deposits. "Volatility at the time was spiking and options were expensive so the participation offered for structured deposits was low," he said. "We developed the index to provide better participation on the equity underlying as it carries around a third less volatility than the FTSE100."

The UK Controlled Volatility Fund offers both accumulation and income shares in a strategy targeting long-term capital growth while aiming to reduce volatility. Cash commensurate to the dividends paid by the constituent stocks in the index can be distributed quarterly with the income share class.

The index has two mechanisms to manage volatility. One is the stock selection – evenly weighted and rebalanced monthly – and the other is a volatility control mechanism whereby if at any point the volatility of the EVEN30 index is greater than a floating level (half the volatility of its selection universe plus five points), the index divests proportionally across all stocks into cash.  When the volatility of the EVEN30 falls the index reinvests proportionately back into the 30 stocks.

Passive funds
After the launch of the EVEN30 index, said Dale, the next step is to develop a range of funds on the back of the success of both the Investec Qtrac funds  – the UK Controlled Volatility Fund and the Income Booster Fund launched in November 2013.

"The performance of the UK Controlled Fund has been staggeringly good when compared to the FTSE100," he said. "Since March 2014 when it was launched it has outperformed the FTSE100 by a considerable margin and the dividend yield has been around 120bps pa higher on average than the FTSE100 since 1998."

According to Dale, Investec has also been working on an institutional share class of the Investec Qtrac UK Controlled Volatility Fund that opened last week with a TER of 15bps aimed at discretionary asset managers.

"We have now established our structured products range in the UK market and we have plans to continue investing in it as it gives us strong flow and we retain a strong market share," he said. "But because we have done so well on that side of the business we can now focus on developing other more innovative parts to complement our structured products business."

Dale said that instead of developing a range of structured funds Investec has focused on launching an OEIC with the idea of building different share classes.

"The income booster – a call-overwriting structure that has been running since last November – came first," he said. "Then we launched the UK control vol fund, and we are now focused on the launch of a Euro version and a US tracker fund is also in the pipeline as the firm is looking to further develop similar strategies on a more global scale. "

At the moment, said Dale, Investec is not looking into exchange-traded funds (ETFs) because the firm's passive funds already provide all the liquidity of an ETF.

"We want to focus on structures that are commonly understood by the advisory community," he said. "We are not turning our backs on ETFs but we believe that the best way to market funds in the advisory market is by using an OEIC structure wrapped as a Ucits and make it available through wrap platforms."