Nomura targets European insurers with CPPI-like strategy

Nomura has launched Quantam SolCap Europe, a new fund targeted at institutional investors in the main European markets, including Austria, Belgium, France, Germany, Ireland, Italy, Spain and the UK. The objective is to offer long-only exposure to the EuroStoxx 50 Total Return index with reduced tail risk. Offered in euros, the fund provides access to European equities, capturing upside while reducing equity drawdowns through a dynamic allocation programme.

The fund is neither a structured fund nor a smart beta strategy but an automatic exposure reduction strategy, according to Jean-Philippe Royer (pictured), chief executive of Nomura Alternative Investment Management. “The fund can be seen as a structured product, in the sense that it does purchase derivatives to receive the financial protection,” said Royer. “It is not a smart beta strategy under the definition of smart beta, although it is geared to outperform the underlying index in downside scenarios.”

The quantitative strategy used can be seen as an evolution of what portfolio insurance structures used to do, said Royer, although the strategy has been further enhanced in the SolCap fund. “There is a mechanism geared towards reducing or increasing the net exposure to the benchmark index based on an asymmetric volatility measure,” said Royer. “This aims at cutting the exposure faster in markets under stress and to reset the exposure in a timely manner to recapture rebounds, which classical PPIs would not do.”

The fund invests directly in EuroStoxx 50 TR index stocks and then implements a net dynamic allocation strategy by going short futures to aim for a net exposure between 0% and 100%, depending on the market regime characteristics. “This aims to capture upside and to achieve its investment objective, while also providing protection to the downside,” said Royer. “The NAV of the fund at any point in time will not be below 85% of the highest NAV observed over the last one-year period. This one-year rolling protection mechanism is achieved through the implementation of a quantitative process, focused on the net exposure achieved through long-only equities and short futures positions. The fund also purchases a daily gap option in order to make sure that the fund, which is constructed on a close-to-close basis intraday, is not exposed to extreme gap move scenarios between two consecutive close-of-business days.”

The fund also includes a formal guarantee by Nomura Bank International (rated A- by S&P as of October 2015), which ensures the NAV will never be lower than the investment objective – beyond the financial structure and the gap option – and addresses material concerns of high downside risks attached to equity investments. It also facilitates a potential reduction of the equity capital charge at a maximum of 15% under Solvency II (under standard formula) due to its formal bank guarantee (Commission Solvency II Delegated Regulation (EU) 2015/35).

“We think that this is a very interesting proposition for insurance companies,” said Royer. “The fund benefits from the bank’s capital guarantee, which covers a number of issues beyond the financial protection offered by the fund, and ticks all the boxes for insurance companies in relation to their exposure to equities and their Solvency II capital requirements.”

Although some portfolio insurance strategies have had issues in the past capturing a rebound in the equities market as well as cashing out (when the NAV felt below a certain threshold), the asset management arm of the Japanese bank has teamed up with quantitative asset manager Quantam which will advise on the fund’s advanced dynamic hedging overlay strategies. “[These strategies] are compatible with the nature of the guarantee that the fund provides,” said Royer. “As the volatility is used to adjust the speed of the gearing, the fund is able to deleverage exposure and re-leverage the structure more efficiently.”

In the low yield environment, it is very difficult to provide full capital protection unless the guarantee applies at very long-dated maturities, said Paul Fulcher, Nomura’s head of asset and liability management solutions, Europe, Middle East & Africa. “But that means the guarantee is backed by a long-duration bank zero coupon bond, and under Solvency II these would lead to material capital charges against credit spread risk volatility,” said Fulcher. “Indeed, the spread risk capital against the capital protection provided could exceed the capital charge for the equity in the first place. Similarly, CPPI structures based on full guarantees at long-time horizons would suffer from the same issues.”

The fund is part of the Nomura Alternative Investment Management Ucits funds range, which provides investors with a broad range of investment solutions including structured funds.

Industry Insights

Data Insights

Webinars

Special Reports

Market

Nomura targets European insurers with CPPI-like strategy