In the second part of an interview, Theam's chief executive Denis Panel (pictured), talks about the shift from constant proportion portfolio insurance (CPPI) towards dynamic payoffs that enable to manage the leverage of the downside buffer, the use of BNP Paribas investment bank to leverage its structuring capabilities and how smart beta strategies are boosting assets under management (AUM) in the firm's model-based investment range.
Theam has moved away from CPPI structures which were very popular in the past, according to Panel. "[These structures] have also evolved and we now see actively managed underlyings being deployed within CPPI type of strategies," says Panel. "We have extensive knowledge of the advantages and drawbacks of CPPI products. In the current environment traditional CPPI strategies are difficult to manage especially when the volatility is high."
That's the reason why Theam has adapted its technology and methodology to develop a new type of payoff which uses a multiple based on volatility to control the leverage of the cushion, according to Panel. "The exposure to the risky assets will depend on the volatility of those risky assets," he says. "So, in a high volatile environment such as the Brexit vote the level of exposure to the risky assets will decrease automatically which is different with a traditional CPPI as you would have to wait until the negative performance reduces the exposure to the risky assets."
This new payoff type which Theam calls dynamic proportion portfolio insurance (DPPI) has the advantage to integrate the volatility in the multiple that leverages the protection mechanism, says Panel. "This kind of product also addresses the cashing-out issues with CPPI structures," he says. "This shows that structured products are flexible and can adapt to different market environments and still offer value."
Theam uses its internal research to come up with ideas that are then discussed and developed with the investment bank "as they have the structuring capabilities", says Panel.
"That combination which BNP Paribas applies to all of its proprietary indices allows us to stand out of the crowd," says Panel. "We also have an extensive range of ETFs that can also be used as underlying for structured products and we have several DPPI products using this approach."
AUM in Theam's ETF and Index Solutions segment stood at €15.3bn as of the end of August 2016 compared to €13bn AUM in early 2014 while the model-based investment range has €15.2bn compared to a €7.5bn AUM in early 2014.
"The model-based investment range has been one of our fastest growing lines because of the success around factor investing and smart beta strategies," says Panel. "BNP Paribas is at the forefront of researching and developing factor investing strategies and managing portfolios based on these strategies."
Panel also points that the Guru range is one of the firm's most successful offerings. This is a range of equity funds whose selection is based on the performance criteria made famous by renowned investors such as Benjamin Graham, Peter Lynch and Warren Buffet, which focuses on momentum, quality and value. The Guru range has over €3bn in AUM.
Theam also has a low vol strategy range which offers exposure to equity funds comprising stocks with a low volatility and the DEFI (Diversified Equity Factor Investing) strategy which offers exposure to an equity fund whose investment criteria combine performance factors including momentum, low risk, value and quality.
"Our risk models for multi-asset portfolios also allow us to apply a vol control mechanism to each asset class in the portfolio and on top of that we have an overlay based mainly on options to hedge extreme conditions that could impact the portfolio," says Panel. "So if the market goes down we can use a put spread to hedge the position and make sure the portfolio is protected to these market moves."
Although indexed management and ETFs will be a strategic focus for Theam's growth in the coming years, as the appointment of Bourcier as the new head of ETF and indexed fund activities suggest, there are areas the firm considers off limits.
"There is no demand from our client base for leverage and inverse ETFs," says Panel. "This is an area mainly driven by retail investors who are actively trading on exchange as opposed to the traditional ETF segment which is driven by institutional investors."
For the kind of retail client Theam serves - long term investors, says Panel, this kind of structure "could be dangerous" and compromise the firm's "duty of care towards our clients".
"We would not launch products that could cause suitability issues, and there are other providers out there covering this segment for those more speculative investors," says Panel.
Since the beginning of 2015, more than 240 products featuring a CPPI payoff type have been recorded. Sweden with 112 products is the country with the highest proportion of CPPI-based products, followed by Poland (38 products) and Ireland (37 products). Of the nine live CPPI-based products in France, BNP Paribas Investment Partners is the most active provider with six products, according to SRP data.
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