Following Societe Generale's launch of the Veritas Risk at Work Index, a gauge based on the Risk@Work approach developed by German asset manager Veritas Institutional in 2007, SRP spoke to Axel Wachsmann, head of cross asset sales, Germany & Austria, and Frank Schuster, vice president cross asset sales, about the bank's plans to develop a range of products based on a unique allocation and risk management method, and how this new 'intelligent investment solution' will address the need for yield and capital protection in the current low-interest-rate environment.

The French bank is responding to client demand for 'efficient' exposure to the capital market via multi-asset-allocation and a controlled risk limitation, according to Wachsmann.

"This is an example of how we can leverage our SG Index platform which is comprised of a number of flagship indices and also a range of customised indices," says Wachsmann. "Most recently the customised offering is the faster growing one and we saw an opportunity to team up with Veritas. This is a very interesting partnership because they have managed to raise €7bn in assets under management thanks to their quantitative strategies, and that is something which is appealing to clients, and is in line with our approach."

Custom indices
According to Wachsmann, most flagship indices are in strong competition with asset management funds while customised indices can be used to provide exposure to interesting themes and ways to allocate assets in a managed portfolio. "We see these indices as building blocks that can be used to address different needs coming from different investors," says Wachsmann, adding that initially the bank will only target institutional investors and leverage its structuring capabilities to provide more than just the exposure via a fund ie. a coupon, some kind of capital guarantee, or leverage.

The main feature of the index is the risk management model 'Risk@Work' which works purely systematic and forecast-free and defines a value protection limit/capital protection limit of a 10% loss. The long-term target of the strategic allocation of the Veritas Risk at Work Index is between 3 and 4% per year in the current capital market environment, according to Wachsmann.

"The implementation of the Veritas Risk at Work Index in the form of individually designed notes allows investors to invest optimally under certain regulatory conditions, whereby the strengths of the embedded risk management can be used particularly well," says Schuster. "The investment in a capital-guaranteed securities linked to the new index, such as a registered bond, can be a very interesting variant for certain investors in economic and regulatory terms."

According to Schuster, this is the first time SG has entered a cooperation with an institutional asset manager in Germany to distribute products for institutional and semi-institutional clients, and that there is scope, based  on the preference of the investor, to deploy the strategy in various investment formats such as notes with or without a capital protection.

"We have already traded structured notes. We started with some investors seeking long term capital guaranteed products in the insurance segment," says Schuster.

Asset allocation
The index provides a global portfolio allocation and is allocated in a rule-based, prognosis-free and security-oriented manner with a 10% dynamic capital protection limit, with Stoxx as the independent calculation agent. The index allocation is made up of 65% pension and pension-related strategies and 25% equity and equity-related strategies, as well as 10% alternative risk premiums and thus market-neutral investments. The allocation is made by means of a risk-based dynamic adjustment of the total investment ratio in dependence of the risk budget. In the process of adjustment the equity as well as the bond weightings are carried out with a separate risk management system.

"Basically, [Veritas uses] a risk control framework which is similar to but not a CPPI structure," says Schuster. "There is a systematic approach where they can control the risk of the underlying indices so if the market is going down they get out of the assets and ensure that there is a maximum loss of 10% p.a. which is a different approach than most value at risk 99 or 99.5%."

The strategy also provides double protection on the downside and has been designed to deliver over a long term horizon "as investors will get a meaningful upside because they actually manage the downside". "On top of that for some investors especially on the semi-institutional side the structured note format ticks all the boxes in terms of regulatory requirements, capital guarantees and asset allocation," says Schuster.

According to Schuster, the product also offers a very interesting alternative to government bonds "which have no appeal at the moment as the yield is very low". "This index has the possibility to shift the allocation as the capital markets environment changes which is something appreciated by investors," says Schuster.

Target market
Following the first trades in the pension fund and insurance segment, SG is now in talks to some banks interested in deploying the strategy in their own accounts, including one that "actually says it would fit perfectly for a distribution product" as it is seeking something conservative and passive that would still provide some "decent upside", and have requested exclusivity in the distribution of the product, according to Wachsmann.

"We did not have [this] in mind when we first launched it [but] it is encouraging [to see] that the index has appeal," says Wachsmann. "We are most likely going to use our EMTN program to issue a structured note and the index will be white labelled. [However] because of Mifid 2 we have to be very careful when it comes to meeting all the requirements of both the distributor and SG internal."

The index for institutional investors is already live and is up now by 1% since inception (end of September), and the bank is working on another trade which will be announced shortly, according to Wachsmann.

"From the beginning our goal was to provide preferably all investors a professional protection against the negative effects of exceptional and sudden market fluctuations," says Dirk Rogowski (pictured), managing director Veritas Institutional. "We have managed this with Risk@Work impressively. For our investors, thanks to risk management, the crisis in 2007 and the following years were a non-event."

"The combination of the well-known Veritas competences Risk@Work and Börsenampel, coupled with SG's structuring capabilities, was a decisive factor for us to invest in a tailor-made concept tailored to our needs," says Michael Dreibrod, chief executive of Mylife life insurance. "The payout profiles that combine the index with a 100% capital guarantee, for example for investors who are regulated according to the Insurance Supervision Act, have a particular charm."

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