Interview

Some investors still don´t know Ossiam. Could you please explain briefly who you are – and what your benefits are in comparison to your competitors?
We are an affiliate of Natixis Global Asset Management, one of the 15 largest asset managers in the world with € 543.9 billion in assets under management, as of 31 December 2011. Ossiam is the first ETF company in Europe to focus on the development of Smart Beta ETF (or alternatively weighted ETF). Ossiam’s professionals have worked in the ETF, asset management and investment banking industries, providing Ossiam with a broad area of expertise which includes investment management, ETF structuring, quantitative research and financial analysis.

Why was Ossiam founded?
Efficient indexing is at the core of our business model. Ossiam was created in response to the growing need among institutional investors for enhanced beta exposure and risk hedging. Q2 2011, we entered the European market with ETFs based on two innovative investment strategies offering an alternative to traditional equity market cap-weighted indices. The minimum variance strategy, for example, addresses very specific needs, be it reducing volatility or achieving better diversification. For its forthcoming launches Ossiam will continue to provide investors with smart and innovative investments strategies.

The first quarter of 2012 is over now. How is your resume so far? What are your most successful products until now?
We have launched our first Smart Beta ETF at the end of Q2 2011. Our most successful ETF has been OSSIAM ETF US Minimum Variance NR which has collected more than 150 million Euros across two shares classes (OSX2 and OSX1). Feedbacks from investors are very positive. The strategy is a long-only equity investment that remains simple to understand and access. The Strategy aims to provide investors exposure to a well-diversified portfolio of US equities while moderating the drawdowns and reducing the portfolio volatility (at least 30% lower volatility than the S&P 500 and similar reduction of the drawdowns). We have also developed ETF based on Europe and Emerging Markets Minimum Variance, which are listed on Xetra. While OSSIAM ETF Emerging Markets NR (OSX9) is still in its early days we believe this ETF will attract new inflows pretty soon.

You have specialized on Smart Beta approaches like “equal weight” and “minimum variance”. Where do you see the benefits in comparison to “market cap weighted” indices?
A recent survey of European institutional investors by consultancy bfinance, showed that one third expects to devote over ten percent of their portfolio to alternative index investments, quoting risk reduction and outperformance relative to the market cap indices as the main reason. Those 2 reasons are the main benefits of Smart beta strategies on which we have launched ETF:  increase diversification for Equal Weight, and a combination of diversification and integrated risk management process for Minimum Variance.

The Equal Weight approach to broad equity investing is one of the most successful developments in alternative equity indexing. Giving the same weight to all stocks in the investment universe is an obvious strategy and as such a very straight-forward benchmark. Boosted by the expansion of ETFs generally – worldwide the ETF Equal Weight product family already counted more than USD 3.9 bln Asset Under Management as of April 30th, 2012.

The Minimum Variance approach is more recent. By construction, the minimum variance portfolio has exposure to low-volatility stocks that historically were shown to perform much better than predicted by the Capital Asset Pricing Model.

In mid-March Ossiam launched the “Emerging Markets Minimum Variance ETF”? How is the strategy built behind this minimum variance ETF?
The OSSIAM ETF Emerging Markets Minimum Variance NR tracks a total return index (the Ossiam Emerging Markets Minimum Variance NR Index) designed by Ossiam, with S&P as independent calculation agent, to capture the equity market performance of emerging markets while mitigating risk.

The index includes a selection of stocks from a global Emerging Markets Index: S&P IFCI NR (Bloomberg IDRICOND Index) where volatility is among the lowest and historical correlations among the stocks are sufficiently low to reduce risk. Constituents of the index are selected by Ossiam on a half year basis and weighted according to a multi-stage procedure which is transposed into the index methodology. The first two stages consist in applying a capacity filter at 85% of the market cap of the S&P IFCI and a liquidity filter. The stocks which pass screening for size and liquidity will then be weighted according to an optimization procedure using an estimate of the variance/covariance matrix of the stocks. This process seeks to minimize the expected variance of the portfolio, making no assumption about future returns. The optimization procedure incorporates a set of constraints managing the range of possible exposure to single stocks (max weight per stock 3.5%), industrial sectors and countries (max weight 20% per sector and per country), and keeping the portfolio 100% invested while no shorts are allowed. An additional dispersion constraint is imposed and guarantees that a sufficient number of stocks are included in the selection, guaranteeing a strong diversification of the portfolio. Volatility for the Ossiam index has been on average 28% lower than its market-cap universe of investment (S&P IFCI) last year.  Drawdowns have also been significantly reduced.

In your ETFs you chose the synthetic replication method. Could you please briefly explain your guidelines and rules regarding replication?
Our ETF using swaps (OTC derivatives) are invested in a portfolio of equities (substitute basket) as well as an index swap with a swap counterparty (investment bank). The return of the substitute basket is offset against the reference portfolio return on the index swap. The substitute basket is chosen as to minimize costs and achieve tax efficiency, while complying with UCITS 4 legal requirements. The set-up for ETF is as follows:

The counterparties to the swap are first class financial institutions that specialize in this type of transaction. A Fund may also enters into multiple swap agreements with multiple swap counterparties with the same characteristics as previously described with the aim of ensuring minimal deviation between the fund‘s return and the performance of the index. Unlike most ETF providers in Europe, Ossiam works within an open architecture. Swap counterparties for Ossiam funds are selected according to a beauty contest process.

As part of Ossiam’s transparent process and commitment in terms of transparency, the composition of the substitute basket as well as the swaps weights and counterparties exposures are published on our website www.ossiam.com. Ossiam is also managing one ETF using physical replication with no securities lending.

Do we see some more product launches of Ossiam ETFs in 2012?
We have launched this year 2 ETFs on Minimum Variance (UK and Emerging Equity markets) and we will launch more products.

What are in your opinion the major challenges for the European ETF industry in the next years?
There are many challenges. In the short term, the first that comes into my mind is: continue to rebuild trust in the product after the regulatory and journalistic debate that we have seen. Second challenge would be investors’ education (there is a lot of confusion when you speak to investors around the differences between Exchange Traded Products) – 3rd would be: a better level of transparency on securities/lending used by most of the players implementing physical replication – 4th: get better level of transparency on secondary market (trades reporting).

Which was your first ETF you invested in and when did you buy it?
The first ETF I bought was an ETF tracking the performance of the Euro Stoxx 50 back in 2001.

Which ETF is currently your favorite one?
I am biased here – being more a buy and hold type of investor – I would prefer the Minimum Variance ETF.

Thank you!