lyxor-weekly-brief-3-january-2017

THE WEEKLY BRIEF

03 January 2017

by LYXOR CROSS ASSET RESEARCH

CTAs Move Higher At The Turn of The Year

Philippe Ferreira Senior Cross Asset Strategist

Clément Chaulot Mutual Fund Analyst

Jeanne Asseraf-Bitton Global Head

On a regular basis the weekly brief is expanded with inputs from our team of mutual fund analysts. This week we focus on the performance of active mutual funds versus their benchmarks in 2016.

It would be an understatement to say that active investing has been challenged in 2016.

Political risks loomed large and the switch from deflation fears to reflation hopes in H2 led to sizeable trend reversals across the board. This took most investors by surprise.

Hedge funds underperformed global equity and bond indices in 2016, while active mutual funds failed to beat their benchmarks. A very small proportion of both European and US equity mutual funds outperformed their benchmarks in 2016 (see p.5). Active investors in the fixed income space also struggled. On a positive note, we find that Asian equity mutual funds delivered alpha. In particular, active funds focused on Japanese equities, which tend to be value-oriented, benefitted from the rotation from quality to value.

of Cross Asset Research

In 2017, active investing could experience a better environment provided that expectations for firmer economic activity are met. And we believe there is room for the new U.S. administration to extend the economic cycle. We expect the Fed to stay accommodative overall and both bond yields and energy prices to remain supportive for growth. However, if Trump’s reflation hopes get disappointed, markets will experience another reversal which will hurt active investors that turned more aggressive over the recent months.

With regards to recent hedge fund performance, the last two weeks of December were supportive and saw both CTAs and Global Macro managers delivering healthy returns. L/S Equity managers underperformed as the rebound in cyclical stocks paused.

Going forward, we believe there is room for U.S. L/S Equity managers to take advantage of higher stock dispersion in 2017. Meanwhile, higher U.S. corporate activity would foster Event-Driven funds. We are more conservative on European managers in the L/S Equity and Event Driven space. Finally, we recently reweighted CTAs. We believe that the environment for momentum investing should improve in 2017.

The poor performance of CTAs in Q4 came to a halt in December - We upgraded the strategy to slight overweight Performance of Lyxor indices (%) 10%

5%

Q4

2016 6% 0% 2% -5%

-2%

-6%

-10% Ev ent Driv en Broad Index

Global Macro Index

Fixed Income Broad Index

CTA Broad Index

L/S Equity L/S Equity Broad - Market Index Neutral

Global Macro Index

Fixed Income Broad Index

Ev ent Driv en Broad Index

L/S Equity L/S Equity Broad - Market Index Neutral

CTA Broad Index

As of December 27th. Source: Lyxor AM THIS DOCUMENT IS FOR THE EXCLUSIVE USE OF INVESTORS ACTING ON THEIR OWN ACCOUNT AND CATEGORISED EITHER AS “ELIGIBLE COUNTERPARTIES” OR “PROFESSIONAL CLIENTS” WITHIN THE MEANING OF MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE 2004/39/CE OR QUALIFIED PURCHASERS WITHIN THE MEANING OF RELEVANT U.S. SECURITIES LAW. SEE IMPORTANT DISCLAIMERS AT THE END OF THIS DOCUMENT

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THE WEEKLY BRIEF

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by LYXOR CROSS ASSET RESEARCH

HEDGE FUNDS AT A GLANCE Global Macro Outperformed in December

Hedge Fund Snapshot Last 2 weeks (13-27 Dec)

Dec*

Q4**

2016

Lyxor Hedge Fund Index

0.5%

1.3%

1.8%

-0.4%

CTA Broad Index

1.4%

1.7%

-5.2%

-3.7%

Event Driven Broad Index

0.4%

0.8%

0.0%

1.9%

Fixed Income Broad Index

0.5%

0.7%

1.7%

0.7%

L/S Equity Broad Index

-0.7%

-0.3%

-1.4%

-4.2%

Global Macro Index

1.6%

3.4%

8.6%

1.2%

MSCI World Index

0.2%

3.6%

6.2%

8.9%

Barclays Glob al Agg Bond Index

0.1%

-0.3%

-3.0%

3.6%

*Fro m 29 No vember to 27 December 2016 **Fro m 27 september to 27 December 2016

During the last two weeks of December, hedge funds delivered positive returns and outperformed both equity and bond benchmarks. For the full month of December, the Lyxor hedge fund index is up 1.3%.

Global Macro managers outperformed in December, on the back of the rebound in European equities and the depreciation of the EUR and GBP vs. USD. CTAs experienced a healthy rebound over the recent weeks, which contributed to reduce their negative performance in 2016.

L/S equity managers underperformed towards the end of December as market conditions turned less supportive and the rebound in cyclical stocks paused.

L/S EQUITY

Year-end break Last 2 weeks (13-27 Dec)

Dec

Q4

2016

L/S Equity Broad Index

-0.7%

-0.3%

-1.4%

-4.2%

Long Bias

-0.5%

0.9%

2.7%

4.0%

Market Neutral

0.5%

-1.0%

-4.8%

-9.5%

Variable Bias

-1.0%

-0.7%

-2.7%

-7.4%

Managers remain primarily exposed to cyclicals Net exposure to Equities, %NAV

Global equity markets eased off their relentless postTrump rally amidst low volumes and low volatility as the year-end period is usually less busy. Logically, long short equity managers have been less active and have maintained their exposures in a relatively stable manner.

European-focused managers successfully extracted alpha on their long portfolio thanks to supportive equity markets. Allocations to the consumer, healthcare and technology sectors were profitable. A quantitative manager outperformed thanks to its long positions in consumers and financials.

Communications Consumers, Cy clical Energy Financials Basic Materials Consumers, Non-cy clical US

Healthcare

Europe Technology

Asia Utilities Others* -15%

-10%

-5%

0%

5%

10%

15%

US-centric funds displayed mixed results. While some funds generated gains on the back of their short positions on cyclicals, long exposure to the latter proved painful for others as investors moved towards defensive stocks.

The EM-specialized fund was the worst performer due to detracting long positions in the consumer and financial sectors, especially in South Africa and Indonesia.

US, Europe and Asia refers to the regional focus of L/S Equity managers in our sample. *Others include indices, funds, diversified. As of December 20th. Source: Lyxor AM.

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CTAs

CTAs end 2016 on a positive note Last 2 weeks (13-27 Dec)

Dec

Q4

2016

CTA Broad Index

1.4%

1.7%

-5.2%

-3.7%

CTA Long Term

1.4%

1.8%

-5.6%

-3.7%

CTA Short Term

0.7%

0.8%

-0.1%

-5.3%

Long exposures to USD were rewarding FX Exposure by currency (vs. USD)

The strategy continued to head north during the last two weeks of December adding to an already positive month. The currency bucket was the leading contributor. Systems benefited from their long USD positioning as global currencies continued to fall versus the greenback.

Equities also led to profits with major contributions from the Japanese and European markets especially during the 3rd week of the month right before Christmas.

EUR Nov -16

GBP

Interestingly, the upward move in developed markets’ rates did not hurt CTAs’ performances. Indeed, after spending most of the year with an overall net long exposure, the recent switch to short duration enabled the strategy to perform well during the post-Trump election period. CTAs benefited from their allocations to Australian, German and U.S. rates.

Dec-16 AUD JPY CAD CHF

Other -45%

-35%

-25%

-15%

-5%

5%

15%

25%

Finally, the commodities bucket was the sole detractor, but with a limited impact.

th

As of December 20 . Equally weighted. Source: Lyxor AM

GLOBAL MACRO

Confirming the end-of-year recovery

Last 2 weeks (13-27 Dec) 1.6%

Global Macro Index

Dec

Q4

2016

3.4%

8.6%

1.2%

Global Macro also maintain long exposures to the USD FX Exposure by currency (vs. USD)

FX allocations continued to be a strong P&L driver, especially during the third week of December. Long USD vs. other developed market currencies took advantage of the FOMC’s statement and the expected rate hikes in 2017.

EUR

GBP Nov -16

CAD

The outcome was however the opposite on fixedincome and inflation exposures, where short Europe, UK and US bonds gave back some gains.

Dec-16

CHF JPY AUD Other -40%

-30%

-20%

-10%

0%

10%

20%

30%

Global Macro funds continued to gain traction and confirmed their end-of-year recovery. In particular, the gains generated towards the end of December allowed some managers to be back in positive territory for the full year 2016.

40%

Regional exposures in equities benefited to a few managers as European and Japanese markets advanced, unlike the S&P.

As December 20th. Equally weighted. Source: Bloomberg, Lyxor AM

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by LYXOR CROSS ASSET RESEARCH

EVENT DRIVEN

Closing 2016 on a positive note

Last 2 weeks (13-27 Dec)

Dec

Q4

2016

Event Driven Broad Index

0.4%

0.8%

0.0%

1.9%

Merger Arbitrage

0.4%

0.5%

-0.5%

3.1%

Special Situations

0.5%

1.6%

1.5%

0.5%

Merger Arbitrage funds benefitted from TDK’s proposed merger with InvenSense InvenSense Inc. share price, USD 13.0

+18%

12.5

12.0

11.0

16-Dec-16

19-Dec-16

22-Dec-16

Gains in special situations funds were driven by positions in consumer non cyclical, energy and technology sectors. They include Conagra Brands, Allergan and Athabasca Oil. Conagra shares rallied after the company reported better than expected quarterly profits. Allergan shares traded up on the back of the company’s announcement of the accretive acquisition of LifeCell, a producer of plastic surgery products. Meanwhile, Athabasca Oil announced a transformational acquisition of high quality thermal oil assets from Statoil.

In the M&A space, US healthcare giant Johnson & Johnson declared it had entered into exclusive negotiations to acquire the Swiss drugmaker Actelion.

The Aleren / Abbott deal was another winning trade as it won antitrust clearance from Chinese, Japanese and Brazilian regulators. Meanwhile, InvenSense shares rose 18% as TDK, a Japanese electronic parts maker, agreed to buy the supplier of sensors to Apple and other Smartphone makers. The deal values the company at about $1.3 bn, a 20% premium.

11.5

10.5 13-Dec-16

Event driven funds extended their gains in the second part of December and were up 0.8% for the full month.

25-Dec-16

Source: Bloomberg, Lyxor AM

L/S CREDIT ARBITRAGE Fixed Income Broad Index L/S Credit Arbitrage

Dec

All funds positive in 2016

Last 2 weeks (13-27 Dec) 0.5%

Q4

2016

0.7%

1.7%

0.7%

0.2%

0.7%

1.9%

5.1%

After a volatile year, Contingent Convertibles close the gap BofA Merrill Lynch CoCo Index, Option Adjusted Spread vs. Treasuries 650

600

550

L/S Credit funds on the platform managed to post some gains, being up roughly 20bp. After a rather volatile year, all Credit funds ended the year in positive territory. In particular our EM credit specialist closed the year up 22.5%, the best performer across all strategies.

500

450

400 Dec-15

The Fed decision to hike rates mid-December was largely anticipated and did not trigger a selloff in Credit. Over the last two weeks, both IG and HY markets were rather flat in the U.S and in Europe. In that dull environment, AT1 was one of the only outliers with the BofA ML CoCo Index tightening by 12bp.

Financials, and Cocos in particular, kept benefiting from a steeper yield curve. Positive developments related to Deutsche Bank’s settlement with the U.S. Department of Justice also contributed to their good performance.

Feb-16

Apr-16

Jun-16

Aug-16

Oct-16

th

As of December 27 . Source: Bloomberg, Lyxor AM

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THE WEEKLY BRIEF

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by LYXOR CROSS ASSET RESEARCH

MUTUAL FUNDS AT A GLANCE 2016: A tough year for active investing (data up to November 2016) Active investing in 2016 was rewarding in some asset classes such as Japanese equities. But this was rather an exception.

Number of Funds in the Peer group

Peer Group

Japan Large-Cap Equity

285

Asia-Pacific ex-Japan Equity

219

USD Diversified Bond

172

Global Emerging Markets Bond

229

EUR High Yield Bond

127

Europe ex-UK Large-Cap Equity UK Large-Cap Blend Equity

150 220

Global Emerging Markets Equity

627

Global Emerging Markets Bond Local Currency Global Emerging Markets Corporate Bond Eurozone Large-Cap Equity EUR Diversified Bond USD High Yield Bond US Large-Cap Blend Equity Europe Large-Cap Blend Equity Global Large-Cap Blend Equity

138 78 452 658 94 538 687 1825

Percentage of active mutual funds beating the ETF (%) 2016 2014 2015 (as of Nov.) 34 26 57

ETF

Lyxor Japan (TOPIX) Lyxor MSCI Asia-Pacific Ex Japan

52

66

57

31

28

52

5

14

46

51

82

44

46 43

79 63

40 40

56

60

40

20

36

35

iShares $ EM Corp Bond

50

31

33

Lyxor MSCI EMU iShares € Aggregate Bond iShares $ High Yield Corp Bond S&P 500 Lyxor Lyxor MSCI Europe Lyxor MSCI World

26 26 27 22 27 21

58 26 64 15 72 33

29 26 24 23 22 22

iShares US Aggregate Bond iShares JP Morgan $ EM Bond iShares € High Yield Corp Bond iShares MSCI Europe ex-UK SPDR® FTSE UK All Share Lyxor MSCI Emerging Markets iShares EM Local Govt Bond USD

Data for 2016 as of November (11 months). Source: Morningstar, Lyxor AM

Most pan-European equity mutual funds underperformed the MSCI Europe in 2016 % of active funds outperforming their benchmark on average (12m rolling performance) 100 90

Active mutual funds outperform ETFs (12m rolling)

Percentile Rank

80 70

50 40

30 Active mutual funds underperform ETFs

10 0 Jan-15

May -15

Sep-15

Jan-16

May -16

Sep-16

Most pan-European equity managers had trouble navigating the strong and frequent style rotations.

They particularly suffered when value stocks rebounded. This market movement gained pace when economic data bottomed out in August 2016 and accelerated after the election of Donald Trump to the U.S. presidency. In 2016, only 22% of Europe LargeCap Equity managers delivered returns above the benchmark, compared to 72% in 2015.

In the U.S. High Yield credit space, performance was strongly driven by volatile energy prices. The energy sector was strongly hurt in H2-15 and the beginning of 2016 on oil price concerns. At that time, most active managers benefitted from their defensive positioning through their low energy exposure. Yet, the bottoming out of oil prices in early 2016 and the associated rebound of the energy sector in the credit space caught most active managers by surprise. As a result, only 24% of active managers in the U.S. High Yield segment outperformed the ETF in 2016, compared to 64% in 2015.

In contrast, most Japan equity managers benefitted from the rotation from quality to value stocks that took place in H2-2016. The active management industry performed well in this market segment. Actually, the equity fund offering in Japan tends to be more value-oriented. 57% of Japan equity managers outperformed the ETF in 2016, compared to 26% in 2015.

60

20

Most active managers struggled to deliver alpha last year. Looking at 16 asset classes, there are only 3 of them where active investing outperformed passive investing in 2016. The last year has been especially complicated for European Equity managers and U.S. High Yield Credit funds. In both cases, active investors proved unable to repeat the good alpha generation they achieved in 2015.

Jan-17

There are 687 active mutual funds in this peer group. Data as of November 2016.

Source: Morningstar, Lyxor AM

Finally, US fixed income managers have also managed to outperform their benchmark. They benefitted from the rise in bond yields in H2-16, especially in the U.S. Most managers tended to be underweight duration, which detracted a lot during the beginning of the year, but which proved helpful when bond yields started to rise. Overall, 52% of USD Diversified bond managers outperformed the ETF in 2016, compared to 28% in 2015.

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METHODOLOGICAL APPENDIX The information contained in this report on the performance and positioning of hedge funds is based on proprietary data from our Managed Account Platform. The universe of underlying funds is relatively stable, though it evolves according to fund openings and fund closures. th

Lyxor Managed Account Platform: breakdown of assets under management by strategy as of November 30 , 2016

Multistrategy 4%

L/S Credit & Fixed Income Arb. 3%

Global Macro 26%

L/S Equity 13%

Ev ent Driv en & Risk Arb. 21%

-

USD 8.4 billion of assets under management Replicating approximately USD 220 billion of AUM

CTAs 33%

Lyxor Hedge Fund Indices

Based on the complete range of funds available on the Lyxor Managed Account Platform, a universe of funds eligible for inclusion in the indices is defined on a monthly basis taking into account the following elements: -

Investability threshold: to be included in any index, the managed account must have at least $3 million of AuM.

-

Capacity constraints: all index components must possess adequate capacity to allow for smooth index replication in the context of a regular increase in investments.

-

Index construction: for each index, the relative weightings of the component funds are computed on an asset-weighted basis as adjusted by the relevant capacity factors.

-

Each Lyxor Hedge Fund Index is reviewed and rebalanced on a monthly basis.

-

The Index construction methodology has been designed to mitigate well-known measurement biases.

Inclusions and exclusions of new Hedge Funds do not impact the historical index track record.

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DISCLAIMER This material has been prepared solely for informational purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell any security or financial instrument, or to participate in any investment strategy. This material does not purport to summarize or contain all of the provisions that would be set forth in any offering memorandum. Any purchase or sale of any securities may be made only pursuant to a final offering memorandum. No advisory relationship is created by the receipt of this material. This material should not be construed as legal, business or tax advice.

This material has not been prepared in regard to specific investment objectives, financial situations, or the particular needs of any specific entity or person. Investors should make their own appraisal of the risks and should seek their own financial advice regarding the appropriateness of investing in any securities or financial instrument or participating in any investment strategy.

Past performance is not indicative of future results, and it is impossible to predict whether the value of any fund or index will rise or fall over time.

While the information in this material has been obtained from sources deemed reliable, neither Société Générale (“SG”), Lyxor Asset Management S.A.S. (“Lyxor AM”), SG Americas Securities LLC (“SGAS”), nor their affiliates guarantee its accuracy, timeliness or completeness. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. SG, Lyxor AM, SGAS and their affiliates assume no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from an investment in any security or financial instrument described herein or in any other security, or from the implementation of any investment strategy. Lyxor AM and its affiliates may from time to time deal in, profit from the trading of, hold, have positions in, or act as market-makers, advisers, brokers or otherwise in relation to the securities and financial instruments described herein. Service marks appearing herein are the exclusive property of SG and its affiliates, as the case may be.

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by LYXOR CROSS ASSET RESEARCH NOTICE TO HONG KONG INVESTORS: This document is distributed in Hong Kong by SG Securities (HK) Limited and Société Générale Hong Kong Branch, which is regulated by the Securities and Futures Commission and Hong Kong Monetary Authority respectively. The information contained in this document is only directed to recipients who are professional investors as defined under the Securities and Futures Ordinance, Part III. NOTICE TO JAPANESE INVESTORS: This document is distributed in Japan by Société Générale Securities (North Pacific) Ltd., Tokyo Branch, which is regulated by the Financial Services Agency of Japan. This document is intended only for the Professional Investors as defined by the Financial Instruments and Exchange Law in Japan and only for those people to whom it is sent directly by Société Générale Securities (North Pacific) Ltd., Tokyo Branch, and under no circumstances should it be forwarded to any third party.

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