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March05 Ss SG

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11 views2 pages

March05 Ss SG

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leepinpin1918
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SGSPMar.

qxd 14/03/2005 16:12 Page 26

The dynamic portfolio


insurance alternative
Olivier Nolland from SG Asset Management Alternative Investments explains
one way of making the most of returns and keeping the capital

ociété Générale Asset Management Alternative Investments (SG funds and derivatives instruments. The non-risky assets are generally
S AM AI) has developed a unique technique of managing all types
of assets in order to offer dedicated products with specific
money-market instruments.
The exposure to risk depends on the volatility, the liquidity, the returns
constraints.This technique is called “dynamic portfolio insurance”. and the result of the stress test performed on the risky asset. Other factors
Today, two types of structured products offering capital protection are that are taken into account include the correlation with a benchmark and
available on the market: option-based portfolio insurance (OBPI) and the current term structure of interest rate.
constant proportion portfolio insurance (CPPI).For these formula-driven The allocation between the two asset classes (risky and non-risky) is
payoff products, current market conditions are not optimal to maximise actively and dynamically managed in order to maximise the expected
the clients return: return of the fund within the constraints imposed by
OBPI: Equity volatility is at a historically low level the guarantee.As such, exposure to the risky asset is
today. If it makes sense for investors to buy volatility increased on the upside and reduced on the down-
through OBPI products, the absolute low level of side, making way for an increase in investment of the
interest rates deteriorates the final indexation to risky non-risky asset. This technology allows the asset
assets. manager to take independent decisions on the opti-
CPPI: As with OBPI products, all the structuring mal multiplier to apply to the asset allocation between
parameters are fixed at the launch date. Given that risky and non-risky asset and the composition of the
CPPI products follow a systematic management risk basket itself.
process, it is only the historical volatility that will be
charged to the client. Nevertheless, for any sharp Variable multiplier
increase in volatility until maturity,all the advantages Both quantitative and qualitative filters are used to
of the tactical allocation between the risky and the determine the asset allocation multiplier.
non-risky assets will be lost. Quantitative filters are mainly composed of tailor-
In today’s low interest rate environment, the secret of performance for made volatility monitoring tools,including implicit and historical volatil-
capital-guaranteed structured products thus lies in the quality of both the ity, and the determination of adequate ranges of adjustment of the
structuring technique and the underlyings.To answer these challenges,SG multiplier in order to reduce structuring costs. Qualitative filters include
AM AI has developed dynamic portfolio insurance (DPI), an evolution the manager’s forecast on the risk/return profile of the risky asset, which
of CPPI technology. determines the optimal multiplier and is backed up by a management
The DPI strategy is a cushion management technique that quantifies committee for each underlying asset.
the level of risk borne by the investment in the risky asset. It is struc- A high multiplier enables the investor to benefit from market growth,
tured as a guaranteed fund or note composed of both risky and non- but its adjustment remains expensive. A low multiplier will induce the
risky assets.The risky assets could be equities,bonds,mutual funds,hedge opposite effect. The multiplier determination policy consists of under-

In today’s low interest rate environment, the secret of performance for


capital-guaranteed structured products lies in the quality of both the
structuring technique and the underlyings
SGSPMar.qxd 14/03/2005 16:12 Page 27

Sponsored statement Société Générale Asset Management

weighting during high volatility periods and vice versa.Various volatility- Active and dynamic management of the two assets
related variables are used to adjust the multiplier,such as current,implicit,
and historical volatility.The conclusions reached following the analysis of
volatility can be amplified or minimised depending on macro-economic
Level of
conditions. the
Cushion Cushion
*
At SG AM AI, the maximum multiplier is determined by the result of guarantee Multiplier

the stress test performed on the risky asset. The optimum multiplier Risky asset

depends on the return and volatility of the risky asset and also on the inter- NAV
Floor
est rates level.The adjustment of this multiplier depends on the risk aver-
sion bound to the profile of the guaranteed product.

Active allocation
Non-risky asset
DPI methodology allows us not to have a static portfolio from launch
date to maturity. When a fund underperforms the industry, the asset
manager has the opportunity to substitute the non-performing fund by
a better performing fund. Definitions
The added value of the DPI technique lies in 4 points: NAV: Net asset value of the product
● optimising the multiplier according to market expectations; Floor: The minimum present value of the guaranteed NAV that is sufficient
● adapting the multiplier to the intrinsic quality of the underlying; to provide the guaranteed capital at maturity
● active allocation among the components of the risky asset; and Cushion: NAV floor
● offering structured products when options on specific type of under- Multiplier: Leverage applied to the cushion that determines exposure to
lying are nonexistent. the risky asset. The multiplier is adapted to the return, the volatility of the
The aim of variable parameters in the DPI process is to permanently underlying and the risk free rate.
optimise the management parameters following specific risk department Risky asset exposure (%): (Multiplier X cushion)/NAV
constraints: the more the liquidity of the underly improves, or the level of
maximum drawdown decreases, the more the risk department increases
the maximum and optimal multiplier.The maximum and optimal multi- the performances of 100 American companies selected for their regular
plier can be reviewed on a monthly basis. and high dividends, while securing 100% of the initial capital at maturity.
Last,but not the least,is the minimisation of the selling cost.As there are High Dividend Target enables the investor to combine capital gains with
no options and only liquid assets (as long as we respect the fund notice), regular income via an annual coupon.
there is no extra cost, and prices are transparent for the client. SG AM AI has just completed the launch of Akoya, a six-year invest-
The search for absolute return has led to selection both from the emerg- ment (a French guaranteed FCP approved by the AMF) that makes the
ing market and hedge funds universe.In that sense,SG AM AI has become most of the two main equity investment strategies (equity value and equity
a sizeable provider of guaranteed products on these asset classes. Despite growth fund) by combining them efficiently into a single model.With a
the attractive return such assets offer, high indexation could only be diversified basket of funds optimised over its lifetime,Akoya associates the
achieved through CPPI and DPI techniques. capacity of value funds to cushion market decline with the potential for
For example, SG AM AI has designed ADF Dynamic 2010 to benefit rebound and appreciation of growth funds, while securing 100% of the
from the high returns of the hedge funds industry.This EMTN,leveraged initial net capital at maturity. Akoya relies on an exclusive technique of
on SGAM AI fund of hedge funds ADF, seeks to equal or outperform its funds analysis.The initial allocation comprises 11 funds chosen for their
underlying asset while offering a guarantee of capital at maturity performance potential and risk/return profile.
SG AM AI has also designed High Dividend Target to be especially By associating growth and value strategies, Akoya seeks to optimise all
adapted to current market conditions. It allows the client to benefit from market and business cycles.Investors,therefore,benefit in each market phase
from the specific advantages and outperformance of each strategy. ●
Multiplier

Multiplier level used by the fund manager


Contact:
Multiplier Multiplier Olivier Nolland. Director, Head of Sales, SG AM Alternative Investments –
M–0 Optimum Maximum
Structured Asset Management
t: +33 1 56 37 17 57
Multiplier
f: +33 1 56 37 86 65
e: [email protected]

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