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Is Lyxor Turning The Corner?

Written by Rebecca Hampson

 –  November 16, 2012

European exchange-traded fund provider Lyxor has seen its business model lambasted over the last two years as investors turn their back on the European swap-based ETF model and as concerns have risen over the safety of the region’s banks.

Last year Lyxor lost its number two spot in the European ETF market and saw nearly $10 billion withdrawn by investors from its funds.

The ETF issuer, which is owned by French bank Société Générale, also suffered heavily from rising concerns over the safety of its parent company late last year.

US money market funds, previously a major supplier of funding to European banks and French banks in particular, cut their funding of European financials from over $100 billion to $7 billion in the second half of 2011 as concerns over the future of the eurozone rose dramatically.

Fears over the safety of Société Générale hit a peak in the autumn, with the bank forced to counter press speculation that it might fail.

Lyxor’s ETF market position wasn’t helped by comments from the CEO of rival BlackRock, who claimed last November that “if you buy a Lyxor product, you’re an unsecured creditor of SocGen”.

The French bank’s CEO responded angrily that “attempting to present Lyxor ETF’s investors as Société Générale’s unsecured creditors is a wrong and misleading assessment.”

But Lyxor’s ETF market share has suffered heavily, nevertheless, over the last two years.

According to data from Deutsche Bank, Lyxor’s share of European ETF assets dropped from 18.1 per cent to 13.6 percent during 2011, while market leader BlackRock’s share grew from 35.5 percent to 39.1 percent.

Deutsche Bank’s own ETF platform also saw its share of the market decline last year, from 17 percent to 15.4 percent, though its slower rate of decline meant it leapfrogged Lyxor into second place in the European ETF issuer rankings.

Lyxor’s European ETF market share has dropped further this year, to 11.9 percent, according to data from ETFGI, though the firm has stopped haemorrhaging assets in cash terms.

In a growing European ETF market Lyxor has managed to gain $300 million of net cash inflows in the first ten months of the year, with a particular improvement in the last few months.

This year Lyxor reorganised its asset management business, creating an ETF and indexing investment solutions unit in May. The firm says its aim is to enhance its overall ETF market and index offering. It is early to judge the success of this internal change, but Lyxor has seen positive ETF inflows in three of the last four months.

And parent bank Société Générale issued a new quality income index in May this year, reportedly to widespread client interest. The index includes between 25 and 75 global equities, which are selected according to their dividend yields and subject to an additional quantitative screening for profitability, leverage, liquidity and operating efficiency. The stocks are then equally weighted in the index.

Alain Dubois, chairman at Lyxor, believes that this index launch is well-timed as the ETF market is going in the direction of so-called “smart beta”.

Dubois says: “Institutions want smart beta in order to get a better risk-return proposition than classical, market-capitalisation-based indices, while still benefiting from the transparency and low costs of indices.”

The first ETF on the index was launched by Lyxor in September and has seen consecutive monthly inflows. September saw inflows of €227 million and October €301 million to the quality income ETF, according to data from Deutsche Bank.

Dubois added: “There are four specific criteria that are important to the high quality of an ETF. Liquidity, performance compared to the index, tracking error and transparency. We find that investors are now really focusing on these four elements when investing in ETFs. The capacity of ETF providers to associate their brand with these four qualities will be key to their development.”



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Europe Blog

Tuesday, November 20, 2012 17:02 (CET)

Posted By Paul Amery

Paul Amery

Forget structural risks in ETFs, it’s funds’ liquidity that is now near the top of regulators’ list of concerns

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