An Expert View: Lyxor’s Arnaud Llinas on The Value of True ETF Performance

June 12, 2014

Arnaud Llinas

Arnaud Llinas
Global Head of ETFs and Indexing
at Lyxor Asset Management

Lyxor has two areas of excellence: risk-based portfolio management with ERC index trackers representing €1 billion of assets, and fundamental indexing with the quality income ETF range representing €400 million of assets

Arnaud Llinas is global head of ETFs at Lyxor Asset Management. Taking the helm at the Paris-based ETF provider in 2012 he moved from the market making desk at Societe Generale and has subsequently turned the business around.

Llinas went against the grain when he made an aggressive push for the market to focus on the performance of ETFs, a move that has paid off. In March, Lyxor dominated European flows into ETFs and is on course to hit its goal of taking second spot in Europe.

In particular, it has been its smart beta ETFs that have shone and Lyxor is now strengthening its ETF offering, both through the launch of new products, and detailed research and analysis to increase the quality, efficiency and performance of its existing product range.

The European ETF market is increasingly competitive, but Lyxor has held onto 3rd place and its 11-12% market share. How has it done this?
To achieve this growth Lyxor's ETFs focus on performance and quality. We have implemented an ETF Quality Charter to ensure that every Lyxor ETF complies with the highest standards of performance, liquidity, risk control and transparency. While this growth is extremely pleasing, we see our efforts as part of a long term process. We will continue to work on the performance and quality of our offering, while building out investor's education on ETF products.

Institutional investors have so far focused on ETFs with high assets under management, as they tend to be the most liquid. But increasingly, investors are also looking at performance and the quality of management. If you have multiple ETFs tracking the same index, there may be a gap of several dozen basis points between the best and worst performer, which may in the end be higher than the applicable management fees. ETFs with the lowest management fees are not necessarily the best performers. Investors should choose carefully, focusing on the quality of management, tracking efficiency, liquidity and transparency. In this regard, competition is good for investors but only the best products will survive.

Why should investors choose Lyxor ETFs over other products?
Because Lyxor is committed to leading performance.

Lyxor's strategy is based on 3 pillars: an attentive service to investors, a continuously adapted range of products and a strong focus on performance and quality of its ETFs.

According to the ETF Efficiency Indicator, Lyxor ETFs are ranked #1 or #2 for true performance across 10 major equity indices over a one-year period (using daily data over a one-year period from December 28 2012 to December 31 2013). This is an impressive result, as while the ETF Market represents more than 500 indexes, it is characterised by a very high concentration of assets in a limited number of indices.

Essentially, investors need to be able to understand and answer three key questions when selecting an ETF. Does the ETF maximise outperformance? Does the ETF minimise the tracking error versus the index? Does the ETF minimise the trading cost (the bid/ask or liquidity spread)?

Lyxor's smart beta ETFs have been popular. Why is this and do you have any plans for more?
Lyxor is one of the pioneers of Smart Beta with well-known research-based methodologies. Lyxor benefits from deep insights and long track records. Total smart beta assets managed by Lyxor represent close to €7 billion.

In particular, Lyxor is known in the market for having developed the Equal Risk Contribution strategy (ERC) and the original ERC products, providing the highest level of risk diversification in a portfolio. Our ERC assets under management total €6.3 billion in both equities and fixed income, mostly through segregated accounts, dedicated funds and some open products. Lyxor has been running highly performing ERC portfolio mandates since early 2010 and manages ERC portfolios for European retirement and pension schemes. Lyxor also advises a prominent European public pension fund invested in ERC and, since 2013, has managed several billion euros of assets in risk based bond portfolios for financial institutions. We offer innovative smart beta investment strategies to pension funds and financial institutions, in both equities and fixed-income.



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