The bank for a changing world

Defensive strategies

Why defensive strategies ?​

Benefits of investing in defensive strategies :

  • Leverage on sources of yield not naturally available with low risk.
  • Mitigate the impact of market volatility.
  • Diversify portfolios while controlling risks and capital costs.
  • Implement fully transparent solutions.
  • Optimise return on Allocated Capital (e.g. regulatory capital, economic capital and rating agency).

Typical investment process​

See below how an equity investment process can be built to transform a pure directional risk into a yield-orientated investment.

In equities for example, a core portfolio of stocks selected based on fundamentals is complemented by the sale  of short-dated call options (enhancing the yield and reducing the volatility) and by the purchase of long-dated  put options aiming to improve the risk/return ratio compared to a direct investment in the stock strategy.

Investment Yield for Insurers​

  • Fixed income remains the primary driver of yield for insurance companies but as traditional strategies have generated declining returns in the low-yield environment, insurers face a difficult situation to help match  guarantees on back-books or policyholders’ expectations.
  • Insurance companies have been spurred to search for new investment opportunities, including alternative asset classes such as Long/Short investments. Yet they are sometimes wary of adding equity, lower rated  corporate bonds or alternatives to their portfolio due to the high capital  charges under Solvency II (SCR market ranging from 22.5% of a BB 5-year  bond, 39% for equity and 49% for alternative assets).
  • Moreover, these “performing” asset classes exhibit substantial volatility and drawdowns, that can lead to impairment (under IFRS or local GAAP).
  • Volatility, in the full mark-to-market framework of Solvency II, can lead as well to uncomfortable variations of the SCR ratio by weighing on the available own funds.

Insurers facing both economic challenge and capital constraints ​

Source: Spence Johnson, “Deeper Perspectives” 2017

Source: Deloitte, Capital management in insurance survey2015

Capital-efficient solutions of most asset classes​

Our Solutions​

THEAM Quant – Equity Factor Defensive Funds​

A diversified investment into the main factors driving equity returns with a protection overlay​

The funds are a risk-balanced portfolios composed of four core equity factors – momentum, quality, low volatility and value – aiming to provide capital growth by being exposed to a basket of European equities and by implementing a systematic options strategy which aims at reducing risk by minimizing volatility.

This strategy is available in European and US versions.

THEAM Quant – Equity Income Defensive Fund​

A solvency-friendly equity strategy ​

The objective of the fund is to provide income and capital growth (i) by being exposed to a basket of high-dividend equities and (ii) by implementing a systematic options strategy which aims at generating additional income and reducing risk by minimizing volatility in the fund.

This strategy is available in European and US versions.

THEAM Quant – Dynamic Volatility Carry​

A defensive strategy designed to react positively when faced with major market drop episodes​

The THEAM Quant – Dynamic Volatility Carry fund seeks to provide long volatility exposure during pronounced market stress scenarios, while exhibiting positive carry. The Fund is for qualified investors seeking an agile and efficient defensive solution that does not drag on portfolio returns. The Fund strategy is implemented systematically, and offers and optimized way of getting long exposure to VIX futures, while keeping a positive carry cost on the long run.

      Investments in the aforementioned strategies are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Asset Management Holding, registered with the Paris Registry of Commerce and Companies under number 682 001 904 as a Limited Company with share capital of 23 041 936 euros. Registered office: 1 Boulevard Haussmann, 75009 Paris. Postal address: TSA 47000/75318 PARIS CEDEX 09