Societe Generale Corporate & Investment Banking (CIB) has licensed the Solactive Stable Income Europe Index, a new gauge launched today by German index engineer Solactive, which tracks the performance of 50 European shares selected on the basis of a screening strategy blending together free cash flow yield, dividend yield and low volatility characteristics.

The French bank will deploy the new index as an underlying asset for structured solutions, leveraging on the bank's solid expertise in this area, according to Foued Jaziri (pictured), global head of Societe Generale Index (SGI).

"The new index enlarges the bank's existing smart-beta index range based on fundamental analysis, and is designed for both retail and institutional clients based in Europe," said Jaziri, adding that the bank has a "strong conviction that smart beta indices will increase their weight in the structured products market as they form an attractive diversification tool for investors".

"Most of our clients position smart-beta as an efficient alterative to standard mutual funds," said Jaziri. "The index is particularly well adapted for the structuring of capital protected products."

Daniel Fermon, head of thematic research at Societe Generale CIB, said that "in a constantly changing economic environment, investing in companies which offer high free cash flow visibility and robustness is a compelling strategy".

"We expect this long-term investment thematic to remain key for investors," said Fermon.

The Solactive Stable Income Europe Index targets investors interested in a smart beta concept but with more emphasis on the role played by free cash flow yield, aside from tilting composition towards high dividend and low volatility shares.

Specifically, free cash flows are typically used to provide an insight into a company's financial health. Being closely related to earnings, they can give investors an indication of future shareholder dividends, the company's reinvestments plans and its ability to fulfil financial obligations.

As such, the Solactive Stable Income Europe Index applies at first a free cash flow yield filter which selects the top performing shares in each sector. Companies are then assigned a composite score which combines low volatility and high dividend yield criteria. Only the top 50 companies with the highest score are then chosen as index components.

'Nowadays many indices and financial products are constructed around high dividend yield and low volatility concepts,' said Steffen Scheuble, CEO of Solactive. 'The Solactive Stable Income Europe adds another element into the mix by screening shares also on free cash flow yield, therefore providing an additional filter to evaluate companies' resilience.'

The Solactive Stable Income Europe Index is calculated as a price return index denominated in EUR. Constituents must have a free float market capitalization of at least €200m and a 120-day ADV of at least €1m.

The three most represented sectors in the index are Finance, Industrials and Technology with a composite weight of 76% as of the last rebalancing day. The three countries with the highest weight are France, Germany and Switzerland reaching 66% of the index total. The index is weighted equally and rebalanced quarterly.

SRP data shows that sales of products linked to smart beta indices have consistently outperformed the broader market over the past three years, however, volumes remain far lower than those seen in benchmark-based structures, making up just over 2.6% of the market in 2016, as compared with over 24% for traditional cap weighted indexes.

SRP data also shows that there are 542 alternatively-weighted index underlyings used across markets compared with 427 cap weighted indexes. The top five smart beta index underlyings accounted for less than half of the total smart beta sales volume over the last three years, whereas the top five benchmarks generated over 65% of sales in their respective category.

Smart beta strategies have continued to propel sales in the ETF segment with a number of structured products also moving to cash in on the back of a turbulent equity environment. Assets invested in smart beta equity ETFs/ETPs listed globally reached a new record high US$559.78bn at the end of February surpassing the previous record of US$534bn at the end of January 2017.

Stoxx is at the forefront of developments around smart beta strategies for the structured products market with its Stoxx Select and Stoxx Diversification Select index families that were introduced in October 2015 with a combination of investment themes such as low carbon and ESG with low volatility, high dividend and low correlation screens to create hybrid index concepts to set an attractive pricing framework "especially for structured products".

The Eurostoxx Select Dividend 30 index was used as underlying in 44 structured products across 10 jurisdictions this year to date, according to SRP data, while the Stoxx Europe Select Dividend 30 made its debut on the SRP database in November when it was used by Deutsche Bank's Belgium branch to underlie the 10-year Goldman Sachs International (UK) Europe Callable 2026.

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