Axa Investment Managers (Axa IM) has come out with a novel structure to make the most of the current demand for knockout and early redemption strategies among French investors. The French life insurance firm has launched the Conviction Autocalls Fund (CAF), a new structured solution that seeks to 'offer the benefits of a diversified portfolio of autocalls' actively managed by Axa.

The product which has been approved by the French regulator (the Autorité des marchés financiers -AMF) is made of a portfolio of autocalls in the form of derivatives (futures instruments) as opposed to actual autocall notes, "which means that the credit risk of the manufacturer which is embedded in every single autocall note is fully removed here", according to Lorraine Zafrani (pictured), head of multi asset client solutions (Macs) portfolio management, AXA Investment Managers.

"The new fund can also address the issues investors usually face with autocall notes (debt securities) around entry/exit points, one underlying, a coupon target and a risk linked to the level of one single barrier of capital protection," said Zafrani, adding that the firm applies a discretionary management approach based on a qualitative and quantitative decision making process, with the aim to reach a performance objective of Eonia capitalized +4% for the retail share class. "[The fund provides] a diversified portfolio of autocall derivatives having each customised characteristics relating to the underlying (not only Eurostoxx 50 but for example European sector indices, etc...), maturity, coupon target, barriers, and entry/exit points."

The fund, which is also eligible to the French tax friendly equity savings plan (Plan d'Epargne en Actions -PEA), is open-ended and does not require to monitor entry points, nor to seek opportunities to reinvest his capital. The fund is exposed to derivatives whose valuation depends on the level of underlying around certain dates of observation. From an innovation standpoint, this product is "the very first one in the French market" to offer this approach of derivative portfolios of autocalls, in an Undertakings for Collective Investment in Transferable Securities (Ucits) fund format with a daily liquidity for subscriptions and redemptions and discretionary managed, according to Zafrani.

"We do think this brand new product is a more efficient way to provide access to investors to the autocall market without bearing the issuer credit risk," said Zafrani. "French investors have a clear appetite for autocalls due to their appealing risk return profile, and we saw an opportunity to leverage our fund management capabilities within a solution that would invest in autocalls in a very different way to offer a market risk diversification."

The active management provided by Axa's team secures the follow-up of investment opportunities (reinvestment in case of early recall, reallocation or expiry of positions), as well as the management of any profit taking / reductions of positions (via the sale of autocalls before they expire). The autocalls are integrated into the portfolio according to their level of risk and their impact on the expected average gain, the risk global and portfolio diversification. Exposure to European equity markets is thus variable in time, and therefore, the fund may not be exposed to autocalls over very short periods, according to Zafrani.

"We are working very closely with our macro research team and our equity analysts to capitalise on the active management element and the quantitative analysis expertise of Axa IM," she said, adding that this give the fund managers more reactivity when market conditions are changing to deploy their market views into investments in new or existing autocalls. "We do believe our solution also adds value for the end client as well as the distributor in the sense that they do not have to spend time to look for new issues once an autocall note early terminates or matures. Moreover we clearly display a performance objective, which aligns our investment target with the way autocall notes are usually pushed by the networks."

Most of the autocalls sold in France are linked to the Eurostoxx 50 index, but because of its current high level investors may question its suitability as an entry point for a single Autocall, according to Zafrani. "We think the timing of our solution is right as its various sources of diversification provide a more defensive approach compared to a single-index autocall," said Zafrani.

Axa has marketed 80 structured products in France over the last couple of years of which 15 were knockout structures featuring the Eurostoxx50 index, according to SRP data. Since January 2017, over 1,100 autocalls have been brought to market in France with Societe Generale (252 products), BNP Paribas (175) and Credit Agricole (58) as the main providers. There are 1,670 live knockout structures in the French market.

Click in the link to see the product brochure (in French).

This product will be available shortly on the French database.

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