Source STOXX Europe 600 Optimised Banks ETF (EUR) | SC0U |
par
Alastair Kellett29/01/2013
Stratégie d’investissement
The fund provides access to many of the largest and most liquid bank stocks in Europe. Because of the narrow focus, it should be used as a tactical tool to express a view on European banks. Not only is the sector focus of the underlying index narrow in scope, but at the security level it is concentrated in the top names. And what the last few years has shown us is that the fortunes of large, highly leveraged financial institutions can change quickly in the face of shifting market sentiment. With this type of investment, caution is therefore required. That said, this particular index is constrained so that the weight on any individual stock is capped at 10%, so it is less top-heavy than some other ETFs tracking indices that focus on European financial services companies. Since the start of 2001, the STOXX Europe 600 Optimised Banks Index has been highly erratic, exhibiting annualised volatility of 27.1%, versus 16.6% for the wider MSCI Europe. During the same period it has shown correlation to the MSCI Europe Index of 88% and to the MSCI World of 85%. The Financials sector is already a significant weight within the broader European market, for example it makes up roughly 20% of the STOXX Europe 600 Index. So combining this fund with a European equity product may result in overweighting this particular sector. The fund does not intend to make any distributions, so it may not suit an investor seeking regular income.
Analyse fondamentale
In the aftermath of the global financial crisis, sovereign debt has become a staggering concern for Europe, and of particular concern for European banks that are large holders of it. Government-debt-to-GDP levels have gone above 100% in several eurozone countries, Ireland and Portugal have had to be bailed out by the European Union and the International Monetary Fund (IMF), and Greece has seen a full-blown restructuring of its debt, with haircuts of more than 50%. The lifelines being tossed to various countries are also a way to shore up the banks that have lent to them. The good news is that banks have generally recapitalised. In June 2011, the European Banking Authority (EBA) suggested that 27 banks had a combined capital shortfall of €76 billion to get them to Core Tier 1 ratios of 9%. In the industry group’s final report on the recapitalisation project, released in October 2012, it revealed that those banks have gone above and beyond the target, bolstering their balance sheets by a collective total of €116 billion. Indeed, Morningstar research has found that Core Tier 1 ratios of European banks have improved and compare favourably to their U.S. peers. But the banks’ ratios of common tangible equity to tangible assets, a more robust measure of balance sheet risk, have failed to show similar improvement, and in some cases have actually deteriorated since the end of 2010. On average the European banks are well below U.S. banks by this metric. With some way yet to go in shoring up capital cushions, the European banks—historically bid dividend payers—will likely offer low or no dividend payouts for the next few years, which could weigh heavily on their valuations. As could be expected, having been beset by crisis for much of the last five years, the performance of the STOXX Europe 600 Optimised Banks Index has been miserable. An amount invested at the start of 2001 would have cumulatively lost 41.9% of its value through December 2012. By comparison, the broader MSCI Europe Index has gained 9.4% over the same period. Between June 2007 and February 2009, the index suffered a peak-to-trough drawdown of more than 78%. The index is very top-heavy, dominated by the fortunes of Banco Santander, HSBC Holdings and, to a lesser extent, a handful of other top positions. Using the most recent closing price as of the time of this writing, shares of Banco Santander are trading at a 6.7% discount to what Morningstar’s equity research team reckons the company’s fair value is. Next largest position HSBC is trading at an 11.0% premium to Morningstar’s fair value estimate, and after that BNP Paribas and UBS are trading at respective discounts of 6.7% and 5.4% to Morningstar equity analysts’ fair value estimates.
Construction de l’indice
The STOXX Europe 600 Optimised Banks Index is weighted by free-float market capitalisation with a liquidity adjustment. It covers bank stocks from the following countries: Germany, Austria, Belgium, Denmark, Spain, Finland, France, Ireland, Italy, Luxembourg, Norway, the Netherlands, Portugal, United Kingdom, Sweden, and Switzerland. The index’s universe takes all the stocks contained within the broader STOXX Europe 600 Banks Index and excludes those from Greece, then removes the 30 least liquid and the 30 hardest to borrow securities, provided that there are at least 10 stocks remaining after this screen, and that the combined free-float market capitalisation of the excluded stocks does not exceed 20% of the sector’s total market capitalisation. The index is reviewed quarterly, with buffers around the entrance criteria in order to reduce the turnover. The weight on any individual stock in the index is presently capped at 10%, although that maximum could change if more securities are added to the index. Stock weights are also scaled down if they are above the stock’s average daily turnover for the previous three months. At the time of writing there were 36 names in the index and it’s fairly top-heavy. The top five names accounted for 42.3% of the total. The median constituent’s market cap was €8.6 billion. Top holdings were Banco Santander at 10.7%, HSBC Holdings at 10.6%, and BNP Paribas at 7.7%.
Construction du fonds
Although Source labels the replication method as “physical with swap overlay,” it is, as the rest of the market defines the term, synthetic. The ETF uses an unfunded swap to achieve the total return of the index, meaning that it uses investors’ cash to buy a substitute basket of securities, the performance of which is exchanged for the performance of the index. Source offers complete transparency on that substitute basket; at the time of writing it is made up almost entirely of European equities from a number of different industries but tilted heavily towards the financial services sector. Source is owned by Goldman Sachs, Bank of America, JP Morgan, Morgan Stanley, and Nomura, and it uses all of these entities as counterparties to the swaps in its ETFs (although not all five necessarily provide swaps at once). The use of multiple counterparties can diversify and thus mitigate counterparty risk for synthetic products. Source’s policy is to reset to zero the fund’s exposure to any counterparty when it reaches 0.2% of the fund’s net asset value at the end of any day, and if necessary to cap overall exposure to all counterparties at 4.5%. Under the terms of the swap, the counterparty agrees to provide the fund with exposure to the total return of the underlying index, net of any associated taxes, costs, or fees. The return from the swap assumes that all dividends paid by the underlying stocks are reinvested in the index. The fund does not pay out any dividend distributions. The fund has the Euro as its base currency and is domiciled in Ireland. At the time of writing it had assets of roughly €200 million. The investment manager of the fund is Assenagon Asset Management S.A., and the custodian is Northern Trust.
Frais
The fund’s total expense ratio (TER) is 0.30%, which is in line with other products offering similar exposure. According to the fund’s factsheet at the time of writing, there is no additional cost for the swap. Other costs potentially borne by the unitholder but not included in the TER include bid-ask spreads on the ETF and brokerage fees when buy and sell orders are placed for ETF shares.
Alternatives
To get exposure to European financial stocks, there are a few choices. These include Amundi ETF MSCI Europe Banks, ComStage ETF STOXX Europe 600 Banks, SPDR MSCI Europe Financials, db x-trackers STOXX Europe 600 Banks, Lyxor ETF STOXX Europe 600 Banks, EasyETF STOXX Europe 600 Banks, and iShares STOXX Europe 600 Banks. Of these, the Lyxor fund is the largest. The Amundi and ComStage products have the lowest TER, at 0.25% each.
