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Blog Posts — June 24, 2019

Q&A: Credit Suisse’s Froehlich on Multi-Premia Investing

Last August, Credit Suisse Asset Management (Switzerland) Ltd. launched the first index fund tracking the EURO STOXX® Multi Premia Index, a multi-factor strategy based on cutting-edge research. 

The index integrates the academic research-based Multi Premia® methodology developed by Finreon, a spin-off from University of St. Gallen in Switzerland. The strategy is exposed to seven distinctive sources of equity risk and returns: value, reversal, low risk, residual momentum, momentum, quality and size, on the broad and liquid universe of Eurozone equities that is the EURO STOXX® Index

Pulse Online caught up with Stefan Froehlich, Head of Index Portfolio Management at Credit Suisse Asset Management.

Stefan, what was the background behind the launch of the CSIF (Lux) Equity EURO STOXX Multi Premia fund? 

We came from the successful launch in 2016 of the CSIF (CH) Equity SPI Multi Premia Blue fund in Switzerland, which invests in Swiss stocks through a factor-based approach and that hit the nerve of many investors. It was natural for us, given the positive reception, to extend the strategy to a pan-European portfolio. 

The approach is based on the latest findings from financial markets research and builds on multi-year development work. That closes a gap between academia and practical application. It is a unique approach to factor investing and we are very excited to turn it into an investable proposition for a wider universe of our clients.

Interest in factor investing is very high at the moment, but in particular for multi-factor strategies. What’s the appeal for investors? 

The appeal lies principally in the diversification of risk premia. Each factor is in itself a potential source of extra-market risk and returns. But single factors can undergo prolonged periods of underperformance that are hard to time. Thanks to the low level of correlation between the factors, in combining all of them into one portfolio investors can spread the risk and harvest all these various sources of proven excess returns in a targeted, more stable and broadly diversified manner.

Additionally, in following a passive strategy, we enable this diversified factor exposure in a systematic and cost-efficient way. For investors, the possibility of combining the benefits of an active factor approach with those of passive replication is a very good proposition.

Can you briefly describe the stock selection methodology?

The multi-premia methodology was developed by Finreon. Based on relevant and scientifically proven ratios, the best stocks from the investment universe are selected for each factor premium — value, size, momentum, residual momentum, reversal, low risk and quality. Within these individual factor portfolios of the EURO STOXX Multi Premia, a risk-parity approach is used to weight the individual securities. This promotes a high level of diversification and good risk-return efficiency. The seven factor portfolios thus constructed are aggregated into the EURO STOXX Multi Premia portfolio using an equal-contribution-to-tracking-error approach.

Why is Credit Suisse Asset Management focusing on multi-premia approaches?

We believe multi premia offers an attractive risk-return profile relative to many single-factor strategies for the diversification aspect we discussed earlier. Incidentally, we do offer our clients funds on single premia as well, such as minimum volatility. This increases the freedom of choice and makes it possible to reflect market views. We also see multi premia as a competitive alternative to traditional market-capitalization-weighted benchmarks. Firstly, the index is based on a universe of around 300 stocks, providing much more diversification than many indices with a smaller number of constituents. Secondly, this larger universe means that there is less overweighting of large caps. And thirdly, multi premia gains exposure to very diverse factor premia. 

Normally, for a fund tracking a market-cap-weighted flagship index such as the EURO STOXX 50 Index, you have a matching futures market to equitize cash. How do you equitize dividend accruals in the case of the CSIF (Lux) Equity EURO STOXX Multi Premia fund?

As there are no perfectly-matching futures for this strategy, the fund uses EURO STOXX 50 futures contracts as best match for equitization purposes.

This is based on the underlying universe, as well as on the fundamental characteristics of the futures — high liquidity, narrow spreads — and allows us to gain some market beta.

Does that affect the tracking error of the fund relative to the index?

As the EURO STOXX 50 futures are not a perfect match for the EURO STOXX Multi Premia Index, the usage of these futures indeed increases the tracking error. This is due to the different weighting schemes within the two indices. To minimize the tracking error impact, the cash limit for this fund is lower than for funds with perfectly-matching futures.

Why did you choose STOXX to design and maintain the underlying index for this European multi-premia fund?

It is of utmost importance to implement the passive strategy via transparent and rules-based indices so that investors know and understand where their money is allocated. STOXX upholds that transparency criterion in all of their indices, and they have the experience and capabilities we look for. STOXX is also the leading index provider in the European market, so it was a natural go-to partner for us. 

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EURO STOXX® Multi Premia Index