How can institutional investors benefit from the yield potential of European equity under Solvency II?

Asset Management - 4/26/2016

We firmly believe in the potential of European companies and the key role that institutional investors play in that potential. In this regard, we decided to address the difficulties created by recent regulatory developments by launching an original solution, through the Edmond de Rothschild Equity Europe Solve fund.
​Goal: allow for institutional investors to benefit from the potential yield of European equities while minimising their capital cost*.
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Guillaume Poli, Deputy CEO of Edmond de Rothschild Asset Management, introduces the SOLVE solution our teams created specifically for institutional investors
 

Companies face a financing gap aggravated by regulatory constraints

There are many advantages to investing in European equities. European equities should be encouraged in 2016 due to attractive valuation levels and support from the European Central Bank. However, the arsenal of measures implemented by ECB President Mario Draghi is not enough to increase financing flows towards company equity.

Institutional investors, which have been the real driving force behind European investment for several decades, are now suffering from regulatory inflation. The actual implementation of the Solvency II directive in January 2016 resulted in a significant capital cost for share allocations for investors in the European insurance industry, including insurance, mutual insurance and mutual health insurance companies, and some social welfare group businesses.

One of the key tenets of these new supervisory regulations is to match the level of equity based on the asset classes used. Thus, the cost of equity (Solvency Capital Requirement - SCR) is very high for equity investments, which leads to a drop in allocation levels by institutional investors, which are currently at their lowest in ten years.

Solve, an original solution

To help institutional investors pursue and even increase their investments in European companies, Edmond de Rothschild Asset Management developed an investment solution, the Edmond de Rothschild Equity Europe Solve fund, which was launched in December 2015. The fund is a combination of two aspects of the Group's expertise:

  1. Know-how in European equities management and securities selection
  2. Expertise regarding optional strategies and equity risk management

The goal of this open fund is to offer exposure to European equities while simultaneously minimising capital cost and offering institutional investors who are subject to Solvency II regulations a certain visibility regarding SCR consumption in their portfolios.

The equity segment of the Edmond de Rothschild Equity Europe Solve fund , which reflects our conviction-based management style, is permanently limited by an optional hedging mechanism to reduce volatility. Our strategy aims to:

  • Limit the resulting capital cost for equity investments
  • Limit drawdowns and portfolio volatility

High level of transparency for investors

Edmond de Rothschild Asset Management (France) has long been committed to providing transparency for its funds as part of the Solvency II directive. Therefore, the fund reporting integrates a specific rubric that uses an audited calculation method. The rubric combines elements that give investors an indication as to the SCR consumption of the fund, as well as notably:

  • effects of standard shocks, shown as percentages by risk factor (equity and foreign currency markets)
  • analysis of the various applied hedging strategies by type of instrument
  • a line-by-line contribution to SCRequity and SCRcurrency by type of instrument

As these solutions require a strong cooperative relationship, our teams work very closely with our investors to provide them with bespoke solutions that meet their needs, especially in terms of their regulatory reporting.

*Edmond de Rothschild Equity Europe Solve is a French FCP, feeder of the master fund, the SICAV sub-fund Edmond de Rothschild Fund Europe Synergy. The feeder fund objective is to set up risk mitigation technics, according to the Solvency II Directive.

Main risks of the Edmond de Rothschild Equity Europe Solve: Capital risk, risk linked to the overlay strategy, risks linked to the use of financial derivative instruments, liquidity risk.
Main risks of the master fund: Discretionary management risk, equity risk (small and mid caps), currency risk, exchange rate risk, credit risk, risk linked to financial and counterparty contracts, risk linked to the currency of units denominated in currencies other than that of the Fund