AXA Investment Managers plans to launch its first capital guaranteed fund of funds product in the fall. The investment manager will sell capital guaranteed participation in a fund of funds to French retail investors and use the proceeds to purchase a basket of government and financial institution bonds, explained Daniel Léon, head of structured derivatives in Paris. It will then enter an asset swap in which it pays the counterparty the coupon on the bond portfolio and receives the performance of a fund of funds. The swap counterparty gains exposure to the fund of funds either through direct investments or by buying futures on a benchmark index and swallowing the tracking error.
The fund of funds is likely to consist of a portfolio of 12 funds diversified across the U.S. and European equity and fixed income markets. Léon added it will have a bias toward European equity. Both the fund and the asset swap will have an eight-year maturity.
AXA IM is putting this deal together now because a growing number of banks are offering the derivatives required to structure these products, and thus their price is falling, Léon said. The fund manager currently offers guaranteed funds on indices but wanted to structure a guaranteed fund of actively managed funds because he believes they can out-perform the index funds.
Léon said it is too early to know how much upside participation investors will have in the fund of funds. He declined comment on counterparties but said it looks for derivatives houses with good ideas and execution.