Morningstar Magazine - June/July 2018 - 45

the USD High-Yield Bond category were arguably
motivated to a large degree by the continuing
underperformance of several large funds: AXA IM
Fixed Income Investment Strategies-US Short
Duration High Yield suffered net outflows of EUR
401 million; and Neuberger Berman High Yield
Bond, which holds a Morningstar Analyst Rating
of Silver, shed EUR 165 million in March.
In all, outflows from that fund have amounted
to EUR 655 million for the year to date.
Outflows hit active and passive Europe large-cap
blend funds alike, indicating that asset-allocation
decisions were the main driver for redemptions.
Equity investors seem to take a more positive
stance toward emerging-markets and U.S. growth
equities than European large caps. The
outflows on the passive side are almost entirely
attributable to iShares products, which shed
EUR 600 million in the month. Gold-rated iShares
Stoxx Europe 600 UCITS ETF alone saw EUR
308 million of net redemptions.
Valerio Baselli is an editor with Morningstar EMEA,
based in Paris.
Ali Masarwah is an editorial director with Morningstar
EMEA, based in Frankfurt.

'Premia' Funds Push
Into the European
Market

and current economic conditions, valuations,
and instrument-specific technical attributes.
The most widely known risk premia are
those related to equities, government bonds,
and credit. They simply tell how much an investor
can expect to earn above the risk-free rate
as compensation for investing in a diversified
portfolio of stocks, government bonds, or
corporate bonds.
But in 2018, investors are going beyond such basic
premia. Many funds seeking to profit from
a range of style or alternative factors have come
to the European market. Style premia refer to
drivers of returns such as value, size, low volatility,
momentum, and carry, which studies have
suggested outperform the market over the long
term on a risk-adjusted basis.
There's nothing new in these factors and the
premia associated with them. What's new
is how they are mixed together into funds that are
often managed with a quantitative approach.
These funds sit mostly in the alternatives
categories but can also focus on premia within
equities, fixed income, or commodities.
Flows were strong last year and continued to be
early this year. Among the 15 most popular
alternative funds in the past year were
three premia funds in the alternative-multistrategy
Morningstar Category: AXA World Funds Multi
Premia, AQR Diversified Risk Premia, and
AQR Style Premia UCITS. Another fund gaining
traction lately is La Francaise's LFIS Vision
UCITS Premia.

through March 31. This was less than half
of equity market volatility. The standard deviation
of the MSCI World Index was 11.3% in the
same period.
In selecting premia funds, it is important to look
more closely into the details of the strategy.
Generally, risk premia funds fall into two groups.
One group seeks to harvest the long-term
premia related to different market and style factors
with a long bias. Within a multistrategy fund,
such an approach leads to moderate stock market
risk, or beta. But while investors do gain some
diversification benefits, there's typically a clear
positive correlation with the stock market.
If stocks do well, investors in these funds tend to
reap some of the benefits.
The other genre of premia fund seeks to deliver
the premia from factors without exposing the
investors to market risk. This is achieved through
a long-short portfolio of factors and leads
to low equity market exposure (a market-neutral
approach) that will likely minimize correlations
with equities. Because this approach almost fully
isolates style premia in a market-neutral format,
it generally requires a certain amount of
leverage for the style premia to have a meaningful
impact in a portfolio context.
As a result, current multistrategy premia funds have
seen equity market correlations varying from
14% to 66% for the trailing three-year period. At the
lower end, returns were hardly entangled with
stocks at all, while at the higher end, correlations
were at levels seen at some equity funds.

GREATER EUROPE

Norway
The world of investing is driven by buzzwords. One
of the hottest labels is "premia." In 2017, 27
funds launched in Europe with "premia" in their
name. Another two self-proclaimed premia
funds have come out of the gates in 2018 through
April 25, and more will surely be launched.
The notion of premia is taught in finance theory
classes and is used most widely by quantitative specialists to describe the expected return
of different investments. Premia are typically
estimated as a combination of historical returns

When digging deeper, we find that among the
most popular alternative funds, some hunt
for premia despite not having it explicitly in their
name. One such fund is BlackRock Style
Advantage. Its strategy, according to the fund,
is "harnessing style factors targeting broad,
persistent returns."
To give an idea of the risks incorporated into
premia funds, we can look at volatility
and correlation. Of the nine premia funds with
a three-year track record in the alternatives
category, the median fund had a 4.8% standard
deviation of returns in the trailing three-year period

It is, thus, essential that investors consider what
they are seeking to achieve from investing in
a premia fund. When selecting funds, a thorough
fundamental analysis informed by financial
theory is essential, as many of these funds are so
young that their track records are not sufficient
for any meaningful return analysis. And as always,
it's important to remember that a back-tested
track record of a complex strategy is hardly the
same as one executed in a live market environment
and including transaction costs.
Matias Möttölä, CFA, is an associate director with
Morningstar Manager Research, EMEA.

global.morningstar.com/Morningstarmagazine

http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018