Easyvest OFP Investment Principles Policy
1. Introduction
The FSMA requires the organization to provide more details regarding the investment policy it intends to implement for the management of pension contributions. This policy is sometimes referred to by its English term: Statement of Investment Principles or SIP. The following document explains the organization’s investment strategy as well as the framework for managing pension benefits.
In accordance with the LIRP, the organization has decided to review this policy every three (3) years and immediately after any major change.
This policy summarizes the principles applicable to the organization’s investments made by the Board of Directors or on its behalf.
The policy includes, at a minimum, the methods of assessing investment risks, the risk management techniques implemented, and the strategic allocation of assets with regard to the nature and duration of the pension obligations.
The organization is a multi-employer entity managing non-sectoral pension schemes of various companies.
A summary of each of these pension schemes is included in the specific section of the financing plan for these pension schemes.
It is agreed that the organization manages and implements only defined contribution pension commitments, without guaranteed return, without tariff, and with optional biometric risk coverage.
The Board of Directors of the organization is responsible for defining the investment policy set out in this document, which is composed of a general section and two specific sections.
The general section defines the general principles applicable to each distinct fund. The rule provides that each investment policy is based on the same convictions and investment strategy. It contains a clear description of the asset classes in which investments may be made.
The day-to-day management of the investment of the assets of all distinct funds is entrusted to the same manager, the subcontractor, Easyvest SA, which is licensed as a portfolio management company by the FSMA. This subcontractor is appointed by the Board of Directors. In other words, the affiliation of a company implies that this affiliated company consents to entrust the management of the assets of the distinct fund to the manager chosen by the Board of Directors.
In addition, a specific section is prepared for the Distinct CIPA Fund and a specific section for the Distinct PCP Fund.
The specific section of each pension scheme includes the following elements:
- A summary of the pension scheme ;
- The nature of the pension obligations of the pension scheme ;
- Any division into separate compartments or separate accounts ;
The organization’s investment policy takes into account the principle of prudence defined in Article 91 of the LIRP.
The organization must constitute a secure source of financing for the supplementary pension rights established under the pension commitments.
The investment policy for all distinct funds must aim at achieving an optimal long-term return to ensure the pension obligations of affiliated companies arising from the pension commitments, while maintaining risks at an acceptable level.
The Board of Directors ensures that investment decisions are executed with a view to concretely achieving the principles set out in this investment policy. The concrete implementation of the investment policy and the evolution of the financing are generally reviewed at each meeting of the Board of Directors.
This investment policy was approved on [date of approval] by the Board of Directors and ratified on the same day by the General Assembly of the organization.
2. Governance
The establishment of the Investment Principles Policy, both its general section and its specific sections, falls within the competence of the Board of Directors.
The execution of this policy is entrusted by the Board of Directors to the Subcontractor.
The Board of Directors oversees the monitoring of asset management, investments, and the Subcontractor.
The Board of Directors ensures :
- The definition of this investment policy ;
- The evaluation of the Subcontractor in its implementation of this investment policy, based on monitoring and, where appropriate, reports it requests from the Subcontractor ;
The Board of Directors meets at least three (3) times a year. Investment monitoring is always on the agenda of the Board of Directors at each meeting. Before each meeting, the Chairman of the Board requests the Subcontractor to provide a report on the monitoring of the investment policy.
As part of its evaluation, the Board of Directors may, at the request of the Subcontractor or on its own initiative, examine :
- The adaptation of the investment policy at the global level or at the level of one of the Distinct Funds, in compliance with the principles set out in the “Investment Strategy” ;
- The selection, appointment, monitoring (reporting), termination, and replacement of the Subcontractor, other or additional asset managers if applicable, and the Depositary ;
- The agreement with the Subcontractor and any agreements with other or additional asset managers if applicable, and with Depositaries ;
- The evolution of the portfolio’s performance and costs ;
- The risk management procedure relating to investment risks ;
- The review of the financing plan ;
- An ALM study to be carried out at the global level or at the level of a Distinct Fund and/or any other stress tests at the level of the organization or a Distinct Fund ;
The Subcontractor reports annually to the Board of Directors on how it implements the Investment Policy and whenever requested by the Board. At the request of the Board of Directors and within one month of such a request, the Subcontractor submits to the Board the required data as of 31 December of the last financial year. For example, these data may include :
- The overall composition of the investment portfolio ;
- The composition of each affiliate’s account and its performance ;
- The performance and volatility of the investment portfolio ;
- The performance and volatility of the investment portfolio of the Distinct PCP Fund, and its comparison with the technical provisions of the Distinct PCP Fund ;
- The performance and volatility of the investment portfolio of the Distinct CIPA Fund ;
- The performance and volatility of each model portfolio ;
- The “tracking error” of the trackers invested in affiliates’ accounts ;
- A qualitative explanation regarding the portfolio’s evolution ;
In the event of an incident that may negatively impact financial markets and asset management, the Subcontractor and the Chairman of the Board of Directors meet to discuss and ensure follow-up. After its meeting, the Board of Directors will, where appropriate, instruct the Subcontractor on the actions to be taken in this context.
The management of the organization’s assets, like the other functions entrusted to it, is assigned to the Subcontractor for an indefinite period, with the possibility of termination subject to notice periods and conditions. The Subcontractor’s remuneration is calculated in accordance with the provisions of the management contract defining the relationship between the Subcontractor and the organization.
The Subcontractor’s responsibilities, in its capacity as the organization’s asset manager, are to:
- Act in accordance with this investment policy and the agreement concluded between the Subcontractor and the organization ;
- Select investments based on their appropriateness ;
- Provide advice on the appropriateness of the selected indices ;
- Report regularly on the investment portfolio.
The long-term component of investments is ensured by the binding guidelines of this Investment Principles Policy, particularly with regard to asset allocation based on the time remaining before the affiliate’s retirement.
3. Investment Strategy (General Investment Principles)
In order to limit risks for affiliates and reduce endogenous risks to the stability of the financial sector, with regard to pension commitments, the organization has chosen not to take any direct financial or investment risk on its own balance sheet.
To achieve this, the organization decides, among other things, to invest contributions exclusively in cash or in financial instruments of the tracker type, offering a high degree of liquidity.
Every asset manager holds convictions about how the investment world works and which investments will perform better or worse in the future. These convictions translate into an investment strategy. This strategy is then applied in practice to build a pension account for each affiliated company in line with this strategy.
The organization makes no exception to this rule. It holds the following convictions, which it translates into an investment strategy composed of trackers :
- Following the Market
It is extremely difficult to outperform the market over the long term. The organization believes that trying to find the “right” stock through stock picking is a waste of time and money. Instead, the organization prefers to buy an index of all the stocks in the world, i.e. the market itself—reflecting the adage: “Nobody beats the market.”
- Taking a Tolerable Risk
We are not all equal in our tolerance for risk: buying a stock index, even a diversified one, is not suitable for everyone, as it remains a volatile investment with sharp rises and declines. To reduce this volatility, a much less risky index—such as eurozone government bonds—can be added. The proportion between equities and bonds will depend on loss tolerance, investment horizon, and the financial objectives of the affiliated companies.
- Risk Diversification
Spreading asset allocation across different asset classes—whether in terms of asset type, type of companies, countries, regions, or activities—is a good way to optimize the risk-return ratio. This is precisely what the organization aims to achieve by investing in highly diversified trackers.
- Minimizing Costs
High costs lead to lower performance for affiliates. That is why the organization buys the indices mentioned above through trackers, which generally have lower management fees compared to other investment funds that do not follow indices and are actively managed.
4. Wealth Management Approach
For its wealth management, the organization applies a framework based on Harry Markowitz’s Modern Portfolio Theory (“MPT”), for which he received the Nobel Prize in Economics in 1990.
Figure 1: Portfolio Management Optimization Framework
Below is a summary of the different steps in the portfolio optimization process :
- Investment Strategy and Asset Selection
The organization’s management strategy consists of selecting all stocks listed on stock exchanges worldwide (the risky asset according to MPT and adding all eurozone government bonds (the risk-free asset 1 according to MPT). To this end, the organization has selected two trackers, each representing one of these asset classes.
- Portfolio Constraints
The organization decides that the trackers can only be long only. It prohibits itself from shorting, carrying out short sales, or leveraging these trackers. Thus, the organization requires each tracker to have a positive allocation, mathematically speaking, within the portfolio.
- Modeling Expected Performance
The organization models the expected performance of a tracker using the performance of its benchmark index, from which tracker fees and any applicable taxes are deducted. Working with the index makes it possible to rely on larger datasets going further back in time. The organization then works with annualized performance figures.
- Estimating Volatility and Correlations
The day-to-day variation in an index’s price performance allows the calculation of volatility. By comparing performance variations between the two trackers, their correlation is obtained. Together, these values form a covariance matrix, which is essential for subsequent calculations.
- Portfolio Optimization
In the organization’s two-asset investment strategy, with no constraints other than the absence of leverage, this step is straightforward: every allocation is “optimal” and lies on the efficient frontier.
- Risk–Return Efficient Frontier
By applying Markowitz’s formulas, one can determine, for each possible allocation between the equity tracker and the bond tracker, the “efficient frontier.” This is the curve that expresses the expected annual return for a given level of Value at Risk (VaR, a measure of risk). In other words, the efficient frontier equation allows the calculation, for a chosen VaR, of the annual return one can reasonably expect in the long term and the equity/bond tracker allocation corresponding to that VaR. Choosing one of the three variables (VaR, expected return, or allocation) determines the other two.
- Investment Objectives
The key question is to determine where on the efficient frontier one wants to be positioned. This is a complex question that depends on the personal characteristics of each affiliate, such as their risk appetite (for EIP commitments), age, and time horizon (for PCP commitments). The goal at this stage is to define the VaR appropriate for the affiliate at that point in time.
- Optimal Portfolio
The intersection of the efficient frontier with the VaR corresponding to the affiliate determines the optimal allocation between the equity tracker and the bond tracker for that affiliate.
5. Selection of Trackers and Diversification
The organization’s asset management is carried out exclusively through trackers, i.e., investment funds that replicate the performance of a stock market index by investing in the basket of equities and/or bonds that make up the index.
Hundreds, if not thousands, of trackers are available on the financial markets. To select which ones will be placed in accounts, the organization applies a number of criteria:
- The tracker must follow an index consistent with the organization’s investment strategy. For example, an index that represents all listed stocks worldwide or the entirety of eurozone government debt ;
- The tracker must be denominated in euros, as this is the reference currency for affiliates. Ideally, the tracker should be tradable on an exchange where transaction costs are not prohibitive (i.e., more than 1% of the transaction value), typically on Euronext. The tax structure of the fund (e.g., accumulation vs. distribution) will also be considered in order to reduce the overall cost for the affiliate. Under the tax regime applicable at the date of adoption of this investment policy, the accumulation structure is preferred ;
- The organization selects funds from reputable issuers, with several market makers, low fees, and low tracking error ;
- The tracker must be of a respectable size, ideally greater than one hundred million euros, with a performance history ideally longer than three years, and sufficient historical liquidity with an absolute bid-ask spread ideally below 0.5% ;
- The tracker must be monitored by at least one ESG rating agency, or a sustainability score must be calculable by the organization or a third party, in order to periodically monitor the tracker’s sustainability performance ;
Given the use of highly diversified trackers, the organization does not additionally rely on credit ratings from rating agencies.
5.1. What Are Investment Risks?
Investment risks comprise many sub-categories, including market risk, liquidity risk, counterparty risk, credit risk, etc., which are further detailed in this policy. This section focuses on the risk of value fluctuations—and therefore price fluctuations in financial markets—of a tracker-type financial product, with a specific emphasis on market risk
Other categories of risk are also important within the organization’s overall risk management framework and are documented in other documents. For the purposes of this investment policy, the organization considers that the volatility risk of equity and bond markets is predominant and therefore gives priority to explaining this risk and its treatment.
5.2. What Is Investment Risk?
Investment risk can have many different meanings. For an affiliate of the organization, investment risk refers to the risk of a decrease in the value of the pension account due to fluctuations in the financial markets.
This risk of value decline can be expressed mathematically by the statistical concept of Value at Risk (VaR). For example, a VaR of 15% indicates that the organization estimates that, over a one-year period, the account value will not fall by more than 15% of its initial value in 98% of cases. Put differently, the organization estimates that there is only a 2% probability that the decline will exceed 15%.
5.3. What Is a Risk Profile?
The risk profile is the level of Value at Risk (i.e., the VaR defined above) that one is willing to bear. The organization offers ten risk levels, with VaRs ranging from 3% to 30%, in increments of 3%.
5.4. What Is a Model Portfolio?
In common usage, portfolios are often described as conservative, balanced, or dynamic. Each of these labels corresponds to an approximate range of equity investments. For example, a dynamic portfolio might contain between 70% and 90% equities.
The organization rejects this approach for two reasons. First, it believes that such labels are vague, imprecise, and lack any scientific or mathematical foundation. Second, the concept of an equity range to represent risk is meaningless unless one specifies exactly which equities are used and with what allocation and diversification.
The organization uses a different approach.
A model portfolio of the organization is a portfolio composed of trackers in defined proportions such that the portfolio’s Value at Risk is appropriate for the affiliate’s pension objective and personal situation.
The organization defines VaR as the maximum acceptable decline in the value of an account over one year. While the VaR is calculated using a complex statistical formula, it is relatively simple to interpret. For example, an account with a VaR of 15% indicates that, in the event of a significant downturn in the stock markets, it is highly unlikely (based on the organization’s calculations) that the account’s value would fall by more than 15% in one year.
By highly unlikely, the statistical model actually means that, in the event of a decline in account value over a full year, there is a 98% chance that the decrease will be less than 15% and only a 2% chance that it will exceed 15%.
At launch, the organization will offer ten model portfolios, corresponding to the ten VaR levels, whose characteristics are presented in the table below. For ease of communication with affiliated companies and affiliates, the organization has assigned a number from 1 to 10 to each model portfolio. Portfolio 1 is the least risky, Portfolio 10 the riskiest :
| Model Portfolio | Max VaR | Allowed VaR Range | Bond/Equity Mix * |
|---|---|---|---|
| 1/10 | 3% | 0% - 3% | 8% - 92% |
| 2/10 | 6% | 3% - 6% | 18% - 82% |
| 3/10 | 9% | 6% - 9% | 28% - 72% |
| 4/10 | 12% | 9% - 12% | 38% - 62% |
| 5/10 | 15% | 12% - 15% | 48% - 52% |
| 6/10 | 18% | 15% - 18% | 58% - 42% |
| 7/10 | 21% | 18% - 21% | 68% - 32% |
| 8/10 | 24% | 21% - 24% | 79% - 21% |
| 9/10 | 27% | 24% - 27% | 89% - 11% |
| 10/10 | 30% | 27% - 30% | 2% - 98% |
| (*) When an affiliate’s account VaR falls outside its authorized VaR range, the account is rebalanced so that its VaR returns to within the authorized range. | |||
Tableau 1 : Intervalles de VAR autorisées en fonction du portefeuille modèle sélectionné
Lorsque la VaR du compte d’un affilié sort de son intervalle des VaR autorisées, le compte est rééquilibré afin que sa VaR retourne dans l’intervalle des VaR autorisées.
6. Engagement Policy
As mentioned above, the organization entrusts the day-to-day management of the investments of the assets of the distinct funds to external asset managers: the Subcontractor, but also, indirectly, the managers of the index investment funds (trackers) in which the organization invests the assets.
In this context, it is impossible for the organization itself to implement an engagement policy, since it is, in practice, the managers of the relevant index investment funds (trackers) who exercise the voting rights attached to the financial instruments, attend general meetings, and are able to engage in dialogue with the companies held by these funds.
7. ESG Policy
7.1. Introduction: Mission and Objective of the Organization
The ESG policy explains how the organization integrates sustainability into its investment policy and asset management.
The safeguarding of economic, environmental, and social resources is a prerequisite for a healthy economy and for generating attractive returns in the future.
The mission of the organization is to enable affiliated companies, affiliates, and beneficiaries to achieve their financial goals through their supplementary pension in the short, medium, and long term. Sustainable development is essential to fulfilling this obligation. Easyvest OFP is convinced that companies in which it invests and that practice sustainable business models have a competitive advantage and perform better over the long term. The organization also believes that sustainability has the power to drive positive economic, environmental, and social change.
The organization’s approach to sustainable and responsible investment must be considered in light of its activities and specific characteristics.
7.2. Approaches to Socially Responsible Investment
In general, there are two major categories of socially responsible investment strategies: so-called exclusion strategies and so-called activist strategies.
- Sectoral strategies: excluding entire sectors (e.g., fossil fuels, tobacco, weapons) ;
- Best-in-class strategies: selecting companies or countries with the highest ESG ratings and excluding all others ;
- Thematic strategies: investing with a specific societal or environmental focus (e.g., water, renewable energy, health) ;
- Impact investing strategies: selecting companies that have a positive societal and/or environmental impact ;
- Norm-based screening strategies: selecting companies or countries that comply with international standards on environmental, social, and governance principles ;
7.3. Integration of Sustainability Risks into the Investment Policy, Mitigation and Monitoring
A sustainability risk can be defined as « an environmental, social or governance event or situation which, if it occurs, could have a significant actual or potential negative impact on the value of the investment 3».
First, consistent with its approach to mitigating investment risks in general, the organization believes the best way to mitigate sustainability risks is through broad diversification. This is precisely what the organization does by investing in diversified trackers.
In addition, the organization ensures that the managers of the tracker funds in which it invests actively commit to international standards regarding environmental protection, social responsibility, and good governance. For example, the organization verifies whether tracker fund managers are signatories to the UN Global Compact and the UN Principles for Responsible Investment.
Finally, the organization monitors sustainability engagement. Specifically, it verifies that tracker fund managers actively engage on sustainability issues with the companies they invest in and exercise their voting rights at general meetings. These fund managers report on their engagement activities annually and sometimes on an ad hoc basis. If necessary, the organization may question fund managers about their concrete sustainability engagement.
These controls are exercised (i) at the time of fund selection and (ii) during annual monitoring.
For example, as of 28 March 2022, the global equity fund in which the organization may invest received an overall ESG rating of 7/10 from Refinitiv, an independent ESG rating agency. In addition, the ultimate manager of this fund, State Street, regularly reports on its socially responsible activism. For instance, in May 2021, State Street voted to appoint two directors to the Board of Exxon Mobil, an oil company, with the mission of ensuring the company’s transition towards more sustainable energy sources.
7.4. “Global” Portfolio and “Climate” Portfolio
Alongside a standard “global” portfolio, the organization offers a global portfolio with a climate action bias. This “climate” portfolio invests, through trackers, in companies aligned with the Paris Climate Agreement, which commits to limiting global warming to 2°C above pre-industrial levels.
For example, the climate portfolio excludes companies active in coal, gas, or oil, as well as tobacco and weapons producers, and companies highly controversial in terms of sustainability.
7.5. Sustainability Preferences
When opening a pension agreement or regulation, and on a regular basis thereafter, the organization asks the affiliated company about its sustainability preferences. In particular, it is invited to indicate whether it has preferences, and if so, which ones. These responses allow the organization to recommend an investment portfolio that adequately reflects these preferences, as well as the objectives and investor profile of the affiliated company.
7.6. Modification and Update
The Board of Directors assesses annually whether this policy needs to be updated.
8. Asset Custody
The Board of Directors must appoint one or more custodians. The custodian(s) ensure the safekeeping of the assets of the distinct funds and fulfill the related administrative obligations.
In carrying out their duties for the organization, custodians are required to act in a reliable, honest, professional, and independent manner, in the best interests of the affiliates and beneficiaries of the pension commitments managed by the organization.
Custodians must also comply with the rules on conflicts of interest, as provided for in Article 92 of the LIRP.
At the start of the organization’s activities, asset custody is entrusted to the insurance company Belfius Insurance SA, which in turn deposits these assets with the investment firm Leleux Associated Brokers SA. Easyvest SA is responsible for managing these assets.
The custodian(s) report annually to the Subcontractor and to the Board of Directors within one month of the close of the previous year and are evaluated each year. This does not prevent the organization from entering into agreements with them for a period longer than one (1) year.
9. Overview of Investment Risks in Financial Instruments
9.1. Introduction
Risks are inherent in investments in financial instruments, and not all financial instruments carry the same risks.
First, some general risks associated with financial instruments are described. Next, the characteristics and risks of the financial instruments in which Easyvest OFP invests are reviewed. This overview of the essential characteristics and risks of financial instruments is not exhaustive.
9.2. General Investment Risks
Financial instruments can, to varying degrees, involve the following general risks :
Price or market value risk
When investing in financial instruments, unpredictable price declines are almost inevitable. However, this type of risk can be mitigated. One of the most common methods is to spread investments across several categories of financial instruments and, within each category, across different instruments. This is known as diversification.
Market risk
The risk that the financial market as a whole, or a particular asset class, declines, impacting the price and value of portfolio assets. Such fluctuations may result from, among other factors, currency movements or significant increases or decreases in interest rates and/or stock prices in general.
Currency risk
Since the euro is the reference currency, if investments are made in another currency, the exchange rate between that currency and the euro may fluctuate between purchase and sale, positively or negatively affecting investments.
Credit risk
The risk that the issuer of a bond-type financial instrument does not fully meet its obligations to repay principal or pay interest. This generally occurs when the issuer faces financial difficulties or bankruptcy.
Liquidity risk
Liquidity risk arises when an investment is difficult to trade. Illiquidity can stem from supply-demand imbalances or from the inherent characteristics of the financial instrument or market practices. When there are (almost) only sellers, or conversely (almost) only buyers, trades cannot be executed, or can only be executed partially or under unfavorable conditions.
Interest rate risk
When market interest rates rise, the value of certain investments declines, especially bonds, but theoretically also equities. For bonds, a rise in rates leads to a fall in prices, since fixed coupons become less attractive. Conversely, falling rates lead to higher bond prices. Rising interest rates can also negatively impact equities by increasing financing costs for companies and making alternative fixed-income investments more attractive.
Reinvestment risk
The risk that interest, dividends, or proceeds from sales cannot be reinvested under the same conditions as the initial investment.
Tax risk
Arises from uncertainty or changes in tax law affecting financial instruments. International tax treaties may also impact returns on foreign financial products. Personal circumstances (e.g., divorce, death) can also influence tax treatment.
Economic cycle risk
This risk depends on changes in the economic environment, such as recessions, major social reforms, or depletion of global raw material stocks, all of which may affect financial markets.
Bankruptcy risk
Equity investors become co-owners of a company and therefore bear the risk of losses, potentially losing their entire investment in the event of bankruptcy. Bondholders face less risk but may also lose part or all of their investment if the issuer cannot repay.
Inflation risk
Inflation erodes the real value of money and purchasing power. Even with nominal returns, real returns may be negative once inflation is considered.
Geographic risk
A country or region may become so economically or politically unstable that currencies dry up or financial systems collapse, preventing otherwise solvent issuers from meeting obligations. Restrictions may even make foreign currency payments non-convertible.
Complexity risk
Under Belgian law transposing the EU MiFID directive, Easyvest distinguishes between complex and non-complex instruments. Non-complex: equities and funds listed on regulated markets (or their equivalents), trackers listed on Euronext’s regulated segment, plain bonds, UCITS funds. Complex: equities/funds on non-regulated or MTF markets (e.g., OTCBB), ETFs listed outside Euronext’s regulated market, ETNs, ETCs, complex bonds, non-UCITS funds, derivatives (options, futures, CFDs), leveraged products (Turbos, Sprinters), warrants, forex, structured products.
Psychological risk
Despite objectively favorable conditions, rumors, opinions, trends, or irrational investor behavior (including one’s own) can cause significant price volatility.
IT system risk
Each trading system has its own interface and terminology. Differences between systems or languages may cause errors in placing orders, with potential financial consequences.
9.3. Risks by Financial Instrument
This section reviews the risks of the financial instruments in which Easyvest OFP may invest—namely, trackers and the financial instruments that constitute those trackers.
Trackers
Description
A tracker is a listed investment product (Exchange Traded Product or ETP) that replicates the performance of a basket of assets. There are different types: equity index trackers, sector trackers, commodity trackers, bond index trackers, etc. They can be traded during the day like shares.
Legally, a tracker can take the form of : a fund (Exchange Traded Fund or ETF), or, notamment des trackers sur des matières premières comme l’énergie, le pétrole ou les métaux (« Exchange Traded Notes » ou ETN, et « Exchange Traded Commodities » ou ETC).
Among these, Easyvest OFP invests only in ETFs
ETFs are open-ended funds that replicate as closely as possible a benchmark index (also known as passive ETFs)4. They are generally UCITS-compliant. ETFs may be structured as investment companies or mutual funds.
By investing in an ETF, one invests in a basket of assets, reducing risk compared to individual securities. Management fees are typically lower than those of actively managed funds, which require stock picking.
Some ETFs amplify index returns (leveraged ETFs) or move inversely to the index (inverse ETFs or bear trackers), with or without leverage. These products are naturally riskier.
The price of an ETF is primarily determined by the performance of its underlying index. However, dividends and management fees, as well as market liquidity, also influence ETF pricing. The more an ETF is traded, the narrower the bid-ask spread, and the closer its price will track the index.
To replicate indices, ETF issuers use :
Physical replication – either full replication (holding all components of the index) or optimization (holding a representative sample when full replication is impractical).
Synthetic replication – using swaps with counterparties to exchange the performance of a reference basket for that of the index. While this reduces costs and tracking error, it increases counterparty risk. Synthetic replication is often used for less accessible markets.
General Risks
| Market Risk | Yes, primarily depending on the overall stock market and the underlying investments |
| Currency Risk | Yes, if the underlying investments or the tracker are not denominated in euros |
| Credit Risk | Yes, especially for trackers that follow a bond index |
| Liquidity Risk | Yes, depending on the trading volume of the tracker and the liquidity of the underlying investments |
| Interest Rate Risk | Yes, for trackers that follow a bond index and indirectly those that follow an equity index |
| Reinvestment Risk | Yes |
| Tax Risk | Yes |
| Market Risk | Yes |
| Inflation Risk | Yes |
| Geographic Risk | Yes, depending on the tracker |
| Complexity Risk (MiFID) | No |
Specific Risks
Deviation from the index (tracking error)
The price of an ETF may evolve differently from that of its index due to a lack of liquidity or sudden volatility
Counterparty Risk
A counterparty risk exists if the ETF also purchases derivatives or enters into contracts with other parties (swaps). This is particularly the case for ETFs that use synthetic replication. Counterparty risk is the risk that a party cannot meet its obligations (for example, failure to return loaned securities). In the case of synthetic ETFs compliant with the UCITS directive, counterparty risk cannot exceed 10% of the fund’s net asset value.
Liquidity Risk
Trading volumes can be lower in certain ETNs, making them less liquid than ETFs.
Equities and Equity Certificates
Description
A share is a security representing a portion of a company’s share capital. By purchasing a share, one becomes a co-owner of that company. This means that the investment’s return will depend on the success (or failure) of the company.
When business goes well, investors can benefit from rising share prices and potential dividend distributions. But if the company performs poorly, the share price will decline, and dividends may be reduced or even eliminated. In the event of bankruptcy, a share may lose its entire value.
The share price depends on both internal and external factors:
- Internal factors: actual and expected results, company and/or sector news, dividend policy, etc ;
- External factors: political events, macroeconomic developments, and irrational elements that may exacerbate stock market fluctuations ;
As a shareholder, one benefits, among other things, from the right to vote at the General Meeting (unless holding non-voting shares) and the right to a portion of the company’s liquidation value in the event of dissolution (provided there is a liquidation surplus).
Shares may be registered or dematerialized:
Registered shares are entered in the company’s shareholder register under the holder’s name. Transfers to third parties are made by recording the transfer in the register. This type of transfer is relatively uncommon.
Dematerialized shares are recorded in a securities account in the shareholder’s name at an authorized institution. These can generally be traded easily on a daily basis, especially if the company is listed on the stock exchange.
Equity certificates are securities that represent original shares and are managed by a fiduciary company. The certificate follows the value (price) evolution of the underlying share and provides the same return (dividend).
The main difference with a share is that a certificate does not give the right to vote at shareholders’ meetings.
The risks are essentially the same as those associated with ordinary shares.
General Risks
| Market Risk | Yes, depending on the volatility of the stock. This depends on the company’s policy as well as the economic, microeconomic, and financial context |
| Currency Risk | Yes, if the stock is not quoted in euros or if the company operates outside the euro zone |
| Credit Risk | No, shares correspond to risk capital and are not debts. Naturally, shares can lose part or all of their value in the event of bankruptcy |
| Liquidity Risk | Yes, depending on the trading volume of the stock and the free float. The larger the company’s market capitalization, the more liquid its shares are |
| Interest Rate Risk | Yes, depending on the stocks and the investment climate. Generally, rising interest rates have a negative impact on stock prices |
| Reinvestment Risk | Yes |
| Tax Risk | Yes |
| Market Risk | Yes |
| Inflation Risk | Yes |
| Geographic Risk | Yes |
| Complexity Risk | No |
Specific Risks
Business Risk
As shareholders are co-owners of a company, they face the same risks as any entrepreneur: in times of difficulty, they share in the losses. It is even possible to lose up to 100% of the investment in the event of the company’s bankruptcy.
Dividend Risk
As shareholders are co-owners of a company, they face the same risks as any entrepreneur: in times of difficulty, they share in the losses. It is even possible to lose up to 100% of the investment in the event of the company’s bankruptcy. (Note: this section repeats the definition of business risk, though usually dividend risk refers more narrowly to the uncertainty of dividend payments depending on company performance.)
Bonds
Description
A bond is a tradable security representing a debt acknowledgment issued by public authorities (government bonds), supranational organizations (supranational bonds), or companies (corporate bonds). As a bondholder, one holds proof of participation in a long-term loan (> 1 year) for which interest (the coupon) is generally paid periodically.
A bond is always issued on the primary market, where new debt securities are offered. A new bond issue can only be subscribed during its subscription period.
A bond may be issued at par (100% of nominal value), above par, or below par, depending on market conditions. To buy a bond after the subscription period, one must go through the secondary market, where these securities are freely traded. Liquidity depends, among other things, on the size of the issue and the issuer. The bond’s price depends on interest rate movements (the price is generally below the issue price if interest rates have risen since issuance, and vice versa) and on the issuer’s creditworthiness since issuance.
At maturity, the bond is repaid at a pre-defined price, usually at par (100% of nominal value). Some bonds may be repaid early, usually at the issuer’s initiative.
There are various types of bonds: government bonds, supranational bonds, domestic corporate bonds, subordinated bonds, eurobonds, (reve rate bonds, perpetual bonds. Since Easyvest does not invest directly in bonds, there is no need to examine them separately in further detail.
General Risks
| Market Risk | Yes, if sold before maturity and if the issuer's financial situation deteriorates. For convertible bonds, this applies if sold before maturity and after conversion. For perpetual bonds: the price is sensitive to movements in the bond market due to the indefinite duration |
| Currency Risk | Yes, if the bond is not denominated in euros |
| Credit Risk | Yes, depending on the issuer's quality (rating). Subordinated loans carry more risk |
| Liquidity Risk | Yes, depending on the volume of transactions in the stock and the free float. The larger the company's market capitalization, the more liquid its stock market is |
| Interest Rate Risk | Yes, depending on the stocks and the investment climate. Generally, rising interest rates have a negative impact on stock prices |
| Reinvestment Risk | Yes |
| Tax Risk | Yes |
| Market Risk | Yes |
| Inflation Risk | Yes |
| Geographic Risks | Yes |
| Complexity Risk | No |
Specific Risks
Insolvency Risk
The issuer may become temporarily or permanently insolvent and no longer be able to pay interest or repay the loan, for example due to a general economic downturn or political events. If the bonds are listed on the stock exchange, this may also negatively affect their price.
This risk is virtually non-existent for government bonds issued by OECD countries (backed by state guarantees), bonds issued by supranational institutions, and generally also for issuers with a high-quality rating (at least “investment grade,” i.e., BBB). For “non-investment grade” bonds, the debtor’s insolvency risk, and therefore the risk of non-payment, is significantly higher.
Early Redemption Risk
In some cases, the issuer may proceed with the early redemption of the loan, particularly in the event of a decline in market interest rates. Such a decision may have a negative impact on returns
Credit Risk
Convertible bonds are, like ordinary bonds, exposed to credit risk. However, this risk is higher, as convertible bonds are often subordinated to ordinary bonds.
10. Specific Sections
At its creation, the organization comprises two distinct funds as described in the statutes: the Distinct CIPA Fund and the Distinct PCP Fund.
Figure 2 : Illustration of Account Segregation
Certain specific provisions are foreseen for each distinct fund with respect to this Investment Principles Policy.
10.1. Distinct CIPA Fund: Retirement Schemes for Company Directors (EIP type)
This is the retirement scheme for company directors of affiliated companies under the “CIPA” (individual pension commitment for company directors) scheme, pursuant to the Law of 15 May 2014 on miscellaneous provisions.
The pension scheme is a defined contribution plan without guaranteed return, without tariff, and with optional coverage of biometric risks.
These contributions are invested in equity and bond trackers, in proportions decided by the company director (the Affiliate). Asset management is carried out through model portfolios 1 to 10. After being presented with the possibility of a gliding path (see figure below), the affiliate chooses the proportions between the two trackers among model portfolios 1 to 10.
This gliding path allocation based on age is illustrated in Figure 3. It is a concept similar to the target date allocation or lifecycle fund approach documented in the asset management and pension fund industry.
The graph below should be read as follows: on the day of the affiliate’s 50th birthday, their model portfolio shifts from profile 9 to profile 8; on their 55th birthday, the portfolio shifts from profile 8 to profile 7; and so forth.
Figure 3 : Default Gliding Path of the Organization
All financial instruments (or, where possible, all fractions of financial instruments) and cash are allocated separately into each account per affiliate (or beneficiary), administratively segregated from the accounts of other affiliates (or beneficiaries) within the same distinct fund. The value of the affiliate’s individual account fluctuates with the financial markets. The returns (positive or negative) of the trackers are fully attributed to the affiliate.
The organization charges monthly management fees proportional to the value of the CIPA account reserve.
10.2. Distinct PCP Fund: Employee Retirement Schemes (PCP type)
This is the retirement scheme for staff members of several affiliated companies under the “PCP” (collective pension plan), pursuant to the Law of 28 April 2003 on supplementary pensions and their tax regime, and certain additional social security benefits.
The pension scheme is a defined contribution plan without guaranteed return by the organization, without tariff, and with optional biometric risk coverage. However, this scheme has the particular feature of being subject to a statutory return guarantee on employer contributions made to the employee (currently 1.75% in 2022). This guarantee is provided by the affiliated company to its employee. It is therefore not the organization that must provide this guarantee.
The organization’s policy is to offer the affiliated company only the option of making employer contributions and does not allow the employee to make personal contributions.
After deduction of social security contributions and taxes, the contribution is credited to the affiliate’s account reserve, on which the statutory return guarantee applies.
These contributions are invested in equity and bond trackers, in the model portfolio most suitable given the employee’s age and retirement date.
When the organization initially opens an account for an affiliate, its composition is based on the model portfolio and risk profile appropriate to the affiliate’s age at the time of account creation.
By definition, the affiliate’s age evolves over time and, consequently, so do the risk profile and model portfolio. The organization systematically implements the following allocation : when more than 20 years separate the affiliate from retirement, the organization imposes a VaR of 27%, corresponding to an investment of approximately 90% equities (model portfolio 9/10). As the affiliate approaches retirement, the organization gradually reduces equity exposure to reach a VaR of 18%, corresponding to an investment of approximately 60% equities (model portfolio 6/10) at the time of retirement.
This gliding path allocation based on age is illustrated in Figure 3. It is a concept similar to the target date allocation or lifecycle fund approach documented in the asset management and pension fund industry.
The graph should be read as follows: on the day of the affiliate’s 50th birthday, their model portfolio shifts from profile 9 to profile 8; on their 55th birthday, the portfolio shifts from profile 8 to profile 7; and so forth.
Figure 3 : Default Gliding Path of the Organization
The value of the affiliate’s individual account fluctuates with the financial markets. The returns (positive or negative) of the trackers are fully credited to the worker’s account.
All financial instruments (or, where possible, fractions of financial instruments) and cash are allocated separately in each account by affiliate (or beneficiary), administratively segregated from the accounts of other affiliates (or beneficiaries) within the same distinct fund.
The organization charges monthly management fees proportional to the value of the affiliate’s PCP account reserve.
At the time of retirement, the organization liquidates the investments and returns the balance to the worker, after deduction of any applicable taxes and other contributions. The supplementary pension is therefore equal to the amount in the affiliate’s individual account at the time of retirement. This amount is composed of the net contributions allocated to the financing of individual pension rights, plus the investment returns credited to the affiliate’s account.
Where applicable, this amount is supplemented by the affiliate’s employer at the time of retirement, upon the individual’s transfer after exit, or upon termination of the pension scheme, in order to comply with the statutory return guarantee referred to in Article 24, § 2 of the Law on Supplementary Pensions (LPC).
For employee retirement schemes (PCP), the investment strategy must be adapted to the profile and duration of the obligations arising from the pension commitments. To verify whether the investment strategy is optimal, the organization conducts an ALM study every three (3) years.
1 Short-term sovereign bonds are referred to as the risk-free asset in MPT (“risk-free asset”). While these instruments are indeed considered safe, they are not entirely without risk. In particular, their prices may still be volatile. Back to text
2VaR 98%=μ-α 98%σ, where μ is the expected annual return of the investment portfolio, α is the confidence interval coefficient equal to 2.053, and σ is the expected annual volatility of the investment portfolio. Back to text
3Article 2 of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”), requiring certain financial institutions to ensure transparency regarding the consideration of the negative impacts of investment decisions on sustainability factors. Back to text
4Alongside traditional ETFs that seek to replicate an index as closely as possible, active ETFs have emerged. These instruments aim to outperform a reference index. However, outperformance is not guaranteed. Some ETFs may outperform their index, but they may also underperform significantly. By definition, active ETFs are not trackers. Back to text