Deutsche Bank is the latest entrant to the growing market for European credit index-linked investment products.
Following the launch in March of JPMorgan’s Jeci instrument and Morgan Stanley’s Euro Tracers, Deutsche has unveiled its own innovation – the Xavex Dynamic Bond Portfolio Fund.
The exchange-traded fund, which has a five-and-a-half-year life and is initially being marketed to German private investors, is the first product of its kind to be based on the indices of the iBoxx consortium. It will be listed on the Deutsche Börse on May 22.
Whereas the JPMorgan and Morgan Stanley products were based on the banks’ own credit market indices, Deutsche believes that the perceived independence and transparency of the iBoxx indices will give its instrument added credibility.
iBoxx is owned by eight banks – ABN Amro, Barclays Capital, BNP Paribas, Deutsche Bank, Dresdner Kleinwort Wasserstein, Morgan Stanley and UBS Warburg – as well as Deutsche Börse.
“iBoxx is a multi-contributor, independent pricing source,” says Michele Faissola, global head of OTC derivatives at Deutsche Bank. “Compared with any other index out there, there is basically no risk of manipulation.”
Dominant iBoxx
Of the eight indices that make up the Dynamic Bond Portfolio Index, five are Deutsche’s – covering corporates and emerging markets. But the three iBoxx indices – covering sovereigns and Pfandbriefe – are dominant, accounting for over 72% of the fund’s double-A rated composite weighting.
The fund works like this: investors buy shares in a Luxembourg Sicav, which in turn buys bonds issued by OECD sovereigns and supranationals. The Sicav then enters into a total return swap with Deutsche, which receives the cashflows of the bonds held by the Sicav and pays to the Sicav the euro-denominated total return of the Dynamic Bond Portfolio Index.
The return to investors will thus comprise the total return of the Dynamic Bond Portfolio Index and, in addition, the spread performance of the underlying bond portfolio – which may be adjusted every three months according to investors’ tastes. Deutsche’s OTC trading desk hedges its own market and credit risk using index swaps, credit default swaps and interest rate products.
Deutsche says its product offers diversification (with access to more than 500 bonds through the chosen indices) and the potential for dynamic asset allocation (since the fund weighting can be changed every quarter). In addition, the shares in the fund are listed and traded on a stock exchange. Deutsche believes its fund offers the first fixed-income version of equity index products, which have proved enormously successful.
“We believe that the iBoxx indices will create in fixed-income land similar indices and index-linked products to those that already exist in equity land,” says Faissola.
The subscription period ends on May 17, with the fund on target to achieve subscriptions of around e1 billion. “The larger it is, the better it is – in overall terms,” says Faissola. “But the larger it is, the more problematic the hedging becomes – and the greater the cost to us.”
