Deutsche launches credit index fund

Deutsche Bank launched the Xavex Dynamic Bond Portfolio Fund today. The new credit fund is index-based and indirectly uses the German bank’s over-the-counter (OTC) trading desk for hedging.

The fund is initially being offered to German private investors who can purchase shares in the Luxembourg-based vehicle via Deutsche’s private banking arm. “We will also be distributing the fund through other private banks, and directly offering it to institutional investors,” said Michele Faissola, London-based managing director and global head of OTC derivatives at Deutsche Bank.

Fund investors gain exposure to the Dynamic Portfolio Bond Index (DPBI) that includes a basket of European total return indexes. Four of Deutsche’s credit indexes – triple-A corporates, double-A corporates, single-A corporates and emerging market eurobonds - are in the basket.

However, sovereign and Pfandbriefe indexes provided by iBoxx – the credit index consortium formed in early 2001 – have an initial weighting of around 72% of the DPBI. Investors can change their allocation between indexes on a quarterly basis during the 5.5-year life of the product.

In order to give investors index-like performance, the Luxembourg vehicle first enters into an index swap with Deutsche’s OTC trading desk – swapping the cashflows of the bonds it holds for the total return of the DPBI. Deutsche then manages the market and credit risk on its OTC book with interest rate and credit derivatives, index swaps and bonds.

In addition to diversification (investors in the fund effectively gain exposure to around 500 bonds) it’s the product’s fair, transparent and independent pricing that will appeal to investors, claimed Deutsche’s Faissola. The iBoxx consortium includes ABN Amro, Barclays Capital, BNP Paribas, Deutsche Bank, Deutsche Börse, Dresdner Kleinwort Wasserstein, Morgan Stanley and UBS Warburg.

The product will be listed and traded on the exchange-traded fund segment of the Frankfurt Stock Exchange starting from May 22; Deutsche is also considering white-labelling the product for other banks.