This is a marketing communication for professional investors only. Capital at risk.
We are pleased with the fund's first-year performance, achieving a return of +8.4%. With assets now approaching £50 million, it’s been encouraging to see the continued strong demand for defined return investments among investors. Throughout the year, the fund performed as anticipated, meeting its 8-9% return target while offering significantly lower drawdowns and volatility compared to that of equity markets. Our measure of the strategy's success is not based on its one-year performance but rather on its ability to consistently achieve its return target over the long term. The Global Defined Returns Fund is managed by the same experienced team and using the same process as our flagship £2.2 billion Defined Returns Fund, which has successfully delivered on its 7-8% annualised return target since its inception 10 years ago. We believe our fund offers a valuable addition to clients' portfolios by providing a more consistent and predictable path to achieving equity-like returns.
Why we created the fund?
When we launched our Defined Returns fund 10 years ago, client portfolios were significantly more UK-focused than they are today. In recent years, we’ve noticed a growing demand from clients who appreciate defined return investments but seek greater exposure to global markets and -are willing to accept slightly less protection in exchange for a higher targeted return. With the Defined Returns Fund then managing £1.7 billion in assets, we were cautious about altering its established strategy. However, in response to this client demand, we decided to launch a Global version of our flagship fund. This new offering leverages the same experienced investment management team, proven process, and approach, but with a broader, global opportunity set and a more ambitious return target.
Differences between Global Defined Returns and Defined Returns Fund:
The Global Defined Returns Fund will primarily focus on the US market as its main equity index, rather than the UK. The fund will adhere to the maximum country limits outlined below, with the portfolio manager striving to align regional exposures closely with those of a global equity index.
Source: Atlantic House Investments, Bloomberg.
The Global Defined Returns Fund aims to achieve a higher target return of 8-9%. To reach this goal, the investments in the fund will have slightly lower protection barriers relative to the Defined Returns Fund.
A look back at the first year’s performance
We are very pleased with the fund's performance, delivering a total return of 8.4% net of fees in its first year, comfortably within its 8-9% long-term return target. While the fund's autocalls are sensitive to equity market movements, it is expected to underperform during periods when equities generate returns exceeding 8-9% annually. However, we assess the fund's success based on its ability to achieve its 8-9% return target over the long term, rather than outperforming equity markets. Ultimately, it is up to investors to decide whether an 8-9% return is a satisfactory outcome given the associated equity market downside risk.
Past performance does not predict future returns. Source: Morningstar 26/06/23 to 26/06/24
Minimising drawdowns
While delivering our targeted return is crucial, it's equally important to consider how the fund performed during periods of equity market drawdowns. In its first year, the maximum drawdown in global equity markets was 10.3%, compared to just 2.2% for the fund, with corresponding volatility levels of 11.7% and 4.2%, respectively. This significantly lower drawdown and volatility highlights the effectiveness of the defensive barriers inherent in defined return investments. As illustrated in the chart above, an investment in the fund can offer a noticeably smoother journey compared to direct equity exposure.
Past performance does not predict future returns. Source: Morningstar 26/06/23 to 26/06/24
Throughout the year, equity markets remained well below the thresholds of a 20% positive return and a 25% capital return barrier. The most significant drawdown occurred between July 31st and October 27th, driven by concerns over a more persistent inflationary environment, hawkish central bank rhetoric, and weaker economic data, leading to a 10.3% decline in equities over the summer. During this same period, the fund experienced a much smaller decline of just 1.6%. Before this downturn, the fund had approximately 33% protection before any capital loss and 28% cover to achieve a positive return. At that time, our forward-looking scenario analysis estimated that the fund would fall by 1.69% if equity markets dropped by 10% over the following three months. This outcome underscores the predictable return profile that defined return investments can offer clients.
Past performance does not predict future returns. Source: Morningstar 31/07/23 to 27/10/23
Throughout the year, the fund demonstrated robust downside protection during the four largest equity market drawdowns. Importantly, no changes were made to the strategy during these periods, as the built-in protection within defined return investments allowed the fund to remain fully invested and recover as markets rebounded. The strength of the fund lies in its ability to capture equity-like upside while offering downside protection in all but the most severe market conditions, without requiring the portfolio manager to engage in tactical asset allocation—a challenge that is notoriously difficult to execute consistently over market cycles.
Traditionally, downside protection is achieved by a portfolio manager de-risking ahead of a drawdown and then accurately timing the re-entry to the market. While we often discuss the risks of missing the best 10 days in the market, it’s important to remember that these days often follow directly after the worst 10 days. Unlike traditional strategies, our fund does not need to de-risk to provide downside protection, thus avoiding the risk of missing out on significant rebounds. This protection is systematically achieved through capital protection barriers.
For clients with more cautious dispositions, this smoother investment journey, which still aims for equity-like returns, can be particularly valuable, helping them stay invested in equity markets and grow their wealth over the long term.
Past performance does not predict future returns. Source: Morningstar 26/06/23 to 26/06/24
These drawdowns are quite typical for equity markets, which generally experience a decline of more than 5% about three times a year and a drawdown of over 10% at least once annually. Given the frequency of these market fluctuations, the fund is regularly presented with opportunities to minimize drawdowns, providing clients with a much smoother path to achieving equity-like returns compared to a direct equity allocation. This consistency in managing downside risk is key to delivering a more stable investment experience while still targeting attractive returns.
Portfolio Activity
The fund was launched in a highly favourable pricing environment for defined return investments. At the time of launch, GBP interest rates were around 5%, enabling the fund to invest in structures with barriers as low as 70%, and in some cases, with single index structures offering coupons exceeding 9%. Even though interest rates have declined over the past year, we have continued to secure similarly attractive coupons, with most well above our 8-9% return target. To maintain these attractive returns, we have slightly adjusted the final year positive return and capital protection barriers, setting them marginally higher than a year ago.
Redemptions since inception:
New investments in the fund:
Past performance does not predict future returns. Source: Atlantic House Investments
Looking ahead
As it stands, we believe the fund presents an excellent risk-reward profile for investors. The positive return and capital loss barriers, set at 30.62% and 36.09% respectively, provide a substantial level of downside protection. On the upside, the fund has the potential to deliver an 8.4% return in flat equity markets and 10.4% if equity markets rise by 10% over the next 12 months. Remarkably, even if equity markets decline by 10% over the next year, we project the fund to still deliver a positive return of 3.7%. The fund's delta is currently at 27%, with underlying regional allocations closely mirroring those of a global equity index.
Past performance does not predict future returns. Source: Atlantic House as at 31/07/24.
The scenarios presented are an estimate of future performance based on current derivative market conditions and are not an exact or reliable indicator. What you get will vary depending on how the market performs and how long you keep the investment. Although the Fund has a medium to long-term objective to deliver an annualised return of 8-9% over the long term, the scenario analysis is calculated over shorter term periods for greater accuracy. The Fund’s actual returns may differ from the estimates shown above and are subject to daily price movement. Future performance may also be subject to taxation, that could change in the future. The value of investments can go down as well as up and you may not get back the full amount invested.
Possible future maturities
Listed below are the potential maturities in the fund for the second half of the year, representing approximately 18% of the fund’s assets. Assuming markets remain at or above current levels, all four are expected to mature. These hopefully will get rolled into new investments with similar terms but likely with yields above the current ‘yield to call’ on the maturing investments, therefore enhancing the ongoing yield of the fund.
Indicative only. Past performance forecasts are not a reliable indicator of future performance. Source: Atlantic House
2024 August Wobble
The equity market sell-off in August once again highlighted the fund's defensive nature during such drawdowns. Hawkish actions from the Bank of Japan, coupled with weaker economic data from the US, led to a 5.5% decline in global developed market equities, while the fund experienced a more modest drop of 2.85%. Notably, around 19% of the fund was linked to the Japanese equity market, which at one point saw a decline of over 20%. Despite this significant drop in Japanese equities, the exposure only detracted approximately 60 basis points from the fund’s overall performance. This outcome underscores not only the effectiveness of the protective barriers but also the advantages of maintaining diversified regional exposure within the fund.
Past performance does not predict future returns. Source: Morningstar 31/07/24 to 14/08/24
Summary
In conclusion, in its first year the Global Defined Returns Fund delivered on its stated targeted return of 8-9% while maintaining significantly lower drawdowns and volatility compared to equity markets. As we look ahead, we remain confident in the fund's ability to continue providing investors with a stable and predictable investment experience, making it a valuable addition to any diversified portfolio.
This is a marketing communication. Capital is at risk.
All data as at 30/08/24 unless specified otherwise.
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