Andrew Madigan and Steven Adam
As our Defined Returns Fund approaches it’s 11 year anniversary we thought we would provide you with an update on how the portfolio has evolved with changing market conditions over recent years.
The fund aims to deliver 7%-8% pa over the medium to long-term, a return similar to that of long-term equity returns. That return objective has never changed since the funds inception but the risk/return profile can. The delta of the fund (sensitivity to a move in the underlying price of instruments) has materially changed in recent years, helped by higher interest rates allowing the fund to take less risk to achieve its 7-8% objective. Whilst this Delta figure can change as markets move, the current level of around 38% (as at 31/10/2024) is near the funds historical low and is significantly lower than when we entered 2020 with a figure in excess of 50. The chart below shows the changing Delta over the past 4 years and a general trend lower.
Source: Atlantic House 31 Oct 2024
How has the lower delta impacted the behaviour of the fund? As you can see, as we have been able to de-risk the fund as interest rates have risen, the funds correlation to equites and its drawdowns have been much lower. But what if the BoE continue to cut rates? Autocalls tend to price off 2-year interest rates which have already priced in much of the future rate cuts. I would argue the current shape and pricing in the fund is a good reflection of a steady state going forwards.
Past performance does not predict future returns. Source: Atlantic House 31 October 2024
The lower Delta is a factor of the changing shape of the underlying positions of the fund. On average over the past 4 years we have been able to reduce the number of indices each positions is linked to, introduce more protection earlier in the underlying positions and improve the average coupon.
Source: Atlantic House 31 October 2024
This lower level of risk for an improved level of potential return can be illustrated in the table below which shows our forward looking scenario analysis. The estimated returns show a degree of resilience to falling markets will still maintaining an attractive level of return should markets be subdued or keeping pace with a rising market over the medium term.
Source: Atlantic House 31 October 2024
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 7-8% 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.
Comments