UK & EU – For professional and institutional investors only
Switzerland – this is an advertising document for professional and institutional clients as defined by the Swiss Financial Services Act only
Equity and bond markets once again sold off simultaneously in February. First, concerns around inflation and the potential need for more rate hikes slowing future growth continued, before the potential and then realised Russian invasion of Ukraine dominated sentiment. Global equities, led by Europe, suffered significant falls, leaving most down fairly heavily for the year. The exception was in the UK, where heavy energy exposure meant that the index was reasonably insulated. The Bloomberg Commodity Index itself was up 6.2% on the month, leaving it up 15.5% YTD.
The Fund returned -1.8% over the month.
The Fund, by design, is diversified across geographies, and it has been this geographical diversification that has caused some underperformance this year as US and European markets have underperformed their UK counterpart. It is also diversified amongst market cap weighted and equal weighted indices which, in the case of the UK, has seen the equal weight version of the index underperform the market cap weighted version by 6.7% YTD. For those avid readers of the factsheet, the split between equally weighted and market cap weighted indices can be found on page 2. Over the long term, as with all equity or equity-linked investing, this diversification means that the Fund is not as exposed to severe underperformance in a single index at maturity.
As investors will be aware, the protection built into the Fund is predicated on how conservatively the final barriers that stipulate protection of capital and capital growth are set. No investment in the Fund can be incepted that does not allow for falls of more than 30% over a six year period before they would not pay their capital growth in full and return original capital invested. Just how conservatively these barriers are set can be seen by the fact that as at the end of February the average level of protection against any capital loss at maturity sits at 34.4%, and for full capital growth at 32.3%. The average time until that final barrier is observed is over 5 years away, meaning the Fund has significant long term protection at these levels.
The Fund also has an overlay of uncorrelated protection in order to take some sting out of the tail of the investments in severely stressed markets, as they did during the March 2020 crisis, including ¾ of the Fund being covered by long CDS positions. Credit markets have been reasonably well behave to this point, but any threat to the global economy emanating from the current situation, given where inflation and rates are, is likely to cause significant stress. The overlay added 0.2% in February.
The Fund’s long term target return of an annual 6-7% will be achieved if its investments mature above their final barriers, to which they are still afforded significant protection and time. Given that significant protection, the Fund’s GRY (in order to catch up to the 6-7%) looks ever more attractive:
|Hong Kong 50||-2.9%||-4.6%|
|US Equity Income||-8.0%||-3.1%|
The Fund remains positioned to outperform equity in multiple market scenarios, and importantly has the ability to produce significant positive returns even if there is significant further deterioration in equity levels from here. Given the uncertain outlook, a Fund with that ability has rarely looked more attractive.
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