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
March was a fairly extraordinary month. The world’s attention was understandably focussed on the unfolding invasion of Ukraine, which initially weighed heavily on equities and caused unprecedented moves in commodities. The added possible inflationary consequences of the war weighed further on bond markets, which have suffered their worst quarter in 40 years; once more investors are being warned that bonds are unlikely to serve as a diversifier to equity in an environment in which central banks are reversing course on the incredible support both asset classes have been afforded since the Global Financial Crisis.
The Fund returned -1.0% over the month.
The Fund’s equally weighted indices underperformed their market cap weighted counterparts significantly in March. The FTSE 100 EW was down 3.3% against the market cap version’s gain of 1.4% gain, whilst the EuroStoxx 50 EW was down 2.2% against the market cap’s 0.5% retreat. In the FTSE’s case, the underperformance has been stark YTD at -7.6% vs 2.9%, which has had a fairly significant mark-to-market impact on Fund performance. The Fund’s diversification across geographies has also meant that it has picked up more of the downdraft in international equities thus far in 2022, particularly in Europe, as can be seen on the table on the right hand side.
However, when a Fund’s return is predicated on its underlying indices meeting performance criteria at maturity, even if that criteria is ‘not having fallen by more than x%’, having diversification across underlyings is sensible, in the same way it is for any asset class.
One buys defined return funds for their ability to produce positive returns in multiple environments, and therefore the key questions investors should ask themselves are:
The Fund’s current average protection levels sit at 35.5% before any capital loss and 32.3% before investments don’t return their full pre-defined capital growth, even post the drawdowns seen so far this year. What’s more, the average time to maturity of the investments is 5 years, leaving plenty of time for recovery if markets were to experience significant falls of more than 30% in the near term. It is worth remembering that they would only need to recover to the extent that the indices were above those conservative final barriers, they would not need to recover anything like fully.
With regards to the returns on offer, they are significant. This intuitively makes sense as market moves this year mean that a ‘catch-up’ is required for the investments to achieve those pre-defined and contractually agreed returns in order for the Fund to annualise at its 6-7% target return.
|Hong Kong 50||-5.7%||-2.8%|
|US Equity Income||-5.9%||3.7%|
At the risk of sounding like a stuck record, there have been few times when this type of investment has made more sense for multi-asset investors.
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