End of year review 2024

Balanced Return Fund

This is a marketing communication for professional investors only. Capital at risk.

Past performance does not predict future returns.

As 2024 draws to a close, the Atlantic House Balanced Return Fund remains committed to its role as a diversifier to traditional multi-asset funds. Designed to deliver positive returns over the medium to long term across varying market conditions, the fund aims for approximately half to two-thirds the volatility of equity markets. Since its inception, the fund has achieved an annualised return of 4.08%, outperforming both its internal (IA Mixed Investment 20-60%) and official (IA Targeted Absolute Return) sector benchmarks, as of 11/12/24.

While the fund underperformed its benchmarks slightly in 2024, this was largely due to the very strong performance of equity markets. By design, the fund’s equity allocation is capped to enable it to provide some downside protection. We remain confident in the fund’s ability to deliver strong performance over market cycles. Leveraging a largely systematic, derivative-based approach, the fund offers a differentiated multi-asset solution with greater resilience and predictability.

This end-of-year review will cover:

A reminder of the fund’s three-pronged asset allocation approach

Performance Commentary

Outlook for 2025

An evolution in the fund’s portfolio construction

The Balanced Return Fund overview

The Atlantic House Balanced Return Fund is a multi-asset portfolio that uses a broader investment toolkit to provide greater resilience throughout economic cycles. Ideal for investors seeking diversification away from traditional multi-asset funds, the fund’s allocation mirrors that of a 60/40 equity-bond portfolio but with a unique, fully derivative-based strategy. By using derivatives backed by highly liquid UK government bonds, the fund reduces downside risk while maintaining exposure to key markets.

A Three-Pronged Approach:

Equity – predictable returns from shares
The fund’s equity exposure is structured to deliver positive returns of 7-8% per annum unless there is a significant market downturn (25-35%) over six years. This provides equity market participation while offering some protection against market falls. In exchange, investors forgo the potential for higher returns in strongly rising markets.
Bonds – dynamic diversification
The fund dynamically adjusts its bond exposure based on inflation and real yields. It increases bond exposure when inflation is under control and reduces it when inflation risks rise. This strategy should help to mitigate losses during inflationary spikes while retaining the diversification benefits of bonds in stable environments. Additionally, the allocation uses a diversified and systematic credit exposure which aims to enhance return.
Crash Protection – mitigating extreme events
The alternatives allocation provides cost-effective “crash protection,” designed to mitigate significant equity losses during periods of market stress. While not suited for short-lived volatility spikes, this allocation is optimised for prolonged market downturns, such as the Global Financial Crisis or the Covid-19 pandemic.

2024 YTD Balanced Return - Estimated attribution by allocation

Source: Atlantic House, 29/12/23 - 11/12/24

Monthly performance and commentary

Capital at risk. Past performance does not predict future returns.

Source Bloomberg, 29/12/23 - 11/12/24

The fund faced headwinds in early 2024 due to rising bond yields in the UK and US, as markets reassessed the trajectory of rate cuts. While bonds struggled in this environment, the fund’s inflation exposure provided a partial offset.

During the summer, declining yields supported bond performance, particularly as recession risks heightened. However, the equity allocation experienced volatility during the August flash crash, with sharp declines followed by a quick recovery. The Crash Protection allocation underperformed expectations during this event due to its design for prolonged stress rather than short-lived drawdowns. Steps have since been taken which aim to improve its responsiveness to such scenarios, as detailed in our Q3 2024 Fund Note here.

In October, fiscal stimulus from Labour’s UK budget and the November confirmation of a second Trump administration brought significant market movements. Bonds initially struggled on tariff fears but recovered in November, while equities rallied on the prospect of pro-growth policies. Crash Protection also gained on heightened volatility in interest rates.

Outlook for 2025

As a multi-asset fund, outcomes depend on the interplay of key variables such as equity performance and interest rates. To provide greater predictability, we aim to enhance scenario analysis and develop grids similar to those used in our Defined Returns Fund. While this is a work in progress, the defined nature of most of the fund’s investments allows us to estimate the following outcomes under benign market conditions over the next year:

Equity: 5.5% return in flat markets

Bonds: 2.1% return, assuming markets evolve as per current yield curves

Crash Protection: Flat return in stable markets

Expected return in benign conditions (net of fees):

approximately 7%, aligning with our medium-term return expectation of cash + 3-4%.

An evolution in the fund’s portfolio construction

Traditional multi-asset portfolios often face a diversification challenge: asset managers tend to use similar assets, leading to correlated outcomes. This creates a dilemma for investors seeking true diversification. The fund’s access to derivatives markets expands the opportunity set, enabling greater diversification. For advisers incorporating this fund into a wider portfolio mix, this should mean delivering more diversified outcomes for their investors. Importantly, this evolution represents a refinement rather than a substantial change to the portfolio. While the construction is designed to enhance performance, the main drivers of risk and return remain consistent with the previous approach.

But diversification isn’t just about the assets used; it’s also about how they are combined, much like the tactics and formations in sport. Consider the widely used ‘Balanced’ portfolio model of 60% equity and 40% bonds. While it appears diversified by asset class weights, the true balance lies in risk contributions. Below, we compare asset class weights to their contributions to portfolio risk:

Source: Bloomberg, 31/03/2003 - 11/12/24

The data reveals that traditional ‘Balanced’ portfolios are not balanced in terms of risk. They are highly skewed toward equity risk. Since early 2003, a 60/40 portfolio of global equity and global bonds has seen equity contribute 93% of the portfolio’s risk, with bonds contributing just 7%. This heavy reliance on equity risk underscores the diversification dilemma: traditional portfolios often exhibit high correlations, even when equity allocations are reduced.

Conclusion

The Atlantic House Balanced Return Fund continues to stand out as a differentiated multi-asset solution that addresses the limitations of traditional portfolios. With its evolved Target Risk Contribution framework and innovative use of derivatives, the fund aims to offer enhanced diversification, superior risk-adjusted returns, and consistent performance. As we look toward 2025, we remain committed to delivering reliable and robust outcomes for our investors, making this fund an essential consideration for advisers and investors seeking a resilient multi-asset strategy.

2023 Fund Reviews

A comprehensive list of risk factors is detailed in the Risk Warnings Section of the Prospectus and the Supplement of the Fund and in the relevant key investor information document (KIID) final investment decision should not be contemplated until the risks are fully considered. A copy of the English version of the Supplement, the Prospectus, and any other offering document and the KIID can be viewed at www.atlantichousegroup.com and www.geminicapital.ie. A summary of investor rights associated with an investment in the Fund is available in English at www.gemincapital.ie.  
Calculations do not consider credit spread movements of the issuers of the securities. The mark to market of the securities and therefore the NAV of the Fund will decrease as credit spreads widen and vice versa if spreads narrow. 

The price of shares and income from them can go down as well as up, this may in part be due to exchange rate fluctuations. Past performance does not predict future returns. Investors may not get back the full amount invested. There is no guarantee the Fund will achieve its objective. The level and basis of tax is subject to change and will depend on individual circumstances.

The Fund invests in derivatives for investment purposes, for efficient portfolio management and/or to protect against exchange risks. Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of a derivative investment to fluctuate and the Fund could lose more than the amount invested. 

The Fund can invest in high quality government and corporate bonds. All bonds will be rated at least A- by Standard and Poors at outset. If any of the bonds the Fund owns suffer credit events the performance of the Fund could be adversely affected.

A decision may be taken at any time to terminate the arrangements for the marketing of the Fund in any jurisdiction in which it is currently being marketed. Shareholders in affected EEA Member State will be notified of any decision marketing arrangements in advance and will be provided the opportunity to redeem their shareholding in the Company free of any charges or deductions for at least 30 working days from the date of such notification.

This document is issued by Atlantic House Investments Limited and does not constitute or form part of any offer or invitation to buy or sell shares. It should be read in conjunction with the Fund’s Prospectus, key investor information document (“KIID”) or offering memorandum. Atlantic House Investments Limited is authorised and regulated by the Financial Conduct Authority (FCA) FRN 931264. Atlantic House Investments Limited is a Private Limited Company registered in England and Wales, registered number 11962808. Registered Office: One Eleven Edmund Street, Birmingham. B3 2HJ.

The contents of this document are based upon sources of information believed to be reliable. Atlantic House Investments Limited has taken reasonable care to ensure the information stated is accurate. However, Atlantic House Investments Limited make no representation, guarantee, or warranty that it is wholly accurate and complete. The information provided in this document is confidential and only for use by its recipient. This material may not be disclosed or referred to any third party or distributed, reproduced or used for any other purposes without the prior written consent of Atlantic House, any data provider and any other third party whose data is included herein and must be returned on request to Atlantic House and any copies thereof in whatever form destroyed.

The Atlantic House Balanced Return Fund is a sub-fund of GemCap Investment Funds (Ireland) plc, an umbrella type open-ended investment company with variable capital, incorporated on 1 June 2010 with limited liability under the laws of Ireland with segregated liability between sub-funds.

GemCap Investment Funds (Ireland) plc is authorised in Ireland by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (S.I. No. 352 of 2011) (the “UCITS Regulations”), as amended.

Gemini Capital Management (Ireland) Limited, trading as GemCap, is a limited liability company registered under the registered number 579677 under Irish law pursuant to the Companies Act 2014 which is regulated by the Central Bank of Ireland. Its principal office is at Suites 22-26 Morrison Chambers, 32 Nassau Street, Dublin 2, D02 X598 and its registered office is at 7th Floor, Block A, One Park Place, Upper Hatch Street, Dublin 2, D02E762. GemCap acts as both management company and global distributor to GemCap Investment Funds (Ireland) plc.

The Fund is not sponsored, promoted, sold, or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either about the results of using the Index and/or Index trademark or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the Fund. Neither publication of the Index by Solactive AG nor the licensing of the Index trademark for the purpose of use in connection within the Fund constitutes a recommendation by Solactive AG to invest capital in said Fund nor does it in any way represent an assurance or opinion of Solactive AG about any investment in this Fund.

Addressing the problem: risk parity and its limitations

One approach to addressing this issue has been Risk Parity, which emphasises overweighting historically lower-risk assets. This method significantly improves risk-adjusted return metrics, but its limited equity allocations often result in lower annualised returns. Scaling the portfolio to achieve target returns is challenging with traditional models, where a £1 investment is directly allocated—60p to equity and 40p to bonds in the 60/40 approach. Additionally, Risk Parity relies solely on historical correlations and volatility to determine portfolio weights, which limits portfolio control.

An optimised solution: target risk contribution

The proposed solution is a Target Risk Contribution approach, which balances asset weights based on their contributions to portfolio risk rather than their nominal weights. For example, instead of allocating 60% of the portfolio to equity by weight, we target a 60% risk contribution from equity and 40% from diversifiers. This approach creates a portfolio that is more balanced in risk terms.

Historically, this method results in lower volatility compared to traditional Balanced portfolios. To continue to meet the fund’s target volatility of 10% (approximately a half to two-thirds the volatility of equity), the portfolio is scaled appropriately. The result is a diversified multi-asset portfolio designed to deliver consistency across a wider range of market environments, without detracting from returns. Crucially, this adjustment aims to enhance the fund’s structure without deviating significantly from the previously established asset allocation, ensuring continuity for investors.

Expanding the Opportunity Set

Looking ahead, we see further potential for diversification beyond the fund’s traditional equity, bonds, and crash protection framework. By including trend-following strategies, FX, and commodities, already key components of our Uncorrelated Strategies Fund, we can enhance portfolio diversification and improve consistency of outcomes. These additional assets act as diversifiers, broadening the portfolio’s scope and increasing its resilience in varied market conditions.

Strategic and Tactical Allocation

Target contribution to portfolio risk.png

Source: Atlantic House as at 11/12/2024

Our strategic asset allocation is guided by the Target Risk Contribution framework, ensuring balanced risk contributions across asset classes. Tactical risk management applies tight bands around these strategic targets, informed by both long-term data (since 2016) and shorter-term trends (three years).

Previously, our framework that allocated 60% to equity, 40% to bonds, and incorporated Crash Protection as an overlay resulted in an approximately 80% equity risk contribution. By integrating a diversifiers allocation and increasing the risk contribution from Crash Protection, our evolved approach should offer improved consistency and greater diversification relative to traditional portfolios, without foregoing returns.