Equity
This is a marketing communication for professional investors only.
Capital at risk. Past performance does not predict future returns.
It’s easy to be drawn to the "bird in the hand" appeal of the 4–5% yields currently available on cash. Making the brave jump into equities with the constant headlines of markets hitting all-time highs can create a psychological barrier to invest investors and clients alike. It can feed into the misguided mindset of “I’ll wait for a crash and then buy equities.” While this might sound logical, it rarely works in practice. From my experience, clients are more likely to sell rather than buy equities in a crash.
The focus on “all-time highs” is misleading. Since 1950, the U.S. large-cap equity market has hit approximately 1,250 all-time highs—an average of 16 per year. These records are a natural feature of upward-trending markets. Historical data further debunks the fear of investing at all-time highs. Historically U.S. equities have only had a 9% chance of being down 10% one year after hitting a peak. Three years later, this drops to just 2%. Over a five-year horizon, there has never been an instance since 1950 when markets were 10% lower than an all-time high.
The true risk for clients isn’t short-term equity volatility—it’s the failure to grow their portfolio above inflation over the long term. While cash may seem attractive now, its real returns, after adjusting for inflation, have historically been poor. Add investor fees, and the return is likely to turn negative. Equities, despite their inherent volatility, offer significantly better real returns over time.
30 year inflation adjusted returns of US Equities vs US Treasuries vs USD Cash (%)
Past performance does not predict future returns.
Source: Bloomberg World Large & Mid Cap Total Return Index. 31/12/93 to 31/12/23
Convincing clients to give up the perceived safety of a 4.5% yield (the current YTM on an October 2025 gilt) for the uncertainty of equity returns is no easy task. Many clients might assume they can simply switch from gilts to equities once rates begin to decline. However, equity markets typically rally in anticipation of rate cuts, long before cash rates actually fall. Over the past year alone, the 1-year gilt yield dropped by 43bps, while global equities surged by 27%—the equivalent of six years’ worth of gilt income in just one year. Sitting on the sidelines in cash risks missing these powerful moves, which could prove costly for investors.
Yield Curve - UK
Past performance does not predict future returns.
Source: Factset 30/11/24
Imagine an investment that combines equity-like returns with a degree of predictability more commonly associated with bonds. This is where autocalls come into play. Autocalls aim to deliver a coupon in line with long-term equity returns in all but the bleakest market conditions. However, the more pressing question isn’t whether autocalls can achieve equity-like returns, but whether they are attractive relative to cash. Specifically, how much additional return should investors demand to compensate for the extra risk? This is what we call the Equity Risk Premium (ERP).
Historically, the ERP provides a useful benchmark. Over the past 20 years, UK equities have delivered an ERP of about 4.3%, while U.S. equities, with data dating back to 1871, have averaged 4.5%. Yet, given current starting yields and certain market valuations, it’s reasonable to question whether these levels of ERP are achievable going forward. Especially considering that the U.S. large-cap earnings yield currently stands at 3.3%—one standard deviation below its long-term average—and significantly lower than the U.S. 10-year Treasury yield at 4.4%. Historically, an earnings yield below the 10-year Treasury yield has often signalled that the equity market may be overvalued.
Earnings Yield Gap of US Equities vs US Treasuries
Past performance does not predict future returns.
Source: https://www.gurufocus.com/economic_indicators/151/sp-500-earnings-yield
Examining long-term equity market return assumptions from the sell-side, it’s clear that, absent a significant decline in interest rates, they anticipate a lower equity risk premium in the years ahead.
Long Term Equity Market Return Assumptions
Past performance does not predict future returns.
Can autocalls capture an equity risk premium more in line with long-term averages? Below are three examples of recently launched autocalls from our Defined Returns fund. Since these are 6-year investments, I’ve used the UK 6-year rate of 4.2% as the benchmark for comparison.
Past performance does not predict future returns.
Sources for long term assumptions:
https//am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/portfolio-insights/ltcma/noindex/ltcma-full-report.pdf
https//www.invesco.com/content/dam/invesco/emea/en/pdf/long-term-capital-market-assumptions-EUR.pdf
https://institutional.fidelity.com/app/proxy/content?literatureURL=/9904178.PDF
https://www.morganstanley.com/assets/pdfs/2d9493c3-822f-4f18-8c28-ba3ad25e8473.pdf
https//www.ssga.com/library-content/assets/pdf/global/mas/2024/long-term-asset-class-forecasts-q2-2024.pdf
On a standalone basis, year 1 coupons of autocalls appear to offer an attractive return above that of cash and inline or above historical equity risk premiums. It’s important to note that these are simple annualised coupons that do not compound over the life of the investment. (i.e. total return = 6 x 8.78%). That said, most autocalls historically are called within the first or second year, as rising markets typically trigger early redemption. This allows investors to reinvest in new autocalls and compound their returns over time. If an autocall extends into its third or fourth year, it will be directly due to declining equity markets. In such circumstances, autocalls often provide more attractive returns relative to equities.
For investors concerned about “all-time highs,” the examples highlighted show that all three autocalls will pay their coupons even if markets decline by up to 31% over the next six years, while still returning the initial capital if markets fall by up to 36%.
For clients who have become accustomed to the predictability of cash returns and need some coaching out of short dated gilts, autocalls could be the answer. They provide the predictability and downside protection many investors seek while simultaneously keeping them aligned with their long-term investment objectives.
This is a marketing communication. 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.geminicapital.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 value of investments and income from them can go down and you may get back less than originally invested. There is no guarantee that the Fund will achieve its objective. Past performance does not predict future returns. 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 invests 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.
Other risks the fund is exposed to include but are not limited to, credit and counterparty risk, possible changes in exchange rates, interest rates and inflation, changing expectations of future market volatility, changing expectations of equity market correlation and changing dividend expectations.
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 is a marketing communication 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 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 video 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.
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.
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 to terminate 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.
The Atlantic House Uncorrelated Strategies 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
