Andrew Madigan and Steven Adam
This is a marketing communication for professional investors only. Capital at risk.
As the Atlantic House Defined Returns Fund passes 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 is designed 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 fund’s inception, but the risk/return profile can and has.
What has Changed about the Risk/Return Profile?
Delta
The delta of the fund measures the fund’s sensitivity to the price of its underlying equity markets. This has materially reduced in recent years. The current level is around 38% (as at 31 October 2024). This means that if the underlying markets to which the fund is exposed to were to fall by 10% tomorrow, we would expect the fund to fall in response by 3.8% in reaction. When we launched the fund 11 years ago, this sensitivity was more like 55%.
Atlantic House Defined Returns Total Delta
Source: Atlantic House 31 Oct 2024
The fund’s composition has not changed, the strategy is still allocating to Defined Returns Investments on large global indices (predominantly FTSE 100, EuroStoxx 50 and S&P 500) with a return objective of 7-8%pa net of fees.
So how can the fund still achieve slightly better equity-like returns over the medium to long term but with a reduced day to day sensitivity? The answer is down to interest rates.
How do interest rates impact the fund’s sensitivity to equity markets?
Zero Coupon Bond
Higher interest rates means that the fund can achieve improved terms on the new investments it builds. This is because a component of each underlying defined return payoff is a gilt, and higher rates means the zero-coupon bond part of the gilt is cheaper which in turn leaves more money to spend on the upside. Given the targeted return of this fund, that means the same 7-8% return but with greater protection (i.e. the levels the underlying indices need to be over on the observation days are lower than they have been previously). This in turn means in market wobbles, the fund has more protection to its barriers and is therefore less sensitive. On average over the past four years, we have also been able to:
1.) Indices: Reduce the number of indices each position is linked to
2.) Protection: Introduce more protection earlier in the underlying positions
3.) Return: Improve the average snowballing annual return.
See the two tables below illustrating the difference in Autocall Barriers, Capital protection Barriers and Coupons achieved now versus Q4 2020:
Average 'weighted' Autocall Barriers
Year 1 | Year2 | Year 3 | Year 4 | Year 5 | Year 6 | Capital Protection Barrier, observed at maturity only | Average No. of Indices | |
Q4 2020 | 100.00% | 99.66% | 98.52% | 92.5% | 88.36% | 68.28% | 66.47% | 2.41 |
31 Oct 2024 | 100.00% | 96.90% | 92.06% | 87.21% | 82.37% | 67.98% | 63.62% | 2.08 |
Average Coupon | Average Cover to Achieve Positive Return | Average Cover before Capital Loss | |
Q4 2020 | 8.05% | 27.62% | 33.53% |
31 October 2024 | 8.84% | 32.02% | 36.38% |
Source: Atlantic House 31 October 2024
Forward
The second way interest rates impact the fund’s sensitivity to equity markets is via the ‘forward’. The forward can be thought of as the future value of an asset, but mathematically in option pricing, it is simply rates minus dividends, i.e., the opportunity cost for owning the asset. So why is the forward relevant? Bear with us.
Forward Explanation: Imagine you wanted to enter into a contract with us to buy £100 worth of Company X share in one year’s time. In order to enter into this contract with you, we need to buy Company X to sell in a year’s time, so first we would have to borrow £100 off a bank which we would then need to repay at the end of the year, repaying the £100 loan and the interest rate on the loan. We are short rates for the year. We would then spend the £100 on buying Company X’s shares so that we can deliver the shares in a year’s time (i.e. so we are ‘hedged’). We would receive the dividends on those shares for the year. We are long dividends for the year.
Example: If rates were 2% and dividends were 4%, we would make 2% on that trade (Dividends minus rates = 4% - 2%). To equal that out, the price of that future asset should be £98. Vice versa if rates went up to 6% but dividends remained at 4%, we would lose 2% entering this trade with you, which in turn means the future price of the asset should be £102.
In summary, if dividend levels remain broadly unchanged, higher rates push the future value of an asset up via the forward. This is a mathematical relationship rather than taking into any other quantitative or qualitative considerations regarding the underlying asset.
So what? What this means for the fund is that where rates have risen, the future values of the underlying indices are calculated to be higher. So not only has the fund been able to achieve more protection with lower barriers, but the forward level of those indices on those barrier dates is calculated to be higher and further away as well, making the investments built on those indices less sensitive to fluctuations in those indices, i.e. lowering the delta.
What this looks like in practice
We have been able to de-risk the fund as interest rates have risen, which has resulted in the fund’s correlation to equites and its drawdowns being lower, which can be seen below.
Fund and UK Equity Drawdowns (LHS) vs UK Base Rate (RHS)
Past performance does not predict future returns. Source: Atlantic House 31 October 2024
What happens going forward?
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 while still maintaining an attractive level of return.
Looking forward, the fund remains well positioned to achieve its return objective of 7% -8%pa in anything but the bleakest market conditions.
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.
Key Risks
This is a marketing communication. The fund is aimed at advised & discretionary market investors over the long term who have the capacity to tolerate a loss of the entire capital invested or the initial amount.
A final investment decision should not be contemplated until the risks are fully considered. 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). 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. 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.
Important Information
Source for all data is Atlantic House Investments, Solactive and Bloomberg as at 31 October 2024, unless stated otherwise. Calendar year performance to 31 December each year.
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 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 material 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 Defined Returns 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 with regard to 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.
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