Funds of structured products: aiming for autocalls that do not autocall

Market Stability Fund (formerly Mondriaan Structures Fund)

This Dutch fund invests in a variety of structured products with the objective to generate an average long-term return at least equal to the average long-term return of equity markets in general, however with a lower level of risk compared to a diversified equity portfolio.

The fund closed the month 0.62% higher relative to May. Its cumulative performance since the start of the year is 4.80%.

MSF is becoming better known and therefore interest in the fund and the added value it can offer for a broad group of investors increases - Ivo van Wees, MSF

“In Q2 2024, similar to the first quarter, all monthly returns were positive, even in April when all stock markets fell,” said Ivo van Wees (pictured), managing director, risk & compliance, Market Stability Fund (MSF). “This is exactly what we like to strive for, namely stable returns.”

The number of participants in the fund increased further in Q2 2024 while its assets under management (AuM) increased from €132.95m in March to €136.69m end-June.

“MSF is becoming better known and therefore interest in the fund and the added value it can offer for a broad group of investors increases,” said Van Wees.

During June, many structures were redeemed early for a total notional of approximately €20m. All intended coupons were paid throughout the month with the revenues, including a part of the available liquidity, reinvested in new structures denominated in both euros and dollars for a total of around €24m.

The fund invests in products with a conditional principal guarantee and its managers have the option to choose between structures that potentially redeem early (autocallables) or memory coupon notes.

“The choice is mainly determined by the extra compensation that an autocallable provides compared to a memory coupon note,” said Van Wees.

In case a product redeems early, usually in a market that has risen, capital is often reinvested at a higher level, which is to the fund’s disadvantage.

“Yet we currently almost always opt for autocallables, because the coupon is considerably higher and so far we have been able to reinvest continuously under almost comparable conditions.

In fact, we prefer autocallables because of the higher coupon, but at the same time we’d rather have that they do not autocall - Ivo van Wees, MSF

“In fact, we prefer autocallables because of the higher coupon, but at the same time we’d rather have that they do not autocall,” said Van Wees, who admits that the fund has no control over this.

“If products are autocalled, it is important that we can reinvest under comparable conditions and that has certainly been the case so far. It also offers flexibility, which is to our advantage.”

The average coupon of the new investments is 11.2% pa compared to an average coupon of 10.8% pa for the structures that autocalled during the month.

At the end of June, the average buffer towards the protection barrier was more than 37%, with a lowest buffer of more than 31%. The initial buffer for all traded structures is at least 40%. In addition, all structures are currently paying their coupon.

The maximum maturity of the fund’s products is 10-years. If none of the structures are called for early redemption, the average maturity is approximately 0.9 years with a maximum maturity of 1.2 years.

The Market Stability Fund has €137m (US$148.7m) assets under management (AuM). The fund was launched on 1 January 2018 and the minimum subscription is €100,000. Key investor information risk and reward profile: five out of seven.

Atlantic House Defined Returns Fund

Launched in 2013 and with assets of more than £2 billion, this Dublin domiciled fund is one of the oldest and most established funds of structured products.

The fund aims to deliver an annualised net return of 7-8% of the medium to long-term in all but the bleakest market conditions. It will do so via an actively managed exposure to a diversified portfolio of structured products linked to global equity indices. It invests primarily in UK government bonds to provide the return of capital to investors over time, alongside a portfolio of global, liquid derivatives that generate the return on capital.

The fund is aimed at advised and discretionary market investors and benchmarks its performance to the Solactive United Kingdom Large Cap ex Investment Trust Net Total Return Index, the Solactive US Large Cap Index and the Solactive Euro 50 Net Total Return Index.

In June, the fund was up 0.3%, compared to -1.15% for the UK large cap market, +3.69% in the US, and -1.74% in the EU.

There were five maturities during the month, all of which were on their first anniversary. These were replaced with five autocalls on similar terms. Some 40% of the fund matured in the first six months of 2024.

The average coupons on the current portfolio are around nine percent.

At the end of the month, the average cover before capital loss was 36.10% with an average cover to achieve a positive return of 34.30%.

Atlantic House Defined Returns Fund has £2.2 billion (US$2.8 billion) in AuM. The fund was launched on 4 November 2013 and the minimum subscription is £5m or an equivalent amount in another currency. Key investor information risk and reward profile: six out of seven.

Atlantic House Global Defined Returns Fund

The UK investment manager launched another Dublin registered fund in June 2023. It aims to generate an annualised net return of 8-9% pa over the medium to long-term in all but the bleakest market conditions.

It will do so via an actively managed portfolio of structured products linked to global equity indices. To provide the return of capital to investors over time, it invests in US government bonds.

In June, the Solactive GBS Developed Markets Large & Mid Cap Index, the fund’s benchmark was up 2.14%, and the fund itself was up 0.5% - about a quarter of the markets.

The cumulative performance of the fund since its launch is 8.39% against 23.17% for the benchmark.

The fund celebrated its first anniversary on 26 June and with a one-year performance of 8.39% it is meeting its 8-9% target. In June, the fund had another autocall (its fourth): two new autocalls were added as a replacement, and also to service the inflows it has been receiving.

As of end-June 2024, the fund comprised 20 autocalls with an average annual coupon of 10%. The average cover before capital loss is 36.19% with an average cover of 30.49% to achieve a positive return.

The Atlantic House Global Defined Returns Fund has US$45.8m in AuM. The fund was launched on 26 June 2023 and the minimum investment is US$10,000 or the equivalent in EUR, GBP or CHF. Key investor information risk and reward profile: six out of seven.

Levendi Thornbridge Defined Return Fund

Levendi’s fund comprises of a diversified portfolio of defined return investments linked to major market equity indices. It aims to maximise the chance of generating an average medium-term annual return of six percent above GBP deposit rates.

Against a backdrop of UK and European equities falling 1.34% and 1.8%, respectively, and US equities rising 3.47%, the fund increased 0.50% in June.

During the month three positions with coupons in the 9-9.25% range autocalled. These were replaced by two new positions with exposure to European and US equities.

At end-June the average cover to achieve the target return was 42.9% while the average cover to capital preservation is 53.3%.

The fund is fully exposed to worst-of autocalls of which 56.2% is linked to the FTSE 100/S&P 500; 32.3% is linked to the S&P 500/Eurostoxx 50; and 11.5% is linked to FTSE 100/Eurostoxx 50.

Some 82.8% of the fund’s products are autocalling at current market levels.

Levendi Thornbridge Defined Return Fund has £118.8m AuM. The fund was launched on 31 January 2018 and has a minimum subscription of £5m for institutional investors (B-Class) and £1,000 for retail investors (A-Class).

Fortem Capital Progressive Growth Fund

This Irish Ucits V Icav fund aims to provide positive returns of 6-7% along with reduced equity beta over the medium to long term. To provide capital growth it uses a portfolio of structured products.

The fund remained stable, posting a return of 0.34% in June.

The average cover to capital preservation was 39.2% with the average cover to capital growth set at 38.2%.

Fortem Capital Progressive Growth Fund has £362m (US$465.4m) AuM. The fund was launched on 20 September 2017 and the minimum subscription is £5m. Key investor information risk and reward profile: four out of seven.

---

Do you have a confidential story, tip or comment you’d like to share? Write to info@structuredretailproducts.com