SRP reviewed how the various funds of structured products performed in September and Q3 2023.
In part one of a three-part article, we review funds from the Netherlands, UK and Ireland.
This Dutch domiciled fund invests in structured products with a conditional principal guarantee.
The fund closed September 0.98% higher relative to August, despite a negative performance displayed by the global stock markets. The evolution of the fund year-to-date is also positive: 9.30%.
By investing in government bonds to hedge the derivatives we use, the counterparty risk on financial institutions has been reduced to a minimum - Jeroen Sinnige, Mondriaan Structures Fund
In Q3 2023, the value of a participation in the fund increased by almost 2.5% against a negative net performance for its three reference indices: MSCI World Index, Eurostoxx 50 and the Euro Broad Investment-Grade Bond Index.
During September, three structures were redeemed for a total notional of €9m while five new structures with a combined nominal value of €14m were initiated.
The conditional protection barrier is intact for all structures and the average buffer towards the protection barrier is more than 36% at the end of September, with the lowest buffer at 33%. In addition, all structures are currently paying their coupon.
The performance of the fund rests on four pillars, according to Jeroen Sinnige (pictured), managing director portfolio management at Mondriaan Structures Fund.
“We choose major international indices as the underlying value for our structures [and although] these indices may deviate from each other in the short term, in the longer term and in the event of very sharp price falls, their performance develops in a similar manner,” said Sinnige, adding that by opting for worst-of underlying values, the coupons are relatively attractive.
“The current coupon is over 12%,” he said.
The fund maintains a redemption barrier of maximum 60% of the initial level, with the final repayment date of the structures spread out and the timing of investment therefore always spread out too.
“We do not invest everything at the lowest price level nor everything at the highest price level.
“By investing in government bonds to hedge the derivatives we use, the counterparty risk on financial institutions has been reduced to a minimum,” said Sinnige.
Mondriaan Structures Fund has €120.6m assets under management (AuM). The fund was launched on 1 January 2018. The minimum subscription is €100,000. There is a management charge of 0.72% pa. Key investor information risk and reward profile: five out of seven. Net asset value (NAV) as of 30 September 2023: €141.85.
Atlantic House Defined Returns Fund
Launched in 2013 and with assets of £1.8 billion, this Dublin domiciled fund is one of the oldest and most established funds of structured products.
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.
During September, the UK large cap market was up 1.25% while both the US and EU large cap markets were down, 4.69% and 2.99%, respectively, leaving the fund’s performance relatively flat at 0.36% for the month. In Q3, the fund returned 1.20% compared to 2.32% for the UK large cap market, 3.14% in the US and -5.17% in the EU. The fund is typically most sensitive to moves in the UK large cap market.
The two investments that matured in September were replaced with dual index investments with an average coupon of 9.50% and more defensive autocall barriers and capital protection barriers.
Around 65% of the fund has now matured over the last 11 months, according to fund manager Jim May, speaking at Atlantic House Investments’ ‘Buy, sell or hold?’ webinar on 31 October.
‘They had average coupons of 7.8% and have been replaced by products with coupons of 9.24% […] barriers of the maturities were around 69%, the replacements around 65%,’ May said.
As of the end of September 2023, 92.89% of the fund is backed by gilts and cash, with the remainder of the portfolio made up of individual notes issued by Crédit Agricole (2.82%), J.P. Morgan (1.74%), RBC (1.44%), and Citi (1.11%).
The fund’s average cover to achieve a positive return is 30.90 while the average cover before capital loss is 35.81%.
Atlantic House Defined Returns Fund has £1.8 billion (€2.1 billion) in AuM. The fund was launched on 4 November 2013. The minimum subscription is £5m or an equivalent amount in another currency. Key investor information risk and reward profile: six out of seven. NAV as of 30 September 2023: 1.8833 (Accumulator share class).
Atlantic House Global Defined Returns Fund
The UK investment manager launched another Dublin registered fund in June. 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.
The fund aims to be exposed to equity markets in a proportion similar to that of a large cap world index. The largest exposure is the US large cap market, with lower exposures to Europe, Asia, and Australia. Its performance for September was -0.73% against -4.69% for US large cap, -2.99% for UK large cap, and -1.65% for EU large cap.
Having launched in June 2023, the fund managers are taking a staggered approach to fully investing the fund and ensuring that the maturities of the first 12 investments are spread over 12 months. Three new trades were added in September, with the fund now 77% invested. The average annual coupon of the first 10 trades is 9.7%, with an average final autocall barrier of 71.3%.
The fund’s average cover before capital loss is 30.55% with an average cover of 25.89% to achieve capital return.
The Atlantic House Global Defined Returns Fund has US$13.9m (€13.1m) in AuM. The fund was launched on 26 June 2023. Its base currency is US dollar, 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. NAV as of 30 September 2023: 0.9997 (Accumulator share class).
This UK open-ended investment company (OEIC) uses structured products to deliver reliable and consistent returns for portfolio managers allocating to alternatives.
Three of the fund’s notes autocalled during the month, which helped limit losses to -0.54%. The fund’s performance for full year 2023 is positive at 7.39%.
The maturities allowed the fund to invest in a new defensive autocall from Leonteq, linked to the Eurostoxx 50 and S&P 500. It offers a semi-annual coupon of 5.125% with a final level barrier of 80%. The remaining proceeds have been tactically held in cash which has reached around 10%, reflecting the fund’s current defensive stance.
The top 10 holdings of the fund include a Bank of America Dual Index Reducing Autocall (6.51% share), a Natixis Triple Index Memory Income Autocall (6.47%) and an EFG Mining Reducing Autocall (4.35%).
As of 30 September, the fund was invested for 73.05% in core holdings and 16.22% in tactical holdings – both comprising broadly of structured products from a range of issuing banks. The remaining 10.73% were cash holdings. Its average cover to capital loss is 36.31% with the average cover to capital gain -7.73%.
Idad Refined Growth Fund has £3.7m (€4.3m) AuM. The fund was launched on 23 August 2021. The minimum subscription is £50,000. There is a management charge of 0.60% pa. Key investor information risk and reward profile: five out of seven. NAV as of 1 October 2023: 97.71p (Class A) and 96.07p (Class R).
Lowes UK Defined Strategy Fund
This Irish domiciled Ucits fund aims to provide capital growth over the medium to long term in rising, directionless or modestly falling UK equities markets by investing in structured products.
The fund rose by 1.10% in September, taking the year-to-date return to 4.47%.
Two strategies, both gilt backed contracts linked to the FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index (FTSE CSDI), were subject to early redemption, returning 9.41% and 9.72%, respectively. One new strategy, also on the FTSE CSDI, was added in September. It has a tenor of maximum eight-years and autocalls if the index closes at or above its starting level on any anniversary, accumulating a 9.43% coupon for each year it is in force.
As of end-September, the funds counterparty exposure was as follows: UK government (76.80%), Morgan Stanley (7.50%), Citigroup (6.01%), Crédit Agricole (2.93%), BNP Paribas (2.83%), and cash (3.93%).
Out of the 21 strategies within the fund, all but two were in positive territory at the end of the month.
Lowes UK Defined Strategy Fund has £26.9m (€30.9m) AuM. The fund was launched on 11 December 2018. The minimum subscription is £1m for institutional investors and £100 for retail investors. There is a management charge of 0.4% pa (Class B) and 0.5% (Class C), respectively. Key investor information risk and reward profile: five out of seven. NAV as of 30 September 2023: £1.2181 (Class C).
Ballybunion Insignia Defined Returns Fund
This fund is regulated by the Central Bank of Ireland and primarily invests in euro-denominated autocalls.
For September, the fund’s net asset value per share fell 4.4%. However, year-to-date it is up 13.2%. One note autocalled during the month for a 7.5% return over a six-month period. It was replaced with a new note, using the same underlying equities and at a similar coupon.
The fund has exposure to 14 counterparties, including, among others, BNP Paribas (8.9%), Leonteq (8.5%), Itau (7.3%), and Morgan Stanley (7.1%), with 15.7% linked to money market instruments. Eighty-five percent of the fund’s assets is invested in step-down autocalls; eight percent in a 100% capital protected note; and seven percent in a twin-win note.
Ballybunion Insignia Defined Returns Fund has €26.7m assets under management (AuM). The fund was launched on 10 February 2020. The minimum subscription is €250,000 or equivalent (Class A shares). Currency classes are EUR, USD, GBP, CHF, SEK. There is a management charge of 1% pa. Key investor information risk and reward profile: four out of seven. The net asset value (NAV) per share as of 30 September 2023: 103.68.