18 August 2020
Within the MI Diversified Strategy Fund you will typically find an allocation to structured notes. We like these investments as they give a part of our portfolio definition, whereby at particular market levels we know the return which they should deliver. Whilst their performance is determined by their underlying indices, the terms of some of these notes means that the performance of the index does not need to be positive for a positive return by the note to be achieved.
One such note has just successfully matured on its third observation date. This investment was dual index, with the FTSE 100 and EStoxx 50 as its underlying indices. It had a maximum 6 year duration at launch, paying a coupon of 9.5% for each year in force. Whilst the indices needed to be at or above the strike price for the first two observations, it then had a 5% reduction in the observation each year thereafter, falling to 80% in year 6. This note also had a rare consolation feature, whereby if the worst performing index ended the term between the final defensive feature (80%) of strike and the end of term capital protection barrier (65%), the investor would still be entitled to half of the snowballed coupons.
This note was purchased for the Fund a little under 2 months after its initial strike, but due to market weakness we were able to purchase under par value, at 98.78 before trading costs, thereby improving the return profile. On its 3rd anniversary, on the 02 August, this note matured, providing a total return before costs of 34.9%, representing an annualised return of 9.34%. The EStoxx 50 index was comfortably above the required level of 3,347.116 and indeed above the initial strike level of 3,523.28. The FTSE 100 meanwhile was only a little over 10 points above the required level, at 7,081.72, this being 4.86% below the initial strike level.
Within the Fund we allocate such investments to our equity bucket. When assessing such investments therefore it is not just a case of whether we believe that the investment may outperform the underlying index but also is the potential return attractive relative to what active equity managers could generate. Over the period to its kick out the return achieved proved attractive indeed relative to active equity, with the IA UK All Companies sector average having posted a total return of 24.49% over the period. Indeed, the return of 34.9% would have placed this investment in the 1st quartile. Many of the funds in this sector will have benefitted from mid-cap exposure over this period, which significantly outperformed large cap over the period. In our eyes therefore, this was an excellent way to gain UK large cap exposure, particularly with the added bonus of the defensive and consolation features just in case markets didn’t go our way.
This article is for information purposes only and should not be construed as advice. We strongly suggest you seek independent financial advice prior to taking any course of action.
The value of this investment can fall as well as rise and investors may get back less than they originally invested. Past performance is not necessarily a guide to future performance.
The Fund is suitable for investors who are seeking to achieve long term capital growth.
The tax treatment of investments depends on the individual circumstances of each client and may be subject to change in the future. The above is in relation to a UK domiciled investor only and would be different for those domiciled outside the UK. We strongly suggest you seek independent tax advice prior to taking any course of action.