Defined return investments, with their known return profile from the outset depending on certain market conditions being achieved, can provide structure to a portfolio. With that structure can come success. Within the Lowes UK Defined Strategy Fund (the Fund) we recently had another strategy mature which proved just that.
This now matured strategy was in note form, issued by Morgan Stanley. Commencing on the 16 January 2020 with the FTSE 100 as its underlying index, this offered a potential coupon of 10.8% simple for each year in force. It had the ability to kick out, or mature, from 1st anniversary and every 12 months thereafter, if the index was at or above its initial strike level of 7,609.81*. The strategy carried the benefit that if it did not mature, as long as the index was not below 60% of the initial index level on the final maturity date the full capital would be returned.
Whilst the first potential maturity in January 2021 did not occur, it successfully matured on its second anniversary on the 17 January this year, with the FTSE 100 closing at 7,611.23*, less than 2 points above the required level. So whilst the index in price terms posted a mere 0.02% return, the strategy returned a total return for the 2 year period of 21.6%. Even on a total return basis the FTSE 100 returned only 7%. The IA UK All Companies [CT1] sector, which includes funds which invest at least 80% of their assets in UK equities which have a primary objective of capital growth, produced an average return did not come close either, posting a total return of only 9.72%*.
When looking to add new strategies to the Fund, we are first and foremost looking to include those which will help achieve the overall performance objective of in excess of cash plus 5%, as measure by SONIA (Sterling Over Night Indexed Average). Whilst it is not the aim to outperform equities, it is something which we are happy to see when it does occur. It also highlights that, depending on the type of strategy you implement, you don’t need the underlying index to move far to achieve the returns you are looking for when allocating to defined return investments. Whilst the maturity is nice to report and enjoy, at a coupon of 10.8% it is shame to see this one leave the portfolio. However, I am sure its replacement will adequately fill its shoes.
Lowes UK Defined Strategy Fund.
Defining investments, Defining returns.
‘** FE Analytics
The value of this investment can fall as well as rise and investors may get back less than they originally invested. For a full list of potential risk factors please see the section entitled “Risk Factors” set out in the Prospectus for the ICAV. There are fees and charges applied to your investment. For a full list of these fees please refer to the KIID and Fund Supplement. The Fund is actively managed with reference to the target benchmark, SONIA +5%.
The Lowes UK Defined Strategy Fund is a sub-fund of the Skyline Umbrella Fund ICAV and is regulated by the Central Bank of Ireland. The full suite of fund documentation can be accessed by visiting UKDSF.com/literature and is only available in English. Lowes Investment Management, Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne, NE2 1TL. Authorised and regulated by the Financial Conduct Authority.