Fund advantages in the real world - Equilibrium

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    Fund advantages in the real world

    Investment Manager Mike Deverell provides an update on how the investment team have reacted to recent market volatility using the company’s new fund structure.

    By Mike Deverell, Investment Manager (on behalf of Equilibrium Investment Management LLP)

    When we launched the IFSL Equilibrium funds we felt there could be several advantages to managing portfolios via a fund structure.

    Some of these include:

    • The ability to place buys and sales at the same time, eliminating out-of-market time on switches.
    • Improved market timing through more efficient trading processes and the use of exchange traded funds (ETFs) where applicable.
    • No need to hold large amounts of cash allowing us to react quickly.
    • The simplicity of being able to place a single trade within the fund and it be effective for all investors in the fund at the same time (again, enabling a more timely execution).

    Many of these theoretical advantages – given that investments will fall as well as rise – have recently been put to the test given the volatility in markets.

    Before the recent dip we had been holding less in equities than usual in both the funds and our discretionary portfolios. However, we had always intended to move some money out of lower risk assets and into equity (and related assets) should markets correct.

    Our plans were to:

    1. Conduct a “volatility trade” at a FTSE 100 level of 7,200. We planned to invest 3% of assets into a FTSE tracker with the intention of selling it again should markets recover.
    2. Strike a new defined returns product should the FTSE 100 drop to 7,100 or lower.
    3. Conduct a second volatility trade if the FTSE 100 hit 6,750.
    4. Consider a larger move once we hit 6,750, after re assessment of the macro and market environment.

    For discretionary portfolios on platform, some of the money for these trades was held in cash to allow the speed of reaction. Within the IFSL Equilibrium funds we were able to hold more of this in other assets, principally in short dated fixed interest, due to the ability to switch from one fund to another immediately without out of market time.

    As I write, the market is at around 7,180 (the morning of 13 February 2018) and so stages three and four are hopefully still some way off. However, the market levels for steps one and two have already been hit.

    This blog aims to explain how we reacted to market volatility and how this differs between the IFSL Equilibrium funds and our discretionary portfolios.

    Stage one – volatility trade

    Within the IFSL Equilibrium funds we were able to invest directly into the market very quickly.

    Once the trigger point of 7,200 was hit on 6 February we purchased an Exchange Traded Fund (ETF) which tracks the FTSE 100. An ETF is similar to any other tracker fund but the difference is that it can be “live” traded at any time during the day. The price is based on the market level at the time of the trade. A normal OEIC (Open Ended Investment Company) or unit trust which tracks an index only trades once a day, usually at midday.

    This live pricing meant we bought in at an index level of almost exactly 7,200.

    For our discretionary portfolios we had cash available to purchase a tracker and therefore activate individual trades for all such clients. However, as live trading is not available on the platform we had to wait until noon the next day before our purchase completed. This did not make too much difference and the market was around 7,210 when the purchase went through.

    At this point we also sold down short-dated fixed interest on the platform for discretionary clients to create cash for later stages.

    Stage two – new defined returns product

    On 9 February 2018 markets dropped further and for much of the morning the FTSE 100 hovered above our target strike level of 7,100.

    We had already been in contact with various investment banks and had decided to strike a product with Morgan Stanley who we felt offered the best rates for a bank with their credit rating.

    We wanted to set up a product based on both the FTSE 100 and the S&P 500 given that both markets had fallen sharply and that this significantly increases the potential rate of return.

    As the market was close to but slightly above our target we agreed with Morgan Stanley that they would strike the product as soon as the FTSE dropped to 7,100. The level for the S&P 500 (which was closed at the time) would be determined based on index futures.

    This meant we were able to set up the product exactly at our target level despite the market mainly being above that level during that day. Should the FTSE 100 be at or above 7,100 and the S&P 500 be at or above 2,583 at close on 9 February 2019, the product will give us a 12.85% return net of fee’s.

    We feel this is an extremely attractive potential return. Even if the market is down over 12 months the product could roll on to the second anniversary and the potential return would then be 25.7%. If the market is down on all the concurrent anniversary’s, at the end of the product we will receive a return of capital; however, if the market is down 40% or more, there is a risk that the investment returns will be reduced proportionately.  Please ask your usual Equilibrium contact if you want to understand more of the potential risk and returns of such products (and don’t do anything without advice).

    One of the features of defined returns is that the rates we are offered increase in more volatile times. Just a few weeks earlier we struck a similar product with Credit Suisse when the markets were at 7,587 and 2,822 respectively. This had a rate of return of 10.825% pa (net). The new product therefore not only has a more attractive entry level but potentially pays over 2% additional return per year.

    As I write we have not yet struck a similar product for discretionary clients. The process of getting such a product available on the platforms is more convoluted than purchasing within the funds, where we simply need to pick up the phone to the investment bank. The platforms have to conduct their own due diligence and set up trading processes with the bank.

    We have also had to move money around as we had used some of our available cash to purchase the Credit Suisse product. This was set up to replace a previous investment which had just kicked out giving an net return of 11.55%. We struck the product the day after the old one ended so as to mitigate out of market risk. However, as these products have a two week settlement period the platforms have only just received these proceeds. We did negotiate with the bank to speed up payment but this only cut the settlement period by a day or so.

    This process has now all been completed and we will potentially strike a second product for discretionary clients in the near future, depending on market levels. Alternatively, we may instead top up our existing defined returns product, some of which can be bought below the price they were issued at. This increases the potential return.

    The recent volatility has proven to us that many of the ways we expected the fund to have advantages have proved to be the case in the real world. Whilst we cannot guarantee returns and in the short term all investments can fall as well as rise, we believe that the advantages of the fund, can make a real difference to long term returns.

    If you have any questions about how we are reacting to market volatility, or would like to learn more about our use of ETFs and Defined Return Products, please get in touch with your regular Equilibrium contact.


    This blog is a summary of recent developments. It should not be regarded as a substitute for advice in any particular case. Equilibrium is not responsible for the content of external websites. Investments may (will) fall as well as rise. Any performance targets shown are what we believe are realistic long-term returns. They are never guaranteed.

    Equilibrium Asset Management and Equilibrium Investment Management are authorised and regulated by the Financial Conduct Authority (FCA). Investment Fund Services Limited (IFSL) is authorised and regulated by the Financial Conduct Authority (FCA) and act as the Authorised Corporate Director (ACD) of the IFSL Equilibrium funds. Potential investors should read the Key Investor Information Document and Prospectus before investing. Copies are available from or can be requested as a paper copy by calling 0808 178 9321 or writing to IFSL, Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP.

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