With the recent market volatility where a lot of asset classes have not been immune to losses, the investment team had a call with our defined return fund managers on Monday morning to discuss how the funds have fared.

Below we have provided an overview of the points discussed and what has occurred within the funds over the past week, which should provide a positive talking point for you and your clients.

How have the funds performed in the past few days following the Tariff announcements?

Fund manager Tom May has given us some of the reasons for the resilience of the AHFM Defined Returns fund.

‘From a market perspective, as you are aware, everything was very orderly on Thursday and then on Friday there seemed to be a bit more capitulation, and then that has carried on today. Having said that, it doesn’t feel like Covid or Global Financial Crisis at this point.

From a structured product perspective, banks are still pricing new trades and buying back structured products at current prices and bid offer spreads haven’t widened too much as we speak. This is positive and means investors do have some protection from the falls that equity markets are experiencing.

Despite the falls on Thursday and Friday, the fund is only off about 4% over those two days, which is a lot better than the markets, so currently we are not fully tracking the markets down.’

Source: Tom May, AHFM Defined Returns Manager April 2025

Frank Cobblestone has set out the reasons behind the Levendi Thornbridge Defined Returns performance over the past few weeks.

‘The Fund is currently running a c. 50 Delta to the market, so we are far away from tracking the markets down 1:1.

As of Friday, we have an average buffer of 42% for Capital Preservation, i.e the market needs to fall a further 42% (and stay there) before capital is affected. We also have an average buffer of 30% for Coupon, i.e the market needs to fall a further 30% (and stay there) before the coupons are affected.

We also do not hold any bank notes so are unaffected by widening in credit spreads/credit worthiness of banks.’

Source: Frank Cobblestone, Levendi Thornbridge Defined Returns Manager April 2025

This is the reason why we like defined returns as an asset class, as despite recent market declines and volatility, our defined return fund holdings have performed better than the broader market.

Why have the defined return funds that we hold provided positive protection for our investors from the sharpest aspects of the equity market sell off?

1. Protection – The funds have a lot more protection barriers than they have done historically. This is because higher rates over the last three years have meant that the managers could get higher coupons whilst also embedding more protection. Greater protection reduces the funds’ sensitivity to market movements.

2. Volatility – Long dated volatility has not risen too much yet. For example, 3-year volatility of the FTSE 100 has only risen about 3% so far, which whilst not insignificant, it is far from extreme. In comparison, during the Covid pandemic, the volatility rose to approximately 12% before reversing.

3. Interest rates – Declining projections for longer-dated interest rates are positive for the funds performance. This is because the price of the zero-coupon bonds held within the funds are expected to increase, and the funds should also benefit from improved pricing on the derivatives used within the investment structure.

4. Time – The funds have plenty of time regarding the longevity of the underlying investments. Most of the trades in the funds are quite recent, so they have a lot of time for markets to recover, however, even if markets remained at their current levels, the investments would make a positive return. As an example, from current levels, if markets don’t move and the underlying holdings were left to mature, the AHFM defined returns fund is on track to yield higher than the target return of 7% to 8% p/a.

In Conclusion

Defined return holdings continue to be a major theme in all our portfolios, with around 10% of our funds under management in this asset class.

The defined returns funds have provided some protection from the major volatility and falls the markets have experienced over the past few weeks, which we think will continue due to the lower correlations, downside protection and alpha opportunities the asset class provides.

With current delta levels on the funds (correlations to underlying markets) being at or below 50% (if the markets fall 15%, the funds will fall circa 7.5%); the longevity of the holdings; the alpha generation from lower market levels; and positive moves on forward interest rate projections, the outlook for our defined return holdings continues to be positive.

The funds will not be totally immune to the selloffs but should provide downside protection to our portfolios over time. Also, as a longer term holding, due to the current capital protection and return levels in place for the funds, if markets stayed at these levels, they would be looking to still provide positive returns from their autocalls ranging from 7-10% p/a. Meaning this year, if markets stayed the same, the funds would return circa 2-3%, when the rest of the market is down circa 10%. This is a major benefit for our portfolios and highlights why defined returns continue to be such an important theme within our portfolios.