Defined return funds continue to be a key holding within our alternative allocation due to their inbuilt defensive characteristics, with the opportunity to produce alpha over the longer term.

The individual holdings within the funds, provide a known return dependant on underlying market conditions and so can reduce volatility if held for longer periods. One of the defined returns held in the portfolio is the Atlantic House defined returns fund. This fund is run by a very experienced team that specialise in managing defined return investments and has been a key holding within our portfolios for several years.

How has the AHFM fund performed over time?

Source: Atlantic House/Solactive. Performance of B share class, total return, net of fees in GBP. UK
Large Cap: Solactive United Kingdom 100 Net Total Return Index, US Large Cap: Solactive US
Large Cap Index and Euro Large Cap: Solactive Euro 50 Net Total Return Index as at 30/06/2022.

As highlighted by the performance table above, the return profile of the fund over the longer term has been good when compared to the underlying indices that the fund benchmarks itself against. This is due to both the defensive barriers built into the holdings, as well as the opportunity to outperform in flat or negative markets.

The underlying positions within the fund have a six year term, and will pay out on any of the anniversary dates if indices are at or above predetermined levels. As an example; one of the funds larger positions matured this month on its fourth anniversary, returning 32%. This position was exposed to the UK Large Cap and EU Large cap markets which returned 9.2% and 6.1% respectively over the same four year period and demonstrates the potential for defined return investments to outperform their underlying market exposures in moderately rising or flat markets.

With the fund having a target return of 7% to 8% per annum, over the longer term, it means that if markets rise strongly the excess return over and above this figure is foregone, as this allows the fund to build in protection for falling markets and provide alpha for flat or gently rising markets. It should be noted however that during shorter time frames where volatility is high, the price of the fund can be affected. The year to date performance is an example of this, although the falls have been slightly less than developed markets in the US and Europe.

The pricing mechanism of defined returns puts a greater probability of markets falling further or remaining at depressed levels when volatility is high. The investments in the fund have repriced lower over the past month, due to the risks that losses could be made if this volatility continues for longer periods. The return profile in June highlights the importance of investing in defined return funds for the longer term.

What is priced in for the future?

Due to the capital protection and positive return barriers being built into the underlying holdings,the prospects for the fund are still encouraging for longer term investors.

The fund has an average cover to achieve a positive return of 20.56%. This means that the underlying market indices would have to fall by another 20.56% on average and not recover from these levels for the holdings to not provide investors with a positive return.

The fund has an average cover before capital loss of 28.70%. This means that the underlying market indices would have to fall by this amount on average and not recover for the invested capital to be at risk.

The team believe that there is still sufficient room to these barriers to provide investors the opportunities of future returns and protection of capital.

In conclusion

Fundamentally, the defined return aspect of the outcome is what is extremely important. The returns that the investments can provide are known at outset, and hence positive returns can be made over the longer term even if markets are flat or slightly negative from current levels. There is still significant room for the final observation levels to be met even with how underlying indices have performed so far in 2022. There is a significant amount of intrinsic value in the fund at the current time. This is a particularly opportune time to hold this and other defined return funds.