The Bloxham Defensive High Yield Fund
Download the Defensive High Yield Fund brochure
The Bloxham Defensive High Yield Fund is designed to offer clients equity market type returns BUT with reduced levels of volatility (or risk). The risk reduction strategy employed is unique in both the Irish and UK retail market.
In the current environment, the volatility of share prices is making investors “reluctant” to commit funds into stocks and shares. This new fund aims to ease investors concerns and provide the opportunity to share in market returns but without all of the risks.
- Returns – continues the successful strategy of high yield investing
- Risk reduction – specific risk management strategy in place to reduce some of the risk that comes from investing in equities
By implementing this risk management strategy, the fund may forego some of the upside returns if markets rally strongly, but this will be in line with investors’ original goals.
The fund incorporates a three pronged investment strategy:
1. Stock selection process
The fund invests in around 40-45 large global stocks which pay out higher than average dividend yields. Similar to our Bloxham High Yield Fund, the fund seeks out stocks which are in a position to progressively grow their dividends over the medium term. Dividends can be an important source of return from investing in equities and the fund aims to benefit from this. For example, between 1950 and 2010, dividend income accounted for 44% of the total return of the S&P500. Another advantage of investing in high yielding stocks is that, typically, these tend to out-perform the broad index when markets are declining.
The stocks selected will ensure broad diversification both in terms of geography and industry sectors. The benchmark for the new fund is the FTSE World Total Return Index.
2. Using options to generate additional income for the fund
The Bloxham Defensive High Yield will use options to generate additional income for the fund. The fund will sell three month call options* on some of the stocks held within the fund. This essentially exchanges some of the potential upside in the share price to generate the additional income. This well developed technique entails selling simple short term options on stocks which are already owned within the fund (NB: there are no naked positions and no unnecessary risks taken).
Call options with three month maturities are typically very liquid and are traded on exchanges throughout the world’s financial centres. The prices of these options change as share prices move, and Bloxham will use an options matrix to determine the best time to sell the calls in order to achieve the best possible price.
3. Focus on added protection
Providing protection against market falls is an important feature of the fund. To do this the fund uses the income it generates from selling the three month call options to buy some insurance against significant market falls, put options+ are used. The fund purchases put options on some of the major stock market indices to provide this insurance: If equity markets fall in value then typically the value of put options rise. Hence, if markets were to experience significant falls in value, then the profits on the put options would help off set some of the losses within the fund (N.B. this fund does not provide capital protection).
It is important to note that the amount of insurance that can be purchased will depend upon the amount of income that the fund can generate from selling the call options. Hence the level of protection will vary on a quarter by quarter basis.
How would the strategy have performed?
During the design process, Bloxham has undertaken some back testing of this strategy. This analysis took the largest holdings in the existing Bloxham High Yield Fund at the beginning of the year and implemented the above strategy.
In the nine months to the end of September 2011, the strategy implemented by the Defensive High Yield Fund would have produced a return of +5.5% whilst the FTSE World Index declined by 13.4%. The main reason for this outperformance is that the underlying portfolio of high yield equities outperformed the broader market indices and the value of the insurance through the put options has risen benefiting the strategy.
Summary
The issues facing many investors are to try to achieve “reasonable” returns whilst at the same time reducing unnecessary risk within portfolios. We believe that the new Bloxham Defensive High Yield Fund will help investors achieve this aim on a medium term basis. The new fund could be used as the core component of a diversified portfolio offering investors exposure to high quality global equities.
*Call options: The buyer of a call option has the right (but is not obliged) to buy an asset at a predetermined price on or before a fixed date in the future.
+Put options: The owner of a put option has the right (but is not obliged) to sell an asset at a predetermined price on a fixed date in the future.
Click here to contact your Private Client broker
Retail clients can access the Bloxham Defensive High Yield Fund via the New Ireland platform. The fund is available through the following:
- Smart Funds
- Smart Funds Saver
- Select Savings Plans
- Trustee Investment Plans
- Personal Retirement Bonds
- Personal Retirement Plans
- Executive Retirement Plans
- Approved Retirement Funds
- Approved Minimum Retirement Funds
Institutional clients can access the Bloxham Defensive High Yield Fund directly via Northern Trust or contact Bloxham on +353 1 611 9200.
