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The use of diversifiers in the funds
Kevin Gray
Chief Investment Officer
5 min read
The use of diversifiers in the funds
The Use of Diversifiers in the Fortem Capital Progressive Growth Fund
Defined Returns are brilliant, but…
• The Fortem Progressive Growth Fund is likely to produce positive returns in all but the very worst market conditions.
• Those conditions are significant falls (>30%) that, crucially, equities do not recover from.
• History would suggest that this is extremely unlikely – insert usual caveat regarding history not being a reliable guide to the future.
• However, there is still journey risk due to equity market exposure and the fact that capital protection barriers are only observed at maturity for the individual underlying strategies.
• Investors are potentially exposed to significant drawdowns over the short term due to Fund delta (sensitivity to the underlying indices).
Delta is Dynamic!
• Delta is not static and will move with markets and the passage of time.
• In fact, a fall in markets will naturally increase Fund delta and therefore sensitivity to the underlying equity indices.
• This would leave an investor even more exposed to a further fall in equities.
The Fund uses Diversifiers to counteract this and manage Delta more effectively…
• The Fund will invest a maximum of 20% in a portfolio of Diversifiers that will dampen down equity market exposure, as well as have the ability to produce positive returns in all market conditions, especially during a downturn.
How do they do that?!
• They are ‘Structural Alternative Beta’ strategies that are fundamentally uncorrelated to equity.
• Alternative Beta is just a piece of nomenclature referring to any source of return other than traditional Beta.
• This is already present across asset classes in portfolios, but by removing traditional Beta, it can be isolated
and taken advantage of.
• The Fund will only invest in Diversifiers that are either negligibly or negatively correlated to equities.
And what makes them structural?!
• The strategy will provide maximum diversification benefit if they are both statistically and fundamentally
uncorrelated to equity.
• The strategies are all based on the physical make-up of a market, rather than any macroeconomic influences
on it.
• Commodities are a good example – these markets are driven by ‘real’ players (OPEC etc) who dwarf investors in size.
• By ensuring the strategies are structural in nature, we further ensure that the Diversifiers are completely
unrelated to the factors driving price movement in the Core portfolio of Defined Return Autocall-like
strategies.
If they are so good, why not just do a fund of them?
• We do! The Fortem Capital Alternative Growth Fund.
Summary
• The fund is, and always will be, predominantly exposed to defensive equity linked investments.
• By employing genuine diversifiers we can improve the stability and consistency of the portfolio during times of equity
market stress.
• This should allow us to achieve the return objective with less volatility, a smoother journey for those who hold the fund, and easier conversations in meetings for our clients!
• We, along with our clients, would hope that the diversifiers are not necessary; history tells us that they are, and that our future selves will thank us for doing something today.
– This document has been issued and approved as a financial promotion by Fortem Capital Limited for the purpose of section 21 of the Financial Services and Markets Acts 2000. Fortem Capital Limited registration number 10042702 is authorised and regulated by the Financial Conduct Authority under firm reference number 755370.
– This document is intended for Professional Investors, Institutional Clients and Advisors and should not be communicated to any other person.
– The information has been prepared solely for information purposes only and is not an offer or solicitation of an offer to buy or sell the product.
– Data is sourced from Fortem Capital Limited and external sources. The data is as at the date of this document and has been reviewed by Fortem Capital Limited.
– Information, including prices, analytical data and opinions contained within this document are believed to be correct, accurate and derived from reliable sources as at the date of the document. However, no representation or warranty, expressed or implied is made as to the correctness, accuracy or validity of such information.
– Fortem Capital Limited assumes no responsibility or
liability for any errors, omissions or inaccuracy with respect to the information contained within this document.
– All price and analytical data included in this document is intended for indicative purposes only and is as at the date of the document.
– The information within this document does not take into account the specific investment objective or financial situation of any person. Investors should refer to the final documentation and any prospectus to ascertain all of the risks and terms associated with these securities and seek independent advice, where necessary, before making any decision to buy or sell.
– The product may not be offered, sold, transferred or delivered directly or indirectly in the United States to, or for the account or benefit of, any U.S. Person.
– The Fortem Capital Progressive Growth Fund is a Sub-Fund of Skyline, an open-ended investment company with variable capital incorporated on 1 June 2010 with limited liability under the laws of Ireland with segregated liability between Funds. The Company is authorised in Ireland by the Central Bank of Ireland pursuant to the UCITS Regulations.
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SWITZERLAND – The interests in the UCITS Fund and any related services, information and opinions described or referenced in this document are not, and may not be, offered or marketed to or directed at persons in Switzerland (a) that do not meet the definition of “qualified investor" pursuant to the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (“CISA") (“Non-Qualified Investors"), or (b) that are high net worth individuals (including private investment structures established for such high-net worth individuals if they do not have professional treasury operations) that have opted out of customer protection under the Swiss Federal Financial Services Act of 15 June 2018 (“FinSA") and that have elected to be treated as “professional clients" and “qualified investors" under the FinSA and the CISA, respectively (“Elective Qualified Investors").
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For more information on the investment philosophy or any of Fortem’s investment offerings, please do not hesitate to contact the team, we would be delighted to hear from you
