The Bloxham Defensive High Yield Fund – The Tortoise and the Hare
We launched the new Bloxham Defensive High Fund at the end of September 2011. The Fund is designed to offer clients equity market type returns BUT with reduced levels of volatility. When we launched the fund we stressed to clients that this fund is likely to do well in modestly rising, flat or down markets. In periods of very strong markets we would expect the fund to under-perform.
The chart below illustrates the performance of the Defensive High Yield Fund versus the FTSE world index. The fund is up 16% whilst the FTSE World index has risen by 17.4% since the end of last September. But more importantly, the volatility of the fund is just 7.2% whilst the volatility of the market is 1.9 times higher. On a risk adjusted basis, the fund is producing significantly superior returns.
Between the end of November and mid March, the FTSE world index performed very strongly and rose by 23% (a bull market?). In mid March, the Defensive High Yield Fund was up c15.5% since inception. Since then, the fund’s unit price has moved marginally ahead (to 16% since inception). This compares to a decline of 5.2% in the FTSE World index.
Essentially, as the pressure on equity markets increased over the last few weeks, largely due to events in Europe, the Fund’s protection strategy kicked in, producing a flat and ‘sleep easy at night’ performance.
The fund incorporates a three-pronged investment strategy.
Firstly, the fund invests in around 40 large global stocks which pay out higher than average dividend yields. The fund seeks out stocks which are in a position to progressively grow their dividends over the medium term. The stocks selected will ensure broad diversification both in terms of geography and industry sectors.
The stocks in the funds are equally weighted at the beginning of the quarter and include: HSBC, McDonalds, Johnson & Johnson, Ericsson, Prudential and Royal Dutch Shell. The average dividend yield from the stocks within the fund is 3.8%.
Secondly, the fund sells 3 month Call Options on some of the stocks within the fund. This essentially exchanges some of the potential upside in the share price in order to generate additional income for the fund.
Finally, the Fund then used this income to buy some “insurance” against significant market falls through ‘Put’ options. If equity markets fall in value then typically the value of Put Options rise. Hence, if markets were to experience significant market falls then the profits on the Put Options would help off set some of the losses within the fund (note: the fund does not provide full capital protection).
The issues facing many investors/trustees are to try to achieve “reasonable” returns whilst at the same time reducing risk within portfolios. We believe that the new Bloxham Defensive High Yield will deliver this on a medium term basis.
Author :James Forbes
16 May 2012
Warning: Past performance is not a reliable indicator of future performance. The value of investments and the level of income from them may go down as well as up and an investor may not get back the amount originally invested. Returns may increase or decrease as a result of currency fluctuations and general market trends.
Warning: Bloxham does not make any representation or warranty, express or implied, as to, or assume any responsibility for, the accuracy, reliability or completeness of any of the above information or any other information contained in this document and will be under no obligation to update or correct any inaccuracy in the information or be otherwise liable to you or any other person in respect of the contents of this document. No statements or representations made in this document are legally binding between Bloxham and the recipient. Any proposal is subject to contract terms being agreed.
Bloxham is a member of the Irish Stock Exchange and the London Stock Exchange and is regulated by the Irish Financial Regulator.