Portfolio Manager Perspectives

Jeff Benjamin

A fourth asset class? Investors are piling in

Hedged-equity funds offer downside protection — and some upside

Jan 10, 2013 @ 1:09 pm

By Jeff Benjamin

If asset flows can be trusted as a guide, the appetite among financial advisers for hedged-equity exposure is reaching a fever pitch, and that suggests plenty about the growing unease in the financial markets.

Exhibit A is the $7 billion Gateway Fund Ticker:(GATEX), which took in more than a billion dollars last year by employing a strategy that is designed to capture at best about half the performance of the S&P 500.

“For our investors, their goal is not necessarily to capture 100% of upside of the market but to protect gains,” said Harry Merriken, chief investment strategist of Gateway Investment Advisers LLC, an affiliate of Natixis Global Asset Management SA.

Last year, the fund gained just 4.5%, while the S&P 500 gained 16%. And yet the money keeps pouring in.

The fund did better in 2011, when its 3% return beat the index's 2.1%, but investors are not turning to this 36-year-old mutual fund for outperformance. “We think of it as a wealth preservation strategy,” Mr. Merriken said. “It is essentially a fourth asset class, to supplement cash, bonds and stock.”

The strategy employs put and call options on a portfolio of about 250 stocks that are managed as a proxy for the S&P 500. The fund's total return is enhanced through the sale of one-, two- and three-month call options, while the downside is limited through the purchase of put options.

When the fund was originally launched, it sold only call options on individual portfolio holdings because there were no index call options available in the late 1970s. The strategy was altered to its current form in 1987 when Gateway started purchasing put options for the downside protection, making the fund a vehicle for low-volatility investing.

Recent performance notwithstanding, the fund's long-term track record delivers what is being promised. The five-year annualized return is 1.3%, compared with 3% for the S&P 500. The 10-year annualized return is 4.1%, compared with 6.8% for the index. And the 15-year annualized return is 4.6%. Over that same period, the S&P 500 generated a 5% return.

In monitoring the fund's three share classes, Mr. Merriken said most of the inflows over the past year have come from institutional-class investors, including private banks, fee-based advisers and wrap fee brokerage accounts.

“We emphasize the low-volatility-to-equity aspect because people should realize the strategy is still correlated to equities, even if it is lower-risk,” Mr. Merriken said. “However, we do have a low correlation to fixed income.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. Visit InvestmentNews.com/pmperspectives for more information.

0
Comments

What do you think?

View comments

Most watched

INTV

How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

INTV

How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.

Latest news & opinion

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.

CFP Board to announce possible delay of new fiduciary standard

Organization's CEO confirms meeting with Edward Jones, says broker-dealer still considering how to move forward.

Departure of Alexander Acosta could slow DOL effort to revise fiduciary rule

Acting secretary Patrick Pizzella will have to make political decision to move ahead.

SEC member Peirce to brokers: Talk to us early, often about Reg BI implementation problems

She's willing to advocate for additional compliance time if firms have made a good faith effort.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print