A strong decade of defined return investing and positive signs for the road ahead

The Defined Returns Fund is up 11.5% this year. Our scenario analysis tool looks positive for 2024 also.

Jim May, Fund Manager

2023 has given most global equity indices a more than solid return, much to the surprise of commentators who predicted a recession a year ago. Perhaps the can has simply been kicked down the road and a recession is still incoming, as governments, companies and individuals grapple with this higher interest rate environment we find ourselves in.

Despite this, the Atlantic House Defined Returns Fund has enjoyed a strong year. Two thirds of the investments in the fund called within 2023 and these maturities were replaced by investments with higher coupons and more downside protection. Additionally, we have reduced the fund’s exposure to the UK equity market a little although this remains the market to which the fund is predominantly exposed.

The UK has been the laggard against its peers over the last couple of decades and 2023 has been similar, with UK the large cap total return index returning 4% as we write this at the end of November.

The Defined Return Fund, which celebrated its 10th anniversary this year, is up 11.5%.

The US and EU large caps, the markets the fund is next most exposed to, returned 21% and 17% respectively this year.

While it's important to reference these equity markets, the fund’s aim is to return 7-8% annualised over the medium to long term, irrespective to a large degree what these equity markets do. Since 4 March 2014, the day the fund became fully invested, it has returned 6.94% annualised. By 4 March 2024, we hope to see annualised returns edging over 7%.

We feel the most useful thing we provide to investors in terms of analysis are our scenario grids. These are estimates of how the fund should perform in various equity market scenarios. This is possible due to defined nature of the investments the fund holds. Below is the grid produced on 30th December 2022.

If we combine our average exposure to the various equity markets with the moves in those equity markets this year, our grids estimate that the fund should be up around 11.2%. In fact, the fund is up 11.5%.

We are pleased that our scenario analysis grids remain accurate and that investors find them useful tools.

Past performance does not predict future performance. Source: Atlantic House modelling as at 30-12-22.

So, what does the grid look like at the moment?

These are the estimates of how the fund will perform looking forward into 2024.

Past performance does not predict future performance. Source: Atlantic House modelling as at 30-11-23.

The grid is more attractive than this time last year if markets are down, flat or up a little. There are two main reasons for this. Firstly, two-thirds of the fund has redeemed in the last year. Additionally, with interest rates being higher the terms for new investments have been significantly more attractive. Looking forwards the return estimates are therefore higher.

The more attractive terms do not just refer to the returns. We have been able to increase the downside protection on the new investments compared to the ones they have replaced.

Equity markets would need to fall over 32% for the average position in the fund to be in the red. The markets would then have to stay at these depressed levels for several years for the investments to remain there.

As the scenario grid suggests, it could be a particularly good time to buy the Atlantic House Defined Returns Fund. Especially as current views on the equity risk premium are pretty low.

We’re looking forward to seeing the Defined Returns Fund in its 11th year and continuing to provide multi-asset investors with a fund that remains dedicated to achieving 7-8% in all but the bleakest market conditions.

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