insights into risk management of an equity portfolio · 2016. 6. 8. · insights into risk...

Insights into risk management of an equity portfolio

10 June 2016

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Dec ‘10 May ‘16

GyrostatASX 200

Cash (BBSW90)

DISCLAIMER

Thisinformationisgeneraladviceonlyanddoesnottakeintoaccountyourparticularcircumstances,yourpersonalinvestmentorfinancialplanningobjectives,yourinvestmentknowledge,needsandrequirements,includingtaxationimplicationsthatmayresultfrominvestingintheFund.

Therearereferencestopastperformanceinthisdocument.Pastperformanceisnoguaranteeoffutureperformance.Gyrostatoranyofitsofficers,advisers,agentsorassociatesdonotinanywayguaranteetheperformanceoftheFund.

InvestorsshoulddownloadandreviewtheInformationMemorandumavailableatwww.gyrostat.com.aubefore makinganinvestmentintheFund.

Gyrations–InsightsintoriskmanagementofanequityportfolioByCraigRacine,ManagingDirectorandChiefInvestmentOfficer,GyrostatCapitalManagement

Inthisfortnightlyreportweprovideinsightsintoriskmanagementofanequityportfolio.

o Globalmacroconditions(inpictures)withkeyupcomingdatareleasewithmarketpricingofoutcomesbasedupontheflowofmoney(whereavailable)

o “Doityourself”riskmanagedequityincomewithprotectioncurrentmarketcosts,varyingthedurationofprotectionandcapitalatrisk.

Ourinvestmentviewisthatinterestrateswillstaylowforanextendedperiod,andstockmarketvolatilitywillincrease.During2012-2016thelevelofvolatilitywaslowbyhistoricalstandards.Ourexpectationisthatvolatilitywillincrease,leadingto“risk-on”,“risk-off”investingmarketcharacteristicsonlydistantlyrelatedtofundamentals.Relyingonmarketpredictions,asisthetraditionalapproach,witha‘straightline’pay-off,leavesinvestorsexposedtolargecapitallosses.

Withthisview,traditionalinvestmentapproachesareill-equippedfortoday’sclimate.Bothassetclasses,‘income’and‘growth’,havefragilities.“Income”assetssuchascashandtermdepositsprovideinsufficientincomewithnoprospectforanycapitalgrowth.“Growth”assets,investingdirectlyinbluechiphighyieldingshares,orequityfunds,leaveinvestorsexposedtofallsinthevalueofinvestmentsinthisfragileandhighlyindebtedglobalenvironment.Thetraditionalportfolioapproachistoblend‘income’and‘growth’assets,whichwillproduceportfolioswithinsufficientincomeandsubstantialfluctuationsincapitalvalue.Thereisaneedforriskmanagedinvestmentsingrowthassets.Theidealsolutionistobuybluechipshareswithinsuranceresultingina“hockeystick”payoffalwaysinplace–alwaysparticipateintheupsidewithminimalcapitalatrisk.Thisdelivershigherincomewhilealwaysprotectingandgrowingtheinvestors’capital.

OutlookOurinvestmentviewisthatinterestrateswillstaylowforanextendedperiod,andstockmarketvolatilitywillincrease.During2012-2016thelevelofvolatilitywaslow.Historicallyvolatilityhasremainedlowforperiodsof4years-1992-1996,2002-2006,and2012-2016.Volatilityhasstartedtoincreaseandislikelytocontinue.

ThesearedangeroustimesfortraditionalinvestmentapproacheswithglobaltotaldebtoutstandingasapercentageofGDPathistoricalhighs.GDPgrowthremainsbelowtrend,interestratesareathistoricallows,andcentralbanksareimplementingunconventionalmonetarypolicies.

Increasedvolatilityisoftenexperiencedaroundkeydatareleasesrelatingtointerestrates,growth,inflationrates,andkeypoliticalevents.Thesedatesaredetailedinthereport,alongwithmarketpricingoflikelyoutcomeswhereavailable.Wepresentdatafromfuturesmarkets,creditdefaultswaps,andonlinebettingodds.

Ourexpectationisthatvolatilitywillincrease,with"risk-on","risk-off"investingoccurringonlydistantlyrelatedtofundamentals.Relyingonmarketpredictions,asisthetraditionalapproach,witha‘straightline’pay-offleavesinvestorsexposedtolargecapitallosses.

Witha‘hockeystickpayoff’investmentprofile,settoalwaysparticipateintheupsidewithminimalcapitalatrisk,investorscanapproachthesemarketswithconfidence.

Longtermvolatility–periodsince2012lowbyhistoricalstandards

VolatilityS&P500(VIX)1990–2016

AustralianvolatilityA-VIX2012-2016UnderstandingtheA-VIX

TheS&P/ASX200VIX(A-VIX)isareal-timevolatilityindexprovidesaninsightintoinvestorsentimentandexpectedlevelsofmarketvolatility.TheindextracksS&P/ASX200indexoptionpricesasameansofmonitoringanticipatedlevelsofnear-termvolatilityintheAustralianequitymarket.

Thelevelofimpliedvolatilityhasbeenrising,butisstilllowbyhistoricalstandards.

CashRate-Australia

• TheRBAcutcashratesto1.75%on3May2016

• UpcomingRBAmeetings:o July5o August2

• Marketpricingofinterestratecutto1.5%atJulymeetingbasedoninter-bankcashratefutures

• Nocut:83%Cut17%

http://www.asx.com.au/prices/targetratetracker.htm

BondYield-Australia

• TheAustralianGovernment10yearbondrateon16May2016fellto141yearlows.

http://www.bloomberg.com/market/rates-bonds

InterestRates–International• UpcomingUSFederalReservedecision:

o Jun16o Jul28o Sep22

• UpcomingBankofJapandecision:o Jun16o Jul29o Sep21

• UpcomingEuropeanUniondecision:o Jul21o Sep8

GDPGrowth–World

GDPgrowthremainsbelowtrend,seeIMFAprilworldoutlook“Tooslowfortoolong.”

June14:USretailsales.Previous+1.3%YoYtoMarchaboveconsensus.

June16:Australiaemploymentchange.

August12:EurozoneGDPgrowth.Previousannualised1.7%inlinewithestimates.

Sep7:AustraliaGDPgrowth.Previousannualised3.1%exceedingexpectations.Highestsince3Q2012.

InflationJun9:Chinainflation.Previous2.3%YoYtoAprilslightlybelowconsensus.

June16:USAcoreinflationrate.Previous2.1%inlinewithconsensus.

July22:Australiainflationrate.Previous1.3%belowconsensus.

ShareIndices

Bearmarketshistoricallyoccurevery4½to5½years–thelastUSfallwasin2007-2009withfallsnearly50%.

Thegraphshowspricedeclinessince1929(range25%to90%,average38%)anddurationofdecline(22to160weeks)

GlobalDebt

Globaltotaldebtoutstandingasa%ofGDPhasgrownfrom180%in2000toover240%,andisathistoricalhighs.

Thisincreasesthefragilitytomarketsell-offs.

PotentialmarkettriggersJune23:Brexit

o Stay$1.40Exit$3.40

July2:AustralianFederalelection

o Coalition$1.30ALP$3.70

November8:USAPresidentialelection

o Democrats/Clinton:$1.50o Republicans/Trump:$3.00

Mid2017:Germanelections

*Pricingbasedononlinebettingodds

CreditDefaultSwaps

Acreditdefaultsswap(CDS)transferscreditriskfromthebuyertosellerinreturnforapremium.Themarketpriceofthepremiumsvarieswithperceptionofriskofdefault.

• China5yearsovereignbonds.o 125basispoints(up2basis

pointspast1month)• UnitedKingdom5yearsovereign

bondso 35basispoints(down3basis

pointspastmonth)

TheGyrostat3stepinvestmentapproach 1. Buy and hold blue chip shares with insurance on the Australian Stock Exchange 2. Technology enables our software systems to choose the lowest cost insurance from the many alternatives. The amount of insurance is set to always participate in the upside with minimal capital at risk. 3. On market moves we re-set the insurance level. If the share price rises, we buy more to 'lock in' the gains, on falls we sell some that is no longer required.

In contrast, traditional approaches have a ‘straight line’ payoff with no protection in place.

We buy and hold blue chip stocks and pass on the franked dividend. We simultaneously enter the Australian Securities Exchange (“ASX”) options market to hedge risk.

We are always fully invested with minimal capital at risk.

Our Track Record of Returns:

Period Gyrostat ASX 200 BBSW 3M

31 Mar 2012 6.1% -6.7% 4.9%

31 Mar 2013 7.6% 2.0% 4.3%

31 Mar 2014 7.1% 4.0% 3.8%

31 Mar 2015 6.7% 5.2% 3.6%

31 Mar 2016 5.1% 1.3% 3.3%

If your objective is to generate a higher level of income than cash and term deposits, whilst always protecting and growing your capital investment...

...our fund can help.

Business Model - “How we invest”

Further details available at:www.gyrostat.com.au info@gyrostat.com.au

Call: (03) 9041 0970

Unit Trust Stock Market ASX Options Market ASX Technology & Deregulation

Investors purchase units in “Gyrostat Capital Stability Income Fund”.

The fund net income is dividends and franking credits less expenses and the cost of protection.

The fund simultaneously buys stock and enters ASX options market

Stocks are “buy and hold” to generate dividends and franking credits

For hedging risk only we use calls and put options to grow your investment when markets rise, and protect your investment when markets fall.

Daily management to restore risk-return profile from market movements

Software continuously monitors price movements to identify “least cost” alternatives to restore risk-return pay-off from market moves.

Deregulation enables low cost transactions

YP

D-G

YR

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Risk managed equity income fund

a Minimum distribution cash rate plus 3% (currently 5.3%)

a Growing your investment on market rises or large ‘one off‘ falls

a Protecting your investment when markets fall

a Compounded returns of 33% since inception

a 21 consecutive quarters of no losses exceeding 2%

* compunded annualised returns since inception

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Dec ‘10 May ‘16

GyrostatASX 200

Cash (BBSW90)