Gyrostat risk managed investing - lowest cost protection always in place
The Financial System Inquiry concluded there is a lack of retirement income products (globally) addressing sequencing risk. Sequencing risk is the risk that the order and timing of your investment returns in unfavourable, resulting in less money for retirement – very relevant ‘late cycle’.
The Financial System Inquiry outlined desirable product features to specifically address sequencing risk for retirees – to combine protection, returns and regular income through all stages of the investment cycle (including large market falls.)
What are you doing to generate strong returns in volatile markets with your defensive assets?
The Gyrostat Absolute Return Income Equity Fund has for 34 consecutive quarters operated within a 'hard' defined risk parameter (no more than 3% capital at risk with our maximum draw-down 2.2% in any circumstances) always in place, delivered regular income by passing through ASX-20 dividends, and met returns guidance based upon market conditions (demonstrating increasing returns with market volatility). The fund buys and holds ASX-20 shares with lowest cost protection always in place with upside. It is an 'alternative - defensive' conservative asset allocation. We have cumulative returns of 49% since inception, with our highest returns in more volatile market conditions.
Returns are designed to increase with volatility (including a tail always in place to benefit from large market falls.)
We have sought investor feedback on our product positioning and value to their portfolio. This process included a review of current and expected future market conditions, past and expected future returns, and income distributions. We continue to be committed to providing a 'hard' risk parameter, and the value of this approach was well recognised. It is our belief that a modest increase to our risk parameter is warranted, to a 'hard' quarterly 3%. This should generate higher returns to our investors. With the evolution of our investment processes and raising the ‘hard’ quarterly risk tolerance from 2% to 3% (in February 2019) we upgrade our returns guidance in stable markets to the 90 day bank bill swap rate ("BBSW 90"+ 3%). We anticipate returns in all market environments be at least BBSW 90 + 3% (enabling investors to receive income and capital growth.)
We offer a solution to investors for the following issues:-
1) Sequencing risk: Move from unprotected growth asset to Gyrostat (usual retirement tactical re-balance to conservative asset, with higher income, higher returns and downside tail for large gains on large market falls.)
2) Conservative assets not generating enough return: Move from cash/short term bonds to Gyrostat, with ‘hard’ protection always in place to offer capital stability. Other risk management approaches without ‘hard’ protection always in place have a much higher maximum NAV capital draw-down during the complete investment cycle.
Suitable investors:
- Equity income in retirement: regular income by pass through of dividends (minimum BBSW + 3% pa paid bi-annually)
- Philanthropic investor: direct cash distributions to your designated charity whilst maintaining control of your capital investment.
- Conservative 'absolute return' asset allocation family offices, particularly in more volatile markets
Asset Consultants and Research
McGregor Asset Consulting have completed their review of the Gyrostat Absolute Return Income Equity Fund. They have concluded:
"McGregor Asset Consulting has developed a solid level of confidence in the manager’s ability to successfully execute on their investment strategy. They have a long history, spanning more than 8 years, and have performed as expected during the various market conditions, in particular volatile markets, where the Fund has protected capital and delivered solid absolute returns. This is the environment where the Fund is expected to perform, and has been the case, providing diversification benefits to long-only equity funds.
Its correlation with the Australian equity market is low, averaging 0.3 while its performance has been particularly effective in delivering strong absolute returns during volatile and falling equity markets.
To our knowledge, there are no other conservative funds available in Australia/Asia with ‘hard’ protection always in place and a 9 year track record of no quarterly NAV draw-downs exceeding 3%, regular equity income, and demonstrated returns increasing with volatility levels. (with tail hedge in place for large gains on large market falls)."
What are you doing to prepare for market falls?
Gyrostat operates under investment mandate applying our investment risk management overlay. Investors face a range of restraints on significant changes to tactical allocation but primarily capital gains tax implications.
Protection can utilise Australian indices such as XJO, be stock specific (largely within the ASX20) orany listed stock or EFT which has a liquid traded options market (international asset allocation).
The protection has a defined 'hard' risk parameter (eg. no quarterly losses to exceed 5%) and is typically funded by the most recent dividend.
Progression of investment risk management
There have been significant advances in risk management approaches for conservative investors. Each level reduces the downside variability of investment capital with complementary return characteristics.
By combining these three levels conservative investors can protect and grow capital with reliable income through the complete investment cycle.
The variety of risk management approaches have complementary risk and return characteristics through the investment cycle.
- Asset allocation: Income and growth assets
- Protection sometimes in place using predictive risk management overlay - additional growth asset benchmark equity index
- Protection always in place, the Gyrostat approach - stable and rising absolute returns with regular income. Benchmark BBSW90 + 3% pa
Risk managed investing is particularly important during high PE periods/later stage bull markets. The risk of a major correction is elevated - we are now in the longest bull market since WW2. Most large corrections occur within 8 years, we are now at year 11, with the longest on record 13 years.
i) Volatile markets provide more profit opportunities to participate in share price upside and protect on share price falls
ii) Gyrostat always has additional downside protection in place in case of large market falls
Our solution – protection always in place with upside return potential
With protection always in place we complement short term bonds and bench-marked against the absolute return bank bill swap rate BBSW90. Our expected returns vary with the stage of the investment cycle with capital growth in trending and volatile markets, as this provides the opportunity to re-set protection levels and lowers the costs.
Traditionally protecting your portfolio was expensive. Gyrostat has overcome this issue by actively managing ASX options, utilising proprietary software and taking advantage of reduced broker costs due to deregulation. We are always fully invested in blue chip high yielding shares and protect downside with lowest cost alternatives on the ASX.
Gyrostat three step investment approach
Super impose a 'hockey stick' pay off at all times on a share price chart, moving the protection level on market moves.
- Buy and hold blue chip shares with protection on the Australian Stock Exchange
- Set the amount of protection to always participate in the upside with minimal capital at risk
- Re-set the protection level on market moves - if the share price rises increasing protection level, on falls reduce protection level
Business Model "How we invest"
Unit Trust
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.
Stock Market ASX
The fund simultaneously buys stock and enters ASX options market
Stocks are “buy and hold” to generate dividends and franking credits
Options Market ASX
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
Technology & Deregulation
Software continuously monitors price movements to identify “least cost” alternatives to restore risk-return pay-off from market moves.
Deregulation enables low cost transactions