Risk managed investing – reduce portfolio risk and increase equity income
Gyrostat Capital’s investment philosophy is founded on the belief that conventional portfolio design that seeks to generate income and/or capital growth is prone to undesirable volatility and large negative shocks. Gyrostat Capital aims to mitigate and control this volatility, while achieving stable returns with regular income streams over the medium-to-long term. In designing the Fund, Gyrostat Capital seeks to provide solutions for a low interest rate environment and major market corrections. Gyrostat Capital’s objective is to deliver a regular and stable income stream with capital security. Returns are designed to increase with market volatility.
Proprietary systems identify volatility skews for lowest cost protection within defined risk parameter always in place.
Further background is provided in our recent Inside Network interview.
The Gyrostat Risk Managed Equity Fund offers three classes of units;
- Gyrostat Absolute Return Income Equity Class:
- 10 year track record no quarterly drawdowns exceed -3%(predefined risk tolerance)
- Reliable income even if dividends are cut (from the risk management overlay additional protection) minimum BBSW90 + 3% paid quarterly
- Returns increase with volatility (track record)
- Downside ‘tail’ always in place for gains on large market falls
Solution for: sequencing risk and equity income – ‘highly defensive’
- Gyrostat Leveraged Absolute Return Income Equity Class
- Leverage class
- “Equity income” objective minimum BBSW90 + 6% paid quarterly
Solution for: sequencing risk and equity income – ‘levered equity income’
- Gyrostat Risk Managed Australian Equities Class.
- Objective to outperform ASX200 index over rolling 12 months
- Objective to match ASX200 index income
Solution for: sequencing risk – large losses from major market falls
Each Class has differing risk-return characteristics but all Classes are based on the risk managed approach developed by Gyrostat Capital and is backed by a Class specific pool of assets and liabilities held on a segregated basis.
Our general observations are:
- With protection always in place a ‘one off’ sell-off event would be beneficial for the Fund
- Increasing levels of volatility are beneficial for the Fund, as this creates the opportunity to more actively manage the ‘options overlay’ and lower the cost of protection
- There is also a static cost for those periods of lower volatility where the options do not trade. The cost of protection is higher during these periods
Asset Consultants and Research
"KK 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 10 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."
Source: KK Asset Consulting Pty Ltd Investment Review February 2021
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 price earnings ratio '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
Gyrostat three step investment approach
Superimpose 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 increase the protection level, on falls reduce the protection level
Business Model "How we invest"
Investors purchase units in “Gyrostat Absolute Return Income Equity 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