For professional investors and advisers only
The Lowes UK Defined Strategy Fund (UKDSF) uses defined return strategies that replicate the behaviour of autocallable structured investments by breaking these down into their constituent parts. A logical first thought would be that the fund itself invests in the exact same structured products that investors are already familiar with. These parts consist of two forms of trades, which are gilts, and swaps. Gilts preserve the capital of the investment, protecting it from counterparty risk; whilst swaps provide the return element which is one of a series of pre-defined autocall returns which are subject to market risk.
When initiating the swap, the UKDSF has the ability to invest in a gilt, which will pay out 100% of the capital invested at maturity. The cashflows from this gilt can be exchanged over the counter to buy derivatives providing a conditional defined return. Simply put, the derivatives are packed into a swap contact with an investment bank to deliver the intended outcome. An autocall option, which provides a return in a pre-defined market situation; and introducing capital at risk beyond a protection barrier, which leaves the UKDSF exposed to market risk, and therefore capital loss in a dire market situation.
Because the investments in derivatives sold by the bank are now supported by the underlying gilt; income streams are swapped, the investments in the UKDSF which utilise the gilt strategy now contain the counterparty risk of the UK government, instead of an investment bank. Whilst this form of investment will dominate the strategy, structured notes will also be used to adopt the credit exposure of a bank and give additional potential returns over that achievable by holding UK Government credit alone.
Also, with UKDSF buying in large size, it allows investors to benefit from further potential returns as a result of gaining access to institutional pricing. Therefore, we would expect investments held by UKDSF to offer better terms than advisers would typically see in the marketplace, but these may also be informed by the view of investment managers as to what they believe are the right terms for a given market scenario.
To diversify credit and market exposures, an investor would have to invest in separate, usually single index plans at different points in time, which can sometimes have a minimum investment set at £10,000 or greater. Due to portfolio asset allocation, monetary limitations, administration hassles and time constraints, this can mean that investors may struggle to diversify their risk whilst investing in structured investments. With UKDSF that challenge has now been removed.
With low minimums – typically determined at platform level - UKDSF enables investors of all sizes to diversify and reduce their credit and market risk with strategies beginning their terms at various price levels, and maturity dates to maintain consistent returns over time overlaid with different, albeit mainly gilt, credit.
And then there is daily pricing of the fund, which allows investors to come and go at will. A key component of the fund is the increased liquidity available to investors. One of the downfalls of structured investments is that if an investor needs to liquidate their investment early, they are likely to be penalised for exiting via a spread at the bank and a provider fee. The UKDSF facilitates ease of entry and exit to the fund at will.
A disadvantage to the daily pricing however, is that structured investments within the fund may also fall in value midway through their term if the underlying index undergoes downturn, or the underlying counterparty within a structured note has been downgraded or, even defaults.
Finally, there is the tax angle to consider and for advisers to actively use the fund to plan for capital gains tax events. With an individual auto-call structured investment however, there would be no way to know in advance whether there would be an early maturity, which makes the staggering of redeeming returns impossible for capital gains tax planning purposes.
If you had been recommending individual structured investments, hopefully you see the benefit of considering UKDSF although we do have to concede that it is a different type of investment to an individual structure which by merit may still warrant recommending.
If you would like to know more about the Lowes UK Defined Strategy Fund, please visit the Fund website or call Lowes Financial Management on 0191 281 88 11. The Lowes UK Defined Strategy Fund is a sub-fund of the Skyline Umbrella Fund ICAV and is regulated by the Central Bank of Ireland. This document should be read alongside the KIID, Prospectus, and Fund Supplement which are available on the Fund website UKDSF.com/Literature and from your financial adviser.
The information within this document does not relate to the personal circumstances of any one individual. It is recommended that investors seek independent advice, where necessary, before making any decision to invest or indeed, to subsequently disinvest.
Lowes has taken all reasonable steps to identify conflicts of interest that may exist in our role as investment manager to the Fund and as a financial adviser to our clients who may have invested in the Fund. We have policies in place to ensure that your interests as investors in the Fund remain paramount and over those of our own. In recognition of this any portion of the Fund management fees that would ordinarily be due to Lowes in respect of an investment in the Fund by a client paying Lowes for ongoing advice in respect of their holding will not be paid to Lowes but will be redirected to UK registered charities selected by the Lowes Charity Committee.
The content of this article has been written and prepared by Lowes Financial Management Ltd. The document should not be relied upon as a forecast, considered research, or an offer to buy or sell securities with respect to any investment vehicle. The purpose of this article is purely to provide information on the Fund. No liability is accepted for the accuracy or completeness of any information and opinion contained in this document which may be subject to updating and amending.
Lowes Financial Management Ltd, Fernwood House, Clayton Road, Newcastle upon Tyne, NE2 1TL. Authorised and regulated by the Financial Conduct Authority.