Defensive By Design Series Part 3: Progressive Risk Models
In this multi-part series, our UK Business Development Manager, Tara Pain, describes how the Levendi Thornbridge Defined Return Fund is truly defensive by design. This approach allows the Fund to generate positive real returns in all but significant and sustained market declines, offering investors meaningful protection for their portfolios.
Progressive Risk Models
Compared to traditional market players, the Levendi Thornbridge Defined Return Fund implements a progressive risk, put spread model at maturity, rather than the industry-standard cliff-edge barrier put method. When designing holdings for the Fund, we prefer progressive capital return and therefore avoid structures that can result in cliff-edge changes to the maturity value. The benefits of the Levendi Progressive Risk model can be seen throughout the life of the Fund’s holdings - one of which is that they exhibit significantly lower downside volatility.
A visual illustration of how the holdings behave if they reach the final year of their life is shown below.
As shown by the industry-standard cliff-edge barrier put method (in gold), once the typical 65% barrier is breached, the maturity value falls precipitously by 35%. Consequently, a 1% movement in the underlying indices near the barrier can cause holdings to shift from realising no losses - even when markets have fallen by 34% - to incurring a 35% loss if the market declines just 1% further and hits the 65% barrier.
Comparatively, the Levendi Thornbridge Defined Return Fund is structured much more defensively on the downside. The progressive risk, put spread model - represented by the grey line - allows for both:
- Markets to fall by a larger amount (c. 47%) compared to the industry standard (35%) before losses begin to be incurred.
- If the barrier is reached, investors only begin to lose capital - and in a linear fashion - unlike the cliff-edge 35% losses typical of the broader industry.
In this way, the Fund has a significantly lower conditional loss compared to industry-standard cliff-edge barrier put methods - i.e., when a loss does occur, it is much smaller for a Levendi holding than for a typical cliff-edge barrier put.
This also translates into more defensive mark-to-market behaviour throughout the life of the holdings - sudden downward movements in the underlying indices typically result in smaller mark-to-market losses for progressive risk holdings compared to cliff-edge barrier put options. This is further reflected in the Fund’s typically lower beta relative to incumbent products. As such, the Levendi Thornbridge Defined Return Fund is designed to be significantly more defensive than other offerings.
Overall, the Fund offers investors a significant degree of capital protection, designed to support both wealth preservation and growth. This is made possible, in part, through the use of progressive risk models on the downside. Investors gain equity market exposure that generates positive real returns in all but significant and sustained market declines. Consequently, the Levendi Thornbridge Defined Return Fund is truly defensive by design.
If you want to learn more about this Fund and our other defined outcome funds, email us at funds@causeway-securities.com
Important information
This is a marketing communication, not a contractually binding document. Please refer to the Fund Supplement and to the KIID, and do not base any final investment decision on this communication alone.
This publication is intended to be Causeway Securities own commentary on markets. It is not investment research and should not be construed as an offer or solicitation to buy, sell, or trade-in any of the investments, sectors or asset classes mentioned. The value of any investment and the income arising from it is not guaranteed and can fall as well as rise, so you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. Movements in exchange rates can have an adverse effect on the value, price, or income of any non-sterling denominated investment. Nothing in this document constitutes advice to undertake a transaction, and if you require professional advice, you should contact your financial adviser.
As with all forms of investment, there are risks involved with structured products, including those on our website.
It should always be understood that:
- Structured products are not suitable for everyone
- Past performance is not a reliable indicator of or guide to future performance and should not be relied upon, particularly in isolation
- The value of investment and the income from them can go down as well as up
- The value of structured products may be affected by the price of their underlying investments
- The potential returns of a structured and the repayment of money invested in a structured product depend on the financial stability of the Issuer and Counterparty
- Capital is at risk and investors could lose some or all their capital
Causeway Securities incorporates Causeway Securities Ltd, authorised by the UK Financial Conduct Authority, and Causeway Securities LLC, a subsidiary of Causeway Securities Ltd, granted FINRA membership in July 2022 to conduct business in the US.
Causeway Securities Limited is authorised and regulated by the Financial Conduct Authority (FCA FRN 749440) in the UK and is an authorised financial services provider in terms of the Financial Advisory and Intermediary Services Act (Act No. 37 of 2002) in South Africa. Causeway Securities Limited is registered in England and Wales with company number 10102661. Registered address Causeway Securities, 60 Cannon Street, London, England, EC4N 6NP. Causeway Securities Ltd is the parent company of Levendi Investment Management. Levendi Investment Management Ltd (FRN: 783607) is an appointed representative of the Investment Manager Thornbridge Investment Management LLP (FRN: 713859), which is authorised and regulated by the Financial Conduct Authority.
