Schroders' multi-asset investments and portfolio solutions (Maps) business has launched the UK’s first volatility controlled equity fund with downside protection, designed specifically for institutional investors.

The Schroder Volatility Controlled Equity Fund has been structured to offer investors equity exposure with downside protection. The fund aims to give investors exposure to global equities while maintaining a protected approach to volatility. This is achieved through exposure to a volatility targeted global equity index via the MSCI Net Total Return Developed World Index, with downside protection gained through a rolling programme of monthly put options.

This is a UK sterling-denominated, open-ended evergreen unitised vehicle aimed at institutional investors which takes rolling exposure to the index with a 10% volatility target and downside protection achieved through a rolling programme that purchases put options on the volatility controlled index on a monthly basis. Investors will get the full performance of the index plus the effect of the options, according to Andrew Connell (pictured), head of portfolio solutions at Schroders.

“The fund has been designed for investors seeking global equity exposure with some kind of risk mitigation who also want some clarity around the cost of the downside protection,” said Connell. “Most risk management programmes have a finite life span, but this one self-refreshes and is therefore ‘evergreen’. By being in a pooled fund, it offers a low governance option as well as leverage. The recent market volatility further supports the importance of having the control capabilities in the fund to manage the downside risks.”

Pension schemes and insurance companies often want two pounds' worth of work for each pound invested. They have to provide excess return on the one hand and to generate assets that match the sensitivities embedded in the liabilities on the other, said Connell.

“Therefore, they need some sort of leverage in their strategies,” he said. “This product is an answer to the problem investors are facing when seeking global equity exposure in the current environment. Investors are demanding strategies that can provide them with equity-like exposure, but with some sort of risk mitigation while controlling the cost of that protection which in this case is done by managing the volatility of the underlying to give clarity regarding the cost of the options. The risk control feature of the index effectively means asset allocating between the underlying index and cash, and that is an operationally complex approach which is why we wrap that up into a total return swap on the equities.”

According to Connell, the trend for de-risking and better risk controls in both pensions and insurance are driving activity around products that provide exposure to excess return assets, but with some sort of risk control overlay. “Passive exposure to equities could lead to very bad outcomes (the biggest drawdown of the MSCI Global is around -40% in one year),” said Connell. “This product is being delivered by the Maps team as part of the risk mitigation outcome.”

Connell said Schroders sees risk management “of which this is an example” as a long-term strategic growth area for Schroders. “We will continue looking at ways to increase our capabilities (by investing in people) and our offering (developing new solutions), as well as processes and systems in order to be able to deliver risk-managed outcomes to our clients,” said Connell.

Initial funding has been received from a UK final salary pension scheme under the advice of its investment consultant Redington. Risk control and downside protection are two powerful tools for keeping clients’ portfolios on track for those long-term goals, said Dan Mikulskis, managing director and co-head of asset liability modelling at Redington in a statement.

Schroders’ Maps business manages £75.5bn (as at 30 June 2015) on behalf of clients globally. According to SRP data, Schroders has nine live structured funds available in Europe, including four of its Income Maximiser range in the UK, which are managed by the Schroders equities team headed by Thomas See, head of structured fund management.

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