CBOE Vest is pitching its Defined Distribution Strategy Fund, a new fund that seeks to generate consistent monthly distributions while preserving capital. The fund is not correlated to equities or bonds and aims to deliver an annualised return of 5.25% over one-month US Treasuries, before fees and expenses, according to the US investment manager. It is the company's second mutual fund, following the August launch of the CBOE Vest S&P 500 Buffer Protect Strategy Fund.
The return is based on a defined distribution strategy and provides for a monthly payout if the S&P 500 Index is within upper and lower bounds over the month, according to Steve Neamtz (pictured), senior managing director at CBOE Vest Financial. "Just like our protection fund, this takes a popular structured note strategy (range bound) and makes it available in an investor-friendly mutual fund wrapper," said Neamtz. "To complement the protection, this fund's mandate is based on periodic distributions in an effort to meet investor income needs.
"The risks in the fixed coupon bond markets are acute, given the likelihood of rising rates and the second order effect on deteriorating credit," said Neamtz. The strategy provides an alternative without exposing investors to the duration and credit risks of fixed income.
"The strategy is implemented by writing options and collecting the premium income to meet distribution targets while seeking to minimise losses," said Nematz. "This is a unique source of distributions that seeks to monetise the systematic imbalance between the volatility implied by the option prices and the actual volatility realised in the swings of the index. As such, there is minimal exposure to credit and duration risks - hence, it is a great way to complement bonds in income portfolios."
The strategy begins every month by setting the upper and lower bounds of the S&P 500 Index for the calendar month. If the price of the reference index is within the target range at the end of the month, the strategy is designed to avert a principal loss. If the reference index is outside the target range, the strategy may decline in value.
As compensation for the risk of loss, the fund collects a predetermined level of net premium income from the sales and purchase of options. The fund seeks to optimise the target range to collect premium income to meet its monthly distribution target, while minimising the chance of losses.
"Target outcome investments focus on delivering returns designed around specific goals, rather than an arbitrary measure of risk or opportunity," said Neamtz. "The strategy targets consistent monthly distributions and aims to take just enough risk to achieve that goal. It's a great way for investors to tap into predictable distributions uncorrelated to fixed-income markets and neutral to the equity markets. This fund is well-positioned to weather the rising interest-rate environment that many see on the horizon.
"Structured notes have been instrumental in providing access to target outcome investments and will continue to do so for a certain parts of the market," said Neamtz. "
The company plans to offer solutions for all parts of the portfolio including protection, income and growth. "Additionally, we plan to offer solutions across more reference assets," said Neamtz. "We plan to increase the scope of the assets and deploy similar strategies to other assets such as the small capitalisation stocks, international markets, emerging markets and other asset classes."
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