Fortem targets European investors as SP fund hits €200m

Fortem Capital Progressive Growth Fund, an Irish domiciled Ucits V Icav fund that invests in autocallables to achieve its objective – a positive return of six percent over the medium to long term, while aiming to reduce equity market beta in short term drawdowns – reached assets of €201.3m (£181.1m) at the end of July, breaking the €200m barrier for the first time since it was launched in September 2017.

SRP spoke to Walter Treur (pictured), director Europe at Fortem Capital, who is based in the company’s newly opened office in Amsterdam, about the funds use of structured products, its performance during the Covid-19 pandemic, and the expansion of the firm into continental Europe.

The fund aims to provide positive returns of risk free rate plus six percent over the medium to long term in all market conditions, except in the bleakest of scenarios.

“By bleak we mean a drop in equity markets of 30% or more from which, crucially, they would not recover,” said Treur adding that this differentiates the fund from direct equity investments where the brunt of return comes from market beta.

To achieve its goal the fund typically uses longer dated, defensive, defined return investments (autocallables) limited to single and dual index structures and only considering the largest indices from developed markets such as the S&P 500, FTSE 100 and Nikkei 225.

“It is unlikely the fund will take exposure to the AEX or Ibex for example,” said Treur.

Now that the fund is also available in the Netherlands, would it not make sense to add the AEX?

Walter Treur: The idea is not to take a market view. It doesn't matter whether we use index A or index B as long as we use the largest, most liquid, developed market equity indices – all of which have a reasonable correlation anyway – to achieve our risk-return objective and diversify the portfolio. The only view our investors need is that they do not expect a L-scenario that lasts for years (eg the Nikkei225 after 1989)

Would you consider other payoff profiles beyond autocallables for the notes the fund invests in?

Walter Treur: We mainly use defensive autocallables, but if conditions allow it we could look at removing the early redemption feature for example, such as a reverse convertible or bonus note. We only choose defensive defined return payoffs that achieve our target return in predefined scenarios without the need for market growth. We will never use turbo’s, as an example, because they require a view on the market and their leverage adds volatility.

Another goal is to offer a reduced equity beta. To reduce the fund’s risk profile we make a smaller allocation to risk premia strategies that are uncorrelated with equities but meet strict risk-return criteria. During the March correction, these ‘diversifiers’ did as well as we expected, significantly limiting the fund’s drawdown compared to global equities and individual equity-linked structured products.

Lastly, our fund managers separately trade investment grade sovereign bonds and the OTC structures in order to more efficiently manage the daily dealing requirements and counterparty exposures and offer investors exposure to defined return investments without credit risk of banks.

In which European countries has the fund been rolled out?

Walter Treur: We are currently expanding the firm’s business into Belgium, Luxembourg and Switzerland after which we will explore additional markets. In the medium term we hope to attract sales people who can cover a German and French speaking areas and share our vision of growing our asset management business next to individual structured products.

Asset managers across Europe all struggle with their defensive allocations in this negative real yield environment. Defensive alternatives in an internationally recognised Ucits wrapper are an attractive solution and very scalable. We definitely have lots of work to do!

How has the fund performed during the Covid-19 pandemic?

Walter Treur: It was of course an unprecedented move in terms of speed and breadth across asset classes. With an eye-catching explosion of long-term implied volatility on top, it is safe to say this was a genuine litmus test for the fund.

We do not have any American barriers so all our positions are still intact and set to deliver their targeted return. There was no need to trade, hedge or restructure throughout the dip and we are currently not too far below where we ended last year with significant intrinsic value left in the fund in flat or even slightly declining markets.

During the market correction the fund’s equity beta was of course higher than our desired 50%, which was mainly due to the aforementioned spike in long term implied volatility to levels last seen during the financial crisis, but it is naturally falling back in line now.

What impressed me personally was that our fund managers were able to continuously monitor all greeks and explain exactly how fund’s NAV was impacted. We invested heavily in our proprietary IT and risk management platform in the last three years and have our first-class quant who built out our modelling and pricing capabilities. We run our own daily stress testing, even intraday when needed. This also helps minimise the number of requests for firm pricings with our partner banks for individual structures for clients. All in all, risk is very well managed - we saw a net inflow of money for the month of March.

What are your expectations for the coming months?

Walter Treur: Where does the market go? I really don't know and with this fund it does not really matter. That is the major selling point, for me at least. Do you like a 5-6% annualized return over the medium to long term and are you not certain where global equities are headed? Then this fund is something you should consider.

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