Investment managers at the $800m Wilmington Multi-Manager Real Asset Fund have increased their use of structured notes to gain more efficient exposure to new markets with defined risks.
“A structured note is usually going to be the less expensive option, but you lose liquidity,” said Wilmington Trust Investment Management co-portfolio manager Amanda Cogar at a recent media briefing.Three years ago in June, the mutual fund broadened its real estate focus to add commodity-linked securities and US Treasury Inflation-Protected Securities ('Tips'). The fund can invest in exchange-traded funds (ETFs), other mutual funds and structured notes.
While a structured note may be the preferred investment vehicle for the fund, the requirement that a mutual fund stand ready for daily redemptions of investors’ shares can limit the use of structured notes. In addition, when deciding whether to go into an ETF or a structured note, the fund’s portfolio managers not only consider prices, but ask the investment company’s fixed-income team to evaluate the credit quality of the issuer, Cogar said.
As of 30 June 2008 the fund, which was designed to protect against the long-term negative effects of inflation, had a positive return of 13.08%, although this has since dropped to about 7%. That return stands out among the sea of red ink that most domestic equity, international equity and balanced funds have seen year to date, according to Morningstar.
At mid-year, the fund had 8.6% of its assets invested in a commodity-linked structured note with the Deutsche Bank Liquid Commodity Index as underlying. A decision had been made to diversify away from the Dow Jones AIG Commodity Index, as the Deutsche Bank index offers lesser exposure to soft commodities, said Cogar. The Deutsche Bank index invests in crude oil, heating oil, gold, aluminium, corn and wheat.
Since then, the fund has also made strides to think more internationally. In recent weeks it departed from investing only in US Tips and invested in a structured note, the performance of which is linked to a global inflation index.
In addition, as of 30 June the Wilmington Multi-Manager Real Asset Fund had more than 5% of its assets invested in the Pimco Commodity Real Return Strategy Fund, which itself can and does invest in commodity-linked structured notes.
As for allocation among its three hard asset classes, the fund’s commodities allocation has been tactically halfed since mid-year from 40% to a neutral 20%, said Wilmington’s head of asset allocation Adrian Cronje. Looking ten years out, “...we’re in a long-run structural bull market for commodities, although over the next six months to a year, commodities are likely to experience a period of weakness,” he said. “Over the next ten years, all commodities will be priced as finite resources.”
