Investors ignoring structured products because of failures during the global financial crisis need to move out of their comfort zone, according to Atlantic House Fund Management’s Tom May.
May’s £1.2bn AHFM Defined Returns fund targets a net return of 7 to 8 per cent over the medium to long term “in anything but the bleakest market conditions with no partial recovery”.
To do this it invests in a portfolio of defined return investments linked to global equity indices, or as some investors might describe them ‘structured products’.
But such is the tarnished reputation of structured products – which encountered well-publicised issues over credit risk in the aftermath of the global financial crisis – that it remains difficult for FE fundinfo Alpha Manager May (pictured) to generate interest without investors switching off. 
“The problem was that people who had bought these things hadn’t been told that they had credit risk,” said the manager. “If they’d been told they had credit risk, then obviously people wouldn’t have been happy, but it would have been a different type of conversation. People would have gone in with their eyes open.”
Having been an OTC (over the counter) derivatives trader at around the time of the global financial crisis, May knows how popular the products were and what they are capable of.
As such, it remains a source of frustration that many investors avoid anything that looks like a structured product.
“We don’t trade individual structured products, but we trade the derivative bits,” he said. “If you glue them all together, it kind of looks a little bit like a structured product. But that depends on where you’re coming from.”
May, Atlantic House Fund Management’s chief investment officer, said the fund invests in autocall securities, or bonds (in this case gilts) with an equity overlay.
“This thing really is a bit like an equity without the dividends,” he explained. “If markets don’t fall catastrophically, this is going to give a positive return. That’s it. You give away the uncapped upside of equities in return for getting a good return, but you accept that if markets have fallen and don’t recover it doesn’t work.”
He said the autocalls it invests in are bespoke derivative contracts with banks that nobody else can buy or replicate.
“We’re not buying stuff in the retail market, we’re trading derivatives like the big pension funds and asset managers trade,” he said. “We speak to the same people that the derivatives guys of BlackRock speak to – in fact, we’re bigger than anyone in the market doing this.
“Clearly, there are lots of fund managers out there that do bigger derivative trades, of course, but the number of firms out there that are experts in derivatives outside of the hedge fund space is limited.”
Source: AHFM
And while May said markets can’t be predicted, investors can tell how AHFM Defined Returns should behave in different scenarios. But, the team – which includes co-managers Jim May and Russ Bubley – won’t focus on trying to hedge market volatility.
“Quite a lot of funds have put hedges in place, but if you hedge too much then it means you just end up not doing anything,” he said. “And from what I hear, for lots of people that buy stuff in the targeted absolute returns sector – not everyone, I’m not criticising anybody – the performance is too flat, they don’t go up enough. They don’t go down, but they just don’t do anything.”
As such, the manager said he leaves such decisions to those building portfolios.
“If you tell people that you can protect them on the downside and then don’t, you look really stupid,” he said. “We’d rather abdicate the responsibility to the people that we’re speaking to [who] build sensible portfolios and make sure that they place this in the correct part of a portfolio.”
But it is still difficult for the manager to convince retail investors to consider a strategy like his that invests in structured product-type securities.
He said: “I’ve been on the roadshows before and there’s a guy who runs a bond fund. So, he stands up and says he buys bonds. And he also says that sometimes he trades derivatives to hedge himself, right?
“So, legally speaking, I’ve got the exact same assets as him. I’ve got a bunch of bonds – but they’re all gilts and I’ve got some derivatives. It’s just that the bonds he buys are more diverse and high yielding and selectively he uses derivatives to either try and make more money or mitigate some potential risk.
“No one calls his fund a structured product fund, his is a bond fund.”
He continued: “What I want to have at some point is a pitch or a discussion where we never mentioned the term ‘structured product’ because we don’t need to.
“If I was going to be completely spivvy I wouldn’t ever mention structured products. But I’m not spivvy, and I want to have a nod to where this stuff came from.”
May concluded: “One of my proudest moments, I had a seminar – a short presentation, it was only half an hour – and we were talking about this. Then this guy came up to me at the end and said ‘Thanks for that, it was really good. I bought some while you were talking’.
“I am proud of that because [it means] I explained it well and was being clear. I’m not saying this [to you] to brag, I’m saying this because there are people out there that love this stuff.
“Not everybody, I’m afraid, is prepared to step outside of their comfort zone and try to understand different things.”
Performance of fund vs sector since launch
Source: FE Analytics
Since launch of the fund in November 2013, AHFM Defined Returns has made a total return of 39.32 per cent compared with a gain of 37.09 per cent for the average IA Flexible Investment peer. It has an ongoing charges figure (OCF) of 0.66 per cent.