INVESTMENT PROFESSIONALS ONLY
On 30th September 30th 2016, the Davy Defensive Equity Income Fund (the Fund) marked its fifth anniversary, a significant milestone.The Fund has provided downside protection with an impressive return of 52.7% over the past five years. The strong performance can be attributed to diligent and prudent management as well as a consistent application of our investment philosophy and process.
It is important to remember the context in which the Fund was established in September 2011. Europe was in the throes of a sovereign debt crisis that was roiling not just European, but global markets. The Eurostoxx 50 Index had fallen -35% from its February 2011 high, the S&P 500 (-17.9%) and MSCI World Index (-20.6%) were feeling similar pressures. There was much fear and anxiety among investors as words like ‘contagion’, ‘financial meltdown’ and ‘Grexit’ were dominating headlines.
The Fund was established under three guiding principles which remain in place today:
1.To invest in high-quality and dividend paying companies.
To achieve the Fund’s objectives, we employ two lines of defence. The first is the underlying equity book, which is defensive in nature and invests in high-quality, global, large-cap, dividend-paying companies with strong balance sheets, good capital discipline and healthy cash flows.
The second line of defence is the protection strategy which has two parts:
True to the objectives of the Fund, investors have benefited not just from strong equity market returns but have also enjoyed a lower level of volatility than the broader equity market. In the five years since inception, the annualised volatility of the Fund has been 10.6% versus 14.7% for the Fund’s benchmark, the MSCI World Index.
A lot has changed in the five years since the Fund was launched. Equity markets are considerably higher: the S&P 500 has gained over 95% from the 2011 lows; the MSCI World Index has advanced by over 115%; and Eurostoxx 50 Index has risen by 50%. Bond yields have lowered globally as many central banks have targeted the price of money through zero interest rates, quantitative easing, and negative interest rates. The threat of Grexit has been superseded by the reality of an impending Brexit.
What remains the same, however, is the anxiety that uncharted waters create in investors’ minds. Back in 2011, the pressure on Eurozone bond markets was unprecedented. Today, it is the valuation of those bonds that confounds many. Volatility can disappear for extended periods before returning with a vengeance.
Figure 1: August 2015 - Chinese yuan devaluation
Source: Davy Asset Management and Bloombery 31st July to 31st August 2015
Markets wobble following the Fed’s decision to keep rates on hold. At the trough the Fund outperformed the market by 3.5% with the MSCI World Index down 5.5% and the Fund down only 2.0%.
Figure 2: September 2015 - Fed does not raise rates
Source: Davy Asset Management and Bloomberg from 16th September to 2nd October 2015
Figure 3: Q1st Quarter 2016 - Markets sell off
Source: Davy Asset Management and Bloomberg from 31st December 2015 to 29th February 2016
On all three occasions, the Fund illustrates its ability to retain market exposure as equities rally maintaining its outperformance. As a result of the underlying investment strategy, the Fund does not time when to be in and out of the market, removing any market timing risk. The Fund will always remain invested in equity markets and have protection in place regardless of our investment outlook.
For more information on the Davy Defensive Equity Income Fund, please contact our Relationship Management & Distribution Team .
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