It’s often said that investors love certainty. That makes a lot of sense — when we feel certain about what’s going on with the economy and the markets, it’s a lot easier to make investment decisions. Without that certainty, many investors start second-guessing themselves and their investment decisions.

We’ve talked before about how uncertainty is on the rise and innovative solutions can help fill the void.

With the outlook growing increasingly unclear, many investors are looking to reduce some risk in their portfolios. This is especially true for equity exposures, where investors have been pushed to effectively take on more risk to counter low interest rates.

This leaves many of us overexposed to a market correction. It’s not a comfortable position to be in.

The problem is how to take action without taking a material hit to your expected returns. The challenge grows even more daunting with the current direction of global monetary policy and its effect on fixed income investments and cash yields.

Purpose Premium Yield Fund (PYF on the TSX) is a key ingredient in the antidote to uncertainty sickness. It can help you meet the challenges of reducing risk head-on.

The Fund uses a cash-covered options strategy to generate yield by effectively selling insurance on stocks we love to other investors. Unlike many other liquid alt funds, PYF is a proven way to diversify equity risk and earn attractive tax-efficient income, with a track record approaching four years.

Because we’ve embedded Environmental, Social and Governance (ESG) factors across all our core funds, PYF benefits from the equity screens we use. This reduces the probability of individual negative events, which is exactly what we’re selling insurance against. We believe that, in the end, adding an ESG lens to our process will result in stronger returns and PYF is a prime example of that brought to life.

1. A History of Stability and Consistency

PYF has delivered an annualized return of 4.21% with very low volatility on top of low beta to equity markets. Over the course of the Fund’s life, it’s exhibited an annualized volatility of only 3.7%. Its beta against the S&P 500 Index is just 0.2. This adds up to make it a powerful solution to remove some of the risk in your portfolios. PYF has generated positive returns in every year since its inception, including in 2018 when the S&P 500 fell more than 6%.

PYF annual returns

* 2016 performance measured from inception 1/20/2016
** as at 9/13/2019

2. Less Downside Sensitivity with No Leverage

Because PYF’s strategy involves selling put options at 5-10% out of the money, its equity market sensitivity is limited. Although this increases as equity markets decline, the Fund doesn’t incorporate leverage. By definition, it can’t have a loss that is greater than that of its underlying securities, which are carefully underwritten for quality and value.

S&P 500's worst months since PYF's inception.

3. Attractive Yield Without a Direct Link to Interest Rates

Even in a low-rate environment, you can generate an attractive yield because PYF doesn’t generate yield from interest-bearing instruments, like a 10-year government bond. Instead, it depends on the volatility premium available in the options markets, which tends to be independent of interest rates.

4. Tax-Efficient Distributions

PYF provides a tax-efficient distribution yield of 5.3%, taxable as capital gain due to its corporate class structure.

The Bottom Line

PYF provides an attractive opportunity to limit the risk in your portfolios with an expected return well above cash, particularly with the current trajectory of interest rates. Combined with other solutions, like private assets and a dynamic asset allocation strategy, investors can start to feel more comfortable meeting the current challenges of ever-rising uncertainty.

– Graeme Cooper is a Product Manager at Purpose Investments

Looking for an options strategy with a bit more torque and a higher yield? Check out Purpose Enhanced Premium Yield Fund.

All data sourced from Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.