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Posted by Jason Chen on Oct 5th, 2020

Experiencing a Canadian First: Purpose Structured Equity Yield Portfolio


  • We built Canada’s first fund to replicate a portfolio of defined-outcome structures
  • The global pandemic forced us to cap the fund to protect investors
  • The pandemic-fueled sell-off also gave us the opportunity to launch a new series of the fund, with even more attractive yields and protection
  • Despite the harsh market environment, both funds are performing as designed

The Early Days

When we first launched Purpose Structured Equity Yield Portfolio in October 2019, we were facing an uncertainty that cast a long shadow over the markets. Amid this instability, there was a lot of pressure on investors to make sure they were doing everything possible to protect their portfolios.

We launched the Fund to help give investors peace of mind and to help them meet their goals through a defined-outcome strategy using Principal At-Risk notes (PARs). We used a specific type of PAR  that offers contingent downside protection and pays coupons so long as the underlying security is above the defined protection barrier. The underwriter of the note will call it back when the underlying security rises above a threshold, paying out a final coupon and returning the principal.

We were very excited about the launch as this was the first of its kind in Canada. Never before had investors been given access to a portfolio of actively managed derivative structures that replicate the payoffs of PARs with diversified exposure to multiple global indices. We turned a lot of manual labour and paperwork into a single-ticket solution. And we paired it with a stable and tax-efficient yield.

Purpose Structured Equity Yield Portfolio provided investors with a unique way to increase portfolio stability over the long run while generating above-market yields. And the fund performed as designed as traditionally stable investments, like fixed income, were seeing their returns compressed.

We got off to a great start and certainly piqued investors’ interest. Within the first four months of the Fund, we were able to achieve the following:

$300M AUM, 6% distribution yield (F series)

March 2020: The Pandemic Problem

The global pandemic hit the world, causing the biggest sell-off since the global financial crisis. Almost instantly, the investment world turned upside down. Our defensive positions, including exposure to gold miners as well as slower capital deployment, helped dampen the impact of the market drop. But performance for the Fund was negatively impacted most by the 30% drop in the US Banks Index and the Saudi-Russian oil standoff that caused the Energy Index to plunge more than 45%.

While the day-to-day pricing of the portfolio is sensitive to extreme market moves, it is crucial to remind ourselves that in this defined-structured strategy, the payoff formula will ultimately determine the outcome at maturity. For example, if a position is one basis point above the principal-protection barrier at maturity, the portfolio will get the initial investment back no matter the pricing today.

In order to protect existing investors and preserve the NAV growth potential, we capped the Fund to new purchases on March 16, 2020. While this was something we wanted to avoid, our detailed analysis led us to believe this was the best decision for all investors as new net inflows would dilute the Fund’s existing positions and impair its ability to recover. Despite the cap, there were never concerns around liquidity and the Fund remains open for redemptions. The fund today is on its way to recovery alongside the market, showing that we did the right thing for our investors.

The Next Generation: Purpose Structured Equity Yield Portfolio II

Given the market and our belief that the strategy represents excellent value for investors, we launched a second series of the Fund in April. We called it Purpose Structured Equity Yield Portfolio II. Launching it allowed us to convert the increased volatility into higher-yielding structures, which allowed investors to enter the market at more attractive levels and set fresh protection barriers. For example in April, a Canadian Banks Equal Weighted Index note had 30% contingent downside protection with an annual yield of 13%. The new fund is showing excellent demand. Since launch, we’ve been able to achieve the following:

$500M AUM, 11% average yield of invested positions

The following chart shows our exposures to the coupon threshold and protection barrier:

Chart that depicts exposures to the coupon

All of the positions are well above the coupon threshold and protection barrier

Looking Ahead: Stay Calm and Keep on Yielding

Elevated volatility presents a great opportunity in the structured yield space when adding new positions. The market sell-off gave us the opportunity to reposition and build an even more attractive solution for our investors. We’re keeping approx. 10% cash for tactical moves in this choppy market and to take the time for diversification, and will gradually invest targeting less than 5% cash long-term.

Structured yield by exposures in Purpose Structured Equity Yield Portfolio II

With the US 10-Year Treasury yield dropping to ~70bps, we continue to believe both the original fund and the new series are essential income solutions in a modern balanced portfolio. Compared to traditional fixed income risk exposures such as duration and credit risks, broad equity indices are the main drivers for our funds with defined outcomes. Coupled with active management, we adjust our exposure accordingly to market conditions and increase the risk-adjusted returns.

We’re very proud of the outcome and success we’ve had in both series of the Purpose Structured Equity Yield Portfolio and are excited for the opportunities to continue to innovate in this structured note and defined outcome space – stay tuned, more to come! In the interim, if you need a competitive income solution with contingent downside protection, now is the time to take action in Purpose Structured Equity Yield Portfolio II.

— Jason Chen is Portfolio Manager, Systematic Investing at Purpose Investments

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 and neither Purpose Investments Inc. nor its affiliates will be held liable for inaccuracies in the information presented.

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. The indicated rate of return is the historical annual compounded total return including changes in share/unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Jason Chen, CFA, FRM

Jason specializes in derivative instruments and quantitative strategies, managing multiple structured-product portfolios at Purpose Investments. He also leads the development of portfolio analytics and systematic overlay strategies using cutting-edge technology and quantitative methods to analyze the asset mix and risks at the total fund level.