Resilience of the Sustainable Swiss Equity Income Plus fund in August

Successful launch of the Vontobel Fund (CH) - Sustainable Swiss Equity Income Plus Fund (SSEIP)

In March of this year, we added another product to our Swiss Equity product range. The Vontobel Fund (CH) - Sustainable Swiss Equity Income Plus Fund (SSEIP) invests in a basket of mainly Swiss large-cap dividend stocks while selling income-generating call options tied to the underlying assets. The option overlay not only provides an  additional level of income but potentially also buffers the impact from falling markets at a time of heightened volatility. The fundraising success of this fund within the first five months since its launch, to assets under management of above CHF 500 million, with significant client backing, has likely been driven by the prospect of equity-like returns combined with bond-like income at overall lower volatility. This may make the fund particularly suitable for investors with a long term investment horizon seeking a resilient exposure to equity markets and limited participation in the potential of single securities, with a focus on income generation. In the following, we show that our covered call strategy¹ offers a mechanism to smooth equity market returns throughout turbulent times.

Fund resilience during August market volatility

While the SSEIP reflects the most defensive investment strategy within our range of Swiss equity products, it proved its resilience in August not only during the sharp market downturn of 6.0 percent between August 1 and August 5 but also during the following full market rebound to the same old index levels within the following 12 days. The witnessed “V-shaped" market pattern can be difficult for covered call strategies as it bears the risk that the written calls limit the upside potential during rebounds more than what they have gained during the downturn. While the SSEIP was not immune to the price slide in the markets, the strategy ended the V-shaped market formation with a still 0.2 percent relative outperformance, thus demonstrating its resilience throughout the turmoil.

Active management matters

The pleasing outcome was made possible through active portfolio management, which included tactically purchasing a call option on the Swiss Market Index (SMI) during the market low, staggering the writing of options over several days, and using higher strike prices during the upswing, which reduced premium income but allowed for more room for stock appreciation. While covered call strategies are simple in principle, their success requires careful implementation to yield the desired results, especially in cases of market turmoil. The Vontobel approach combines the discipline of a systematic strategy with the flexibility of active management, capturing three sources of alpha: strategic equity selection, dynamic option overlay, and active risk management. This contrasts with more rigid covered call index strategies which often underperform in volatile markets due to their mechanical implementation, as such strategies generally provide limited upside in rising markets but still expose investors to downside risks during downturns.

A balanced approach to income and market exposure looking ahead

While the portfolio strategy of the Vontobel Fund (CH) – Sustainable Swiss Equity Income Plus lagged behind the Swiss Performance Index (SPI) during the strong market phases of the second quarter, the benefits of the implemented actively managed covered-call strategy materialized during the latest market turmoil in August. Should equity markets remain fragile with markets rising only slowly, or moving sideways, the covered call approach could potentially yield better returns. Additionally, the fund could also benefit from increased premium income amid higher volatility levels, helping to meet its target distribution of 7-8 percent per annum. Investing in the Vontobel SSEIP Fund provides multiple sources of income potential—market participation, premium income, and dividends—potentially making it a suitable option for those seeking a balanced approach to income and market exposure over a long term investment horizon. On the contrary, if equity markets rose vigorously, investors may be better off investing in a long only Swiss equity fund.