Press / Media | Cadiz News
Top performing Cadiz Equity Ladder Fund reaches five year milestone
23 June 2010
With assets under management now in excess of R1.5 billion, the Cadiz Equity Ladder Fund celebrated its 5th anniversary on 3 June 2010, providing a unique opportunity to review the fund's ability to perform and protect investors through both bull and bear markets.
The Cadiz Equity Ladder Fund, a protected equity fund, aims to achieve equity returns with less market risk. Effectively the fund is a long equity portfolio with active stock picking, which targets medium term capital preservation through equity portfolio protection.
The following Morningstar line chart illustrates the performance of the Cadiz Equity Ladder Fund and the FTSE/JSE Africa Top40 Index over the period that Francois Finlay has managed the fund - 1 November 2006 to date ie all but the first 17 months of the fund's existence.
Observations:
- As expected, during periods of market outperformance (November 2006 to May 2008) the Cadiz Equity Ladder Fund marginally underperforms the market. This is largely due to the cost of protection, which can be equated to the cost of short term insurance – you only benefit when you claim and in the case of the Cadiz Equity Ladder Fund you ‘claim' your protection benefit when the market turns down
- Again, as expected, during periods of market underperformance (June 2008 to March 2009) the Cadiz Equity Ladder Fund outperforms. This is due to two primary reasons. Firstly, and most importantly, the portfolio's protection kicks in and secondly, during periods of increased market volatility, as we experienced over this period, the fund manager is able to eke out additional performance through dynamically managing the portfolio's hedging strategy. The level of protection provided over this period was particularly pleasing – at its worst the Cadiz Equity Ladder Fund was only down approximately 18%, less than half the market's approximate 43% fall (and the average general equity fund's approximate 37% fall)
- This level of protection exceeded what we anticipated given that, on average, we target an effective net equity exposure of 75%. What this effective equity exposure means is that if the market were to fall by 10%, we would expect the fund to fall by 7.5%. However, when we are negative on the market, as we were in April / May 2008, we will reduce this effective exposure to as low as 50% by putting in place derivative strategies that increase the fund's downside protection. When positive we will increase the fund's effective exposure to as high as 90%
- Interestingly, the fund outperformed the FTSE/JSE Top40 Index for the period March – December 2009. This was because the Cadiz Asset Management Equity Team, who select the underlying equities held in the portfolio, generated significant outperformance over this period (some 11% alpha as measured against the Shareholder Weighted Index (SWIX) and as reflected in the one year outperformance of the Cadiz Mastermind Fund)
Current positioning
Francois Finlay, fund manager of the Cadiz Equity Ladder Fund commented: ‘with the FTSE/JSE Top40 Index at 25,125 (Monday, 21 June), the Cadiz Equity Ladder Fund's protection levels are now set, on average, at 5% below the current spot – thus out the money. The protection is set for another 20% down move and therefore the fund is currently very well protected in the event of continued market consolidation. If the equity market does not consolidate then the fund will slightly underperform the Top40 due to the cost of protection, but will still have meaningfully positive returns'.
In conclusion, the Cadiz Equity Ladder Fund has delivered exceptional performance on both an absolute and relative basis since its inception. In fact it was the top performing unit trust fund for the three years ended 31 May 2010 by almost 15% (total return = 57.17%; source: Morningstar).
Paul Hutchinson (June 2010)
