SG Hinde UK Dynamic Equity ETN (50% Hedge) – HALF.L
We are delighted to announce that Hinde Capital has joined forces with Societe Generale (SG) to launch a next generation, ‘Smart Beta’ Exchange Traded Product (ETN) for professional and sophisticated retail investors.
HALF.L is now listed on the LSE and has been trading LIVE since 16th May.
The SG Hinde UK Dynamic Equity ETN (50% Hedge) is an actively managed Exchange Traded Note (The ETN), which aims to accelerate the total return generated by a dynamic portfolio of high yielding UK stocks, whilst providing partial protection against market falls.
Unlike a regular ETN or tracker, this next generation Smart Beta product has a dynamic portfolio of equities that is actively managed by Hinde Capital according to our Hinde Dividend Value MatrixTM (HDVMTM). Each quarter we will define a portfolio of 20 equally weighted UK stocks from the FTSE 350, which according to the HDVMTM offer the highest total return potential for the next quarter.
In order to reduce potential losses if the UK equity markets fall, the dynamic portfolio also includes short positions on the FTSE 100 and FTSE 250 Indices. These short positions are designed to offset 50% of any loss suffered on the equity holdings. To ensure they remain accurate, they are calculated quarterly and adjusted according to the Beta of the portfolio.
By combining a long exposure to UK equities, and a short position on the FTSE 100 and FTSE 250 Indices, this strategy aims to smooth out returns throughout the market cycle.
Although we don’t care for the term ‘Smart Beta’, it does provide a useful name for products following a rules based investment strategy. We consider this to be the next generation of Smart Beta because we are marrying absolute return-like strategies with the long only fund management world, to provide better risk- adjusted returns that can be accessed at a sensible cost by a wider range of investors. The ETN is issued by SG Issuer, and guaranteed by Societe Generale. However, this ETN mitigates Counterparty Risk through the use of UCITS eligible collateral holdings, which are re-balanced daily in order to maintain 110% of the ETN value.
We chose to work with Societe Generale because of their position as a leader in global equity derivatives since 1989, and as the world’s largest provider of Exchange Traded Products by volume.
Investment Rationale of the Hinde Dividend Value Strategy (50% Hedge)
The era of the Zero Interest Rate Policy (ZIRP), unconventional monetary and macro-prudential policies coupled with ‘imaginative’ fiscal dominance has begun to drive nominal UK GDP higher whilst maintaining the egregious imbalances that preceded the collapse of 2008. The UK F.I.R.E (Finance, Insurance and Real Estate) economy is alive and well.
Low rates have distorted the term structure of interest rates and as a corollary all asset classes are on an inexorable rise. This rise has been quite formidable, but understandable. Financial repressive tactics are designed to grab capital from the private sector to plug the burgeoning hole in the collective balance sheet, in this case the UK’s. State ‘leadership’ under these circumstances can direct and allocate capital indiscriminately. This capital ‘conscription’ engineered vis-à-vis the fiscal ‘insanity’ of such imaginative (or is that asinine) policies as ‘HELP to BUY’, the windfall taxes and levies from the banking sector, Basel III and Solvency II regulatory oversight has been designed to prop up the gaps in an ailing economic system. Unfortunately it has driven asset prices so far away from the abyss and so much higher it has merely succeeded in leaving them exposed to potential falls. Worse still their valuations have exacerbated the impact of the purchasing power of real wages and widened the real, as well as perceived, wealth inequality between ‘the haves and have nots’.
Commercial and UK real estate, Corporate AAA to Junk spreads and all UK equity indices have experienced superlative and in some cases excessive gains. The investor’s view on such gains perhaps resides through the prism by which they observe them or more likely by whether they have been invested or not. Either way the yield on each asset class has been driven to the ‘yield’ on cash ie zero, except unlike cash there is capital exposure.
Worryingly such gains have been accompanied by growing leverage with net debt to EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) on corporate balance sheets turning demonstratively higher and covenant lite debt issuance once again de rigueur. The proverbial chasing of yield or what we have termed ‘chasing the dragon’ as investors fixate on income has led to a diminishing return profile in the face of falling credit and asset quality.
Alarmingly the breadth of economic data to date has not supported such widespread asset class appreciation. The question on all our minds is how long can the edifice be supported by such policies once again. Indeed we would argue that any State can just about engineer any outcome under any circumstances but only in the very short-term. To qualify short-term means years not decades. Everyone understands that rates will have to rise and with it credit will have to be restricted, and most likely asset values will fall and possibly uncontrollably. For a country of homeowners whose credit is supplied by this current monetary and fiscal regime, as well as the kindness of strangers (we have second largest current account deficits in the world), this will not be a good outcome for UK consumption and hence revenue.
Investors suffered very severe losses during the financial crisis, which they may not have yet recouped in spite of such asset moves. With bank deposits bearing zero income many are wondering how best to deploy their savings. Investors need yield but they fear capital loss. Now even if rates don’t remain at zero forever it is clear that with ageing demographics in the developed world, the need for an attractive total return, and the desire to reduce potential capital losses will be important over the next few decades.
As a firm Hinde Capital has been working hard to find solutions to the predicament investors find themselves in. We have sought to provide a product that provides some yield and capital appreciation whilst providing protection to mitigate the risks of falling market prices.
We have long understood that high yielding stocks could play an important role in the creation of a sustainable source of total return. To understand the power of dividends, we have written a comprehensive white paper citing internal and external research called Dividends – Back to the Future. Dividends are a long-term driver of real total equity returns and likewise a factor in cushioning downside performance. They offer a sustainable source of returns and protection over the long-run.
Hinde Dividend Value Strategy
Hinde Dividend Value Strategy seeks to generate a total return from an actively managed basket of UK stocks. The strategy selects 20 highly liquid, mid-to-large capitalised stocks on an equally-weighted basis, which offer the highest total return potential. This selection of stocks is then subject to a strategic Beta Hedge, which is designed to cover 50% of the value of the UK stock basket at all times.
The strategy effectively has two parts; a long exposure of high yielding stocks, and a short exposure to UK indices. The strategy aims to capture the capital revaluation of stocks, which due to investor sentiment, cyclical behaviour or even event risk find themselves over the short-to-medium term to be out of favour relative to their sectors and indices. These companies are typically higher yielding, highly capitalised, low debt UK FTSE 350 companies which exhibit sound balance sheet and cash flow credentials.
Hinde Dividend Value MatrixTM
The FTSE 100 and FTSE 250 constituent stocks are screened using the Hinde Dividend Value MatrixTM (HDVMTM), a proprietary stock-rating system. The basic premise of the strategy is to accelerate returns by selecting relatively high yielding stocks which offer the highest potential for capital revaluation. The dynamic rotation of stocks each quarter enables us to sell stocks where the capital revaluation and dividend has been captured, and use this additional capital to invest in more undervalued quality companies. If successful, this cycle of capture and re-investment offers the chance to significantly improve the total return generated by the Dynamic Portfolio. The basis of the stock selection process is the Hinde Dividend Value MatrixTM which is derived from 3 screening processes:
- Dividend Screen
- Performance Screen
- Value Screen
It is the dynamic reinvestment of dividends and capital on a quarterly basis which enables strategy returns to compound faster than traditional passive and active long-only funds.
In order to demonstrate how the ETN would have performed had it been purchased in the past, we carry out a series of tests to determine the ‘simulated past performance’. We apply the exact parameters of the ETN to historic price information between Q4 2002 and Q4, 2013. It is important to note that the analysis includes management, financing and transaction costs. The composite performance of the FTSE 100 and FTSE 250 Indices is calculated as the average performance of the two Indices.
As you can see from the tables above, according to the simulated data the ETN would have provided a higher annualised return than the FTSE 100 Index with less volatility. Furthermore, its maximum drawdown would have been significantly lower than the composite performance of the FTSE 100 and FTSE 250 Indices. Relative to both the FTSE 100 and FTSE 250 Indices, the Hinde Strategy would have provided smoother and more consistent returns.
The aim of our strategy is to provide growth and greater safety to investors through this strategy than your average equity income fund. The back-tests have shown a conservative 12.21% annualised, with a drawdown almost half that of the near 40% correction of the FTSE 350 in 2008, and overall volatility far reduced relative to the constituent indices of the FTSE 100 and FTSE 250. We are looking for stocks with high return potential relative to their corresponding equity indices which pay sustainable dividends that can both cushion losses and accelerate returns. This is designed for investors who want to grow capital by compounding income consistently. Those interested in learning more about Hinde Dividend Products and the HALF.L ETN please click here.
What are the main risks to be aware of?
- Your capital is at risk. The stocks of the Dynamic Portfolio can be volatile and it is possible to lose your entire investment.
- Performance risk. The stock selection process, and the resulting performance is the sole responsibility of Hinde Capital. As such, if their allocation proves unsuccessful, there is a risk of poor performance in the ETN.
- Absolute return. The inclusion of the Beta Hedge means that the ETN will not benefit from the full rise of the Dynamic Portfolio.
- Counterparty risk. If SG Issuer and Societe Generale were to default or become insolvent, the ETN will terminate immediately. The amount that you receive back on your investment will depend on i) the market value of your investment at that time and on ii) the value of the Collateral Assets at the time of default. You may receive back less than your initial investment.
Full details of the SG Hinde UK Dynamic Equity ETN (50% Hedge), the issuer and the risks are available in the Product Guide and Final Terms. Please ensure you read these prior to investing.
How to purchase the SG Hinde UK Dynamic Equity ETN (50% Hedge)
The SG Hinde UK Dynamic Equity ETN (50% Hedge) is listed on the London Stock Exchange and can be purchased by professional and sophisticated retail investors through a UK stockbroker. We do recommend that professional advice is sought prior to investing. Holders of the ETN will pay an annual charge equivalent to 1.3%, which is calculated and deducted daily. Sophisticated retail investors can invest in HALF.L through the stockbroker accounts, in their SIPPs and ISAs and it will be available via portfolio building program so investors can grow their investment through this equity income strategy with relative peace of mind about stock market debacles such as 2008.
THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS AND SOPHISTICATED RETAIL CLIENTS IN THE UK
This communication issued in the U.K. by Hinde Capital who is authorised and regulated in the UK by the Financial Conduct Authority. FCA number 471754. The SG Hinde UK Dynamic Equity ETN (50% Hedge) (the ETN) is directed at professional clients and sophisticated retail clients in the UK, who have a good understanding of the underlying markt and characteristics of the ETN. It is important that you appreciate at the outset that you could lose all of your invested capital when investing in these products. You should be satisfied that they are suitable for you in the light of your circumstances and financial position. If in any doubt, please consult an appropriately qualified financial advisor. We recommend that retail investors seek independent professional advice prior to investing. You should not deal in these products unless you understand their nature and the extent of their exposure to risk. The value of the product can go down as well as up and can be subject to volatility due to a range of factors which include price changes in the underlying instrument and interest rates. Final Terms are published for this security detailing its specific characteristics and its pay-off at Maturity, and the product features given in the Final Terms are prescribed by the approved Base Prospectus. Both documents can be found at www.sglistedproducts.co.uk
This ETN is a security that is listed on the London Stock Exchange and is issued by SG Issuer via an Issuing Programme which is approved by the UK Listing Authority. SG Issuer is a 100% subsidiary of Societe Generale. As the Issuer of the ETN, if SG Issuer and Societe Generale were to default or become insolvent, the ETN will terminate immediately. The amount that you receive back on your investment will depend on i) the market value of your investment at that time and on ii) the value of the Collateral Assets at the time of default. You may receive back less than your initial investment. This ETN is not covered by the provisions of the Financial Services Compensation Scheme (“FSCS”), nor any similar compensation scheme. Societe Generale is the only market-maker for SG ETNs and Trackers and therefore the only liquidity provider. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the index tracked by the product; a failure in the LSE, Societe Generale systems; or an abnormal trading situation or event.