Since the start of the year, the Gateway Active Index-Option Overwrite Composite (the Composite) climbed 13.57%, net of fees, compared to the 10.47% and 16.89% return of the Cboe® S&P 500 BuyWriteSM Index (the BXMSM) and the S&P 500® Index, respectively. Robust volatility continued to support higher index option premiums and potential net cash flow during the quarter, which helped the Composite participate in the intra-quarter market advances while providing loss mitigation during periods of decline. The Composite’s active and diversified approach resulted in a typical amount of market exposure while the passive, rules-based timing of the BXMSM’s replacement of its single written index call option contract resulted in the BXMSM having less exposure than usual during the advance.
Premiums collected from writing options provided significant downside protection during the March 31 through May 4 decline. Specifically, the Composite* provided 175 basis points (bps) of downside protection relative to the S&P 500® Index with a return of 0.69% while the BXMSM returned 0.01%. Premiums collected on written options also supported strong participation in the market’s advance from March 4 through quarter-end. The Composite* and the BXMSM returned 6.21% and 4.25%, respectively, during this market advance as the S&P 500® Index climbed 9.91%.
The Composite’s index call option writing generated risk-reducing cash flow throughout the quarter and gains on written index call option positions contributed to downside protection during the market’s shallow decline at the start of the quarter. Index call option positions positively contributed to returns in April and May but detracted from returns in June, which is expected during sharp market advances. In achieving its low-volatility objective, the Composite’s annualized standard deviation of daily returns for the quarter was 6.32% compared to 11.88% and 6.25% for the S&P 500® Index and the BXMSM, respectively. The Composite* exhibited a beta to the S&P 500® Index of 0.51 for the quarter.
Gateway’s investment team was active in its management of the Composite’s index option portfolio during the quarter. Adjustments to the written index call option portfolio initially focused on maintaining equity market exposure and enhancing cash flow potential through the monetization of robust volatility levels. During periods of market advance, the team was patient in exchanging select index call option contracts in advance of their expiration dates for ones with later expiration dates and higher strike prices to maintain a typical level of market exposure and enhance net cash flow potential.
At the end of the quarter, the Composite’s index call options were sold against over 95% of the equity portfolio’s value with a weighted average strike price between 1.5% in-the-money and 1.5% out-of-the-money, 61 days to expiration and annualized premium to earn between 7.5% and 10.0%. Relative to the beginning of the quarter, this positioning represented slightly higher market exposure and lower net cash flow potential.
All performance data presented is net of fees. Returns less than one-year are not annualized. Past performance does not guarantee future results. Data as of June 30, 2023, unless noted otherwise. Data sources: Morningstar DirectSM and Bloomberg, L.P. *The portfolio statistics reflected for the Composite are those measured by a representative account. This information represents supplemental information to the GIPS® Composite Report. This representative account was selected as it is the largest account in the Composite.