The Gateway Active Index-Option Overwrite Composite (the Composite) provided strong equity market participation and downside loss mitigation as it continued to benefit from an environment of higher interest rates and robust volatility. After a strong July, the realization of higher-for-longer interest rates seemed to settle in, and the S&P 500® Index returned -6.28% from July 31 through September 30. The Composite* provided 370 basis points of downside protection during this decline with a return of -2.58%.
The Composite’s index call option writing generated risk-reducing cash flow throughout the quarter, and gains on written index call option positions positively contributed to return during the quarter. Index call option positions detracted from returns in July, as expected during sharp market advances but positively contributed to returns and provided downside loss mitigation during August and September’s decline.
In achieving its low-volatility objective, the Composite’s* annualized standard deviation of daily returns for the quarter was 7.20% compared to 10.81% and 6.34% for the S&P 500® Index and the BXMSM, respectively. The Composite* exhibited a beta to the S&P 500® Index of 0.65 for the quarter.
Gateway’s investment team was active in its management of the Composite’s index call option portfolio during the quarter. Adjustments to the written index call option portfolio focused on incrementally decreasing the weighted-average strike price while taking advantage of increases in implied volatility to enhance cash flow potential and maintain a typical level of market exposure.
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 greater than 2.5% out-of-the-money, 35 days to expiration and annualized premium to earn between 5.0% and 7.5%. Relative to the beginning of the quarter, this positioning represented higher market exposure and slightly 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 September 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.