Most of the Composite’s first quarter underperformance relative to the PUTSM occurred during February, as its active approach led to consistent market exposure and risk profile throughout the month, while the PUTSM’s single-contract, rules-based approach led to low equity market exposure as the market began its decline. Elevated implied 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 returned 4.45% compared to the 3.99% return of the PUTSM from the start of 2023 through February 2, while the S&P 500® Index climbed 8.98%. As the equity market declined over concerns around the global banking system, the Composite provided 456 bps of downside loss mitigation with a return of -2.97% from February 2 to March 13, relative to the -7.53% return of the S&P 500® Index. As the equity market advanced from March 13 through quarter-end, the Composite returned 4.64% while the PUTSM and S&P 500® Index climbed 5.22% and 6.67%, respectively.
In achieving its low-volatility objective, the Composite’s annualized standard deviation of daily returns for the quarter was 8.76% compared to 16.80% and 8.65% for the S&P 500® Index and the PUTSM, respectively. The Composite exhibited a beta to the S&P 500® Index of 0.49 for the quarter.
Gateway’s investment team was active in its management of the Composite’s index option portfolio during the quarter. As the equity market trended down from February 2 to March 13, adjustments to the written index put option portfolio focused on lowering the weighted-average strike price to maintain market exposure that is consistent with its typical profile while taking advantage of elevated implied volatility to enhance cash flow potential. During periods of market advance, the team exchanged select index put option contracts well in advance of their expiration dates for ones with later expiration dates and higher strike prices. These adjustments were made to benefit from the relatively elevated volatility priced into later-dated contracts.
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 March 31, 2023, unless noted otherwise. Data sources: Morningstar DirectSM and Bloomberg, L.P.