Throughout the quarter, the Gateway Index/RA Composite (the Composite) provided equity market participation and consistent risk mitigation. From the start of the year through February 2, the Composite* returned 3.99% relative to the impressive 8.98% climb of the S&P 500® Index. Shifting expectations around potential Fed policy and the threat of a banking crisis led to a -7.53% return for the S&P 500® Index from February 2 to March 13. During the drawdown, the Composite* provided 483 bps of loss mitigation relative to the S&P 500® Index with a return of -2.70%. The Composite* returned 3.90% from March 13 through quarter end, lagging the S&P 500® Index’s 6.67% rise, which is expected during periods of rapid market advance.
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 in February. Gains on purchased index put options also contributed to downside protection during the equity market’s mid-quarter drawdown; however, the Composite’s index call and put option positions both detracted from returns during the quarter, as expected during sharp market advances.
In achieving its low-volatility objective, the Composite’s* annualized standard deviation of daily returns for the quarter was 8.02%, less than half of the 16.80% for the S&P 500® Index. The Composite* exhibited a beta to the S&P 500® Index of 0.47 for the quarter.
Gateway’s investment team was active in its management of the Composite’s index option portfolios during the quarter. During the equity market’s mid-quarter decline, adjustments to the written index call option portfolio focused on lowering the weighted-average strike price to maintain market exposure that is consistent with the Composite’s typical profile while taking advantage of elevated implied volatility to enhance cash flow potential. During periods of market advance, the team exchanged select index call 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.
As the market began to decline in February, the investment team monetized higher volatility being priced into index put option contracts in an effort to preserve index put option gains while maintaining the Composite’s typical risk profile. The team closed out multiple index put option positions as the selloff intensified in March. Put gains were first monetized on March 10, then again on March 13 and March 15. These adjustments brought put coverage down from full to a range of 50% to 60%, a level maintained until March 21. As the market advanced and volatility levels drifted lower, the team incrementally added index put options at two points before quarter-end. The first increase came on March 21 and the second instance was on March 28, which resulted in put coverage at a range of 80% to 95% through quarter-end. In addition to adjustments to put coverage, the investment team managed the cost of downside protection throughout the quarter by trading select index put option contracts in advance of their expirations.
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. *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.