Index/RA Performance Summary – Q2 2023

From the start of April through May 4, away-from-zero interest rates and robust volatility contributed to the Gateway Inces/RA Composite’s (the Composite) return of 0.67%, net of fees, compared to the -1.06% return of the S&P 500® Index. Hopes for a pause, or even a reversal, in the Federal Reserve’s (the Fed) hiking cycle helped drive markets higher and volatility lower after the Fed signaled such an outcome could materialize during its May meeting. The Fed paused in June, but investors took the hint in May. From May 4 through June 30, the Composite* returned 5.04% compared to the S&P 500® Index advance of 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 positively contributed to returns in April and May. Gains on purchased index put options also contributed to downside protection during the equity market’s shallow decline. However, the Composite’s 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 5.40%, less than half the 11.88% of the S&P 500® Index. The Composite* exhibited a beta to the S&P 500® Index of 0.44 for the quarter.

Gateway’s investment team was active in its management of the Composite’s index option portfolios during the quarter. Adjustments to the written index call option portfolio 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 exchanged select index call option contracts in advance of their expiration dates for ones with later expiration dates and higher strike prices. The team was active in making adjustments to the index put portfolio during the quarter, as well. After maintaining put coverage in a range of 80% to 95% since March 28, the team restored full put coverage on April 4. As the market climbed and volatility declined, the team made active adjustments to manage the cost of downside protection and maintain the Composite’s typical risk profile.

At the end of the quarter, index call options were sold against over 95% of the equity portfolio’s value and had a weighted-average strike price between 1.5% in-the-money and 1.5% out-of-the-money, 58 days to expiration and annualized premium to earn between 7.5% and 10.0%. In April, the team restored full index put option coverage from a range of 80% and 95% and at the end of the period had a weighted-average strike price greater than 12.5% out-of-the-money, 101 days to expiration and an annualized cost less than 2.5%. Relative to the beginning of the second quarter, this positioning represented slightly lower net cash flow potential and similar market exposure. \

Index/RA Performance Summary - Q2 2023

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.