The Gateway Index/RA Composite (the Composite) has 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 358 basis points of downside protection during this decline with a return of -2.70%.
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 during the quarter. Gains on purchased index put options also contributed positively to return and provided a source of downside protection during the equity market’s periods of decline.
In achieving its low-volatility objective, the Composite’s* annualized standard deviation of daily returns for the quarter was 6.22%, compared to 10.81% for the S&P 500® Index. The Composite* exhibited a beta to the S&P 500® Index of 0.56 for the quarter.
Gateway’s investment team was patient but opportunistic in its management of the Composite’s index option portfolios 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 typical market exposure. The team was active in making adjustments to the index put portfolio during the quarter, as well. As the market declined and volatility increased, the team made active adjustments to extend weighted-average time to expiration 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 greater than 2.5% out-of-the-money, 34 days to expiration and annualized premium to earn between 5.0% and 7.5%. Index put options covered more than 95% of the portfolio and had a weighted-average strike price between 5.0% and 7.5% out-of-the-money, 96 days to expiration and an annualized cost between 5.0% and 7.5%. Relative to the end of the second quarter, this positioning represented lower net cash flow potential and slightly higher market exposure.
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.