Protected Equity (SDRF)
The three main objectives of the Sherpa Diversified Returns Fund (SDRF) are:
- To protect capital in declining markets.
- To generate yield in flat markets.
- To provide significant participation in rising markets.
The central investment philosophies that guide the Fund are:
- Equity markets will outperform other asset classes over the long term.
- A superior investment strategy will deliver lower portfolio volatility.
- Diversification of exposures and risks is crucial to providing superior risk-adjusted returns.
- Delivering a consistent static yield, regardless of market direction, is an important component of successful investing.
- A high static yield and considerable protection against large market downturns is preferable over the long term to full participation in extreme upside market moves.
- The core of a superior long-term investment portfolio will consist of companies acquired at value pricing with relatively low earnings multiples.
- Excellent liquidity is an essential aspect in all investment decisions.
Accordingly, the Fund has a long bias though net exposure levels rarely exceed 60%, and will average about 50% over the long term. We are net sellers of options, which allows us to generate yield for the Fund, but we systematically use some of the proceeds to purchase options that provide profitable opportunities as well as options that protect the portfolio from market declines. Most of our core holdings are purchased at attractive price/earnings ratios (although we have some exposure to growth companies), and we only invest in extremely liquid securities. The Fund is mandated to be well-diversified and concentrations of risk (in sectors, securities, options, currencies, etc.) are avoided at all times.
This profile has provided superior returns, lower volatility and, most importantly, has been proven to preserve capital in market downturns. Our vast experience in managing equity and options portfolios has given us the skill set to be able to successfully manage these exposures in even the most extreme volatility, and provides Sherpa a clear edge in generating superior returns.
The graph above shows the expected returns of SDRF relative to the S&P 500 in 12-month market return scenarios ranging from -35% to +20%. The chart below shows the actual rolling 12-month returns for the Fund relative to the S&P 500, and illustrates the lower volatility profile and lower drawdown risk of the SDRF investment profile.