BNP Paribas’ THEAM Quant ‘Equity US Premium Income’ strategy reaches 5-year milestone
• Equity US Premium Income strategy has generated recurrent alternative income in low yield climate
• Strategy achieved a drawdown reduction by 30% vs U.S equities during COVID sell-off
26th September 2022 –This year marks the fifth anniversary of the THEAM Quant – Equity US Premium Income fund (the “Fund”). It forms part of BNP Paribas’ range of THEAM Quant funds’ – an innovative suite of systematic and alternative strategies providing liquid exposure to a broad range of asset classes.
Launched in July 2017, the Fund targets annual premium income of 3% above the USD short term interest rate by implementing a fully transparent and systematic strategy of writing put options on selected US stocks. Since launch the Fund has returned around 3.2% per annum.
An ‘institutional’ flavour of a well-known wealth management technique
A smart beta approach is used to select 25 large-cap US stocks monthly that are considered to have a robust financial profile. This approach can mitigate the risk of writing an option on a ‘wrong’ stock, while also allowing investors to potentially capture a higher premium for option underwriting – something that under normal market conditions is usually higher if applied to a single stock rather than to a broad market index. In this regard, this strategy is similar to the well-known ‘reverse convertible’ or ‘autocall’ products popular with wealth managers globally.
Equity volatility is a risk, but also an opportunity to generate higher premiums
Although the Fund carries downside risk to US equities; it aims to experience more limited drawdowns.
For instance, during the Covid sell-off in Q1 2020, the drawdown of the strategy was 30% lower than that of the broader US equity market, as represented by the S&P 500
Net Total Return Index.
Importantly too, the strategy’s recovery to previous highs was achieved in a similar timeframe to the market despite limited upside exposure to stock prices. This was achieved by cashing in high premiums during a period of elevated volatility.
Vincent Berard, Head of Global Markets THEAM Quant funds’ range Product Strategy, says:
“The Fund is well-noted for its consistency and capital preservation in the long term and has achieved its objective of providing consistent returns in multiple macroeconomic environments.
“The Fund benefits from our experience of and expertise in generating income using options and is a more ‘institutional’ flavour of a popular wealth management solution. Prior to launching the fund five years ago we gave significant consideration to developing the ‘right’ fundamental stock selection criteria, strikes, maturities and execution program, which have proved very satisfactory during the lifetime of the Fund so far.”
Roberto Bartolomei, Head of Global Markets THEAM Quant funds’ range Sales: “This strategy is one that may come to an investor’s rescue in times of challenging markets, generating premium income at times when stable income isn’t easily available. We foresee continued demand for such a strategy in the current macroeconomic environment – the elevated volatility enables the strategy to generate higher premiums, while the downside portfolio risk is usually more limited than a full equity exposure.”
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