August was an interesting month for global markets as the ongoing trade war with China continues to burden equity markets. Fixed Income, especially U.S. treasuries, rallied most likely as the result of two things: they are considered "safe haven" assets and were further buoyed by the Federal Open Market Committee starting to lower rates in the face of ongoing fears of recession. A 2-10 inversion (i.e. the point at which U.S. 2-year Treasury Note begins to yield more than the 10-Year note) also occurred this month. This is a much-watched signifier of potential recession because this doesn't occur in healthy credit markets that are functioning normally. The total return for the S&P 500 Index was -1.58% for August and +2.59% for the Bloomberg Barclays US Aggregate Bond Index.
The collared equity portion of the fund did well in August given the move lower in broad equity markets. Our dividend paying flight-to-quality exposure to stocks did well in August on a relative basis to the S&P 500 Index. Our collar, which we employ as risk-mitigation against large market selloffs also added value during August as the broader markets were down. The contribution effect of this portion of the fund was +.06%.
The option income portion of the fund did very well in August. The fixed income contributed on a stand-alone basis as rates dropped for the month. The option selling strategy also did well in August as higher volatility has led to higher selling prices for options that we short, and the equity market gyrating around a bit has given us opportunities to buy back options at lower prices. The contribution effect of this portion of the fund was +.96%
The market movement portion of the fund was a detractor in August as the longer-term trend of the S&P 500 (higher) reversed course. This bucket does best during pro-longed trends in equity markets. Unfortunately, the last 12 months has been fairly flat despite head fakes in both directions. We saw a head fake lower in Q4 of 2018 and then tested the higher trend in both April and July. The contribution effect of this portion of the fund was -.26%
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The U.S. 2-Year Treasury Note is a debt obligation issued by the United States government that matures in 2 years.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The Federal Open Market Committee is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
A collar is an option strategy that limits the range of possible positive or negative returns on an underlying security to a specific range.
One cannot invest directly in an index.
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