May of 2019 saw domestic equity markets fall for the first time since Q418 as the S&P 500 Index returned -6.35% for the month A drop in oil prices contributed to Energy being the worst performing sector for the month.
Technology also suffered this month as trade concerns have ramped up again between the US and China. Rates dropped across the yield curve in May as Fixed Income acted as a safe haven. The Bloomberg Barclays Capital U.S. Total Return Aggregate Bond Index returned +1.78% for the month.
The collared equity portion of the fund was down in the month of May as our equity holdings dropped in tandem with domestic equities. Our flight-to-quality dividend names outperformed the S&P 500, as our overweight position in Utilities and underweight exposure to Technology helped for the month. The S&P 500 collar that we have overlaid on our equities helped dampen the effect of the drop. The contribution effect of this portion of the fund was -1.13%.
The option income portion of the fund was a positive contributor in May as both our fixed income collateral and our short-dated option writing strategy contributed positively to returns. While, oftentimes, months with larger moves in equity indices have a very negative impact on our option writing a few things helped us in May. Our 'wings’, options purchased to help mitigate the risk of large moves in either direction, helped the option writing strategy. Also, the move lower in May was a return to many S&P price levels that we had sold in the previous month. The contribution effect of this portion of the fund was +.56%
The market movement portion of the fund struggled in May as equities continue to have a hard time creating a long-term trend. The long side of the market movement portion lost money, while the short side made up of long put spreads made money in May. This portion of the fund would benefit greatly from follow through on a trend up or down in the S&P 500 Index. The contribution effect of this portion of the fund was -1.23%.
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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.
An option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option.
A collar is an option strategy that limits the range of possible positive or negative returns on an underlying security to a specific range.
Bloomberg Barclays Capital U.S. Aggregate Total Return Bond Index is an unmanaged index of prices of U.S. dollar-denominated investment-grade fixed income securities with remaining maturities of one year and longer.
Flight-to-quality is the action of investors moving their capital away from riskier investments to safer ones.
One cannot invest directly in an index.
The Reports’ commentary, analysis, opinions, advice, and recommendations represent the personal and subjective views of the author and are subject to change at any time without notice.
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There are risks associated with the potential investment of the Fund’s assets in fixed income investments, which include credit risk, interest rate risk, and maturity risk among others. These risks could affect the value of investments of the Fund, possibly causing the Fund’s share price and total return to be reduced and fluctuate more than other types of investments. Additional information about fixed income risks can be found in the Fund’s SAI. Investment Objective: Seek long-term capital appreciation.
The Fund’s foreign investments generally carry more risks than funds that invest strictly in U.S. assets, including currency risk, geographic risk, and emerging market risk. Risks can also result from varying stages of economic and political development; differing regulatory environments trading days, and accounting standards; and higher transaction costs of non-U.S. markets.
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