Global fund designed to reduce volatility
BetaShares Managed Risk Global is a fund with a twist because it is designed to potentially provide a smoother performance when world sharemarkets are falling. The fund is an exchange traded product (ETP) managed fund and trades on the ASX (code WRLD). It is one of a new breed, joining BetaShares' 22 other ETPs, including a managed risk Australian share fund.
The fund does not track a specific index. BetaShares buys passive investments indirectly in 1500 of the largest companies around the world. Some 58% are in the US, 9% in Japan and 7% in UK with smaller allocations to other countries. Its key feature is that it sells futures contracts against these investments opportunistically to hedge against anticipated market corrections. The fund charges 0.39%pa.
The performance of the fund depends on the investment managers at BetaShares getting the timing of the market movements right. If they believe the market will fall they sell equity market index futures contracts that are a combination of the S&P 500, Topix (Tokyo), FTSE 100 and Euro Stoxx 50 futures. If they are right the gain on the futures trade will offset the losses on the equity portfolio. But if the market goes up instead, then the futures trade will result in a loss, detracting from the underlying equity return.
BetaShares applies this to 10% to 50% of the portfolio. But in periods of higher volatility, it will increase its activity in futures.
Global share funds carry risks relating to the market, currency and manager. The manager risk usually applies to stock selection and country and industry allocation. Because the underlying investments are passive in this instance, those active manager risks are not present. But this fund uses market timing via futures hedging. So while it says it is managing risk, be aware that this strategy carries an extra risk. The fund was launched in February so there is no significant track record yet.