Options Portfolio celebrates five years

Great news for investors as Options Portfolio celebrates five years

Life insurance and investment company Fidelity Life is celebrating the fifth year of its unique Options Portfolio this month, with another positive result on the back of calmer bond markets.

The options portfolio is a cash fund that issues options on Fidelity Life and other government bonds. This alternative, fixed-interest strategy produces volatile returns that are expected to out-perform pure fixed interest over the medium to long-term.

Its run of positive results has continued with a 3.8 per cent return for July.

Fidelity Life marketing manager Peter Lee says this means the portfolio has all but recovered its losses over the past year -- great news for investors.

“The past year has certainly been a turbulent one for most investments, so we’re obviously delighted that the portfolio has come through such a tough period,” he says. “We’re delighted with the success of the portfolio, both in attracting funds and in its performance.”

Launched in August 2004 and marketed as “fixed interest with zing”, the Options Portfolio has been a popular choice for many advisers and investors looking for something a little different to complement more traditional, lower-risk investments.

The portfolio aims to achieve 10 per cent per annum before tax and after fees by investing in cash deposits, bills and other short-term financial instruments and issuing derivatives.

Since inception, the Options Portfolio has attracted more than $56 million, including $13 million via Fidelity Life’s KiwiSaver scheme and returned an impressive 8.42 per cent per annum, after tax and fees, despite turmoil on financial markets during 2007 and 2008.

Lee says the original aim of 10 per cent per annum after tax and fees for what is a high-risk investment still remains. “We think the 8.4 per cent per annum return is excellent considering what the market has had to go through in the past couple of years.”

The portfolio is managed for Fidelity Life by Fergus MacDonald’s respected fixed interest team at Tyndall Investment Management. It uses cash investments as security for put and call options on 10-year government bond rates, typically over a 20-to-30-day period.

Lee says that a number of lessons have been learned over the years, but the core strategy remains in place.

“When Tyndall first started, there was no track record, despite all the back-testing. But over the years it’s definitely worked. In the early days the portfolio used the NZ 10-year rate as the basis for the options contracts, but now it’s exclusively using the US 10-year rate. Tyndall also actively manages both the duration of the contracts and their spread to take account of varying bond rate volatility.”

The Portfolio still remains unique in the market, with no other product offering its combination of fixed interest returns and income from options contracts.

ENDS

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