Downside Protected Portfolio Investment Strategy

The financial markets are experiencing increased volatility. Investors are facing unpredictable shifts that often lead to large price swings, which can erode investor confidence and capital. Additionally, asset classes tend to react similarly to macroeconomic factors and move in tandem. This reduces diversification benefits and leaves investors with limited choices of safe havens. 

In response to changing market conditions, investors are increasingly seeking strategies that offer a balance between growth and protection. To address these needs, we are excited to launch the Syfe Downside Protected Portfolio S&P 500, Singapore’s first of its kind, designed to harness the growth of the S&P 500 while protecting against downside losses.

Table of Contents: 

What is Syfe Downside Protected Portfolio?

How does Downside Protected Portfolio perform in different market scenarios?

Is the Downside Protected Portfolio right for me?

How Downside Protected Portfolio compares to other asset classes?

Where can the Downside Protected Portfolio fit?

How is the downside protection achieved?

Syfe’s Investment Process and Portfolio Re-optimisation

Key definitions and considerations

What is Syfe Downside Protected Portfolio? 

Syfe Downside Protected Portfolio (the Protected Portfolio)  is constructed with a new series of innovative exchange-traded funds (ETFs), which make use of simple option strategies to provide a high level of protection against downside losses (in USD). The Protected Portfolio, as such, gives a less volatile alternative to participate in S&P 500 upside with downside being protected. 

The Protected Portfolio has two key attributes – Estimated max loss(Est. max loss) and Current upside cap. 

As the S&P 500 goes down, the losses of the Protected Portfolio will be limited to approximately the “Est. max loss” level. This keeps investors shielded from major losses even as the market falls. To keep the cost of this protection low, the Protected Portfolio introduces a “Current upside cap” on returns. This means that as the S&P 500 trends higher, the Protected Portfolio returns will initially be limited to the cap level.

To help investors continue capturing the equity market upside, we periodically revise the cap level upward to lock in gains and maintain growth potential beyond the Current upside cap. Compared to investing directly in the underlying ETFs, Syfe’s periodic re-optimisation ensures the Protected Portfolio remains consistently aligned with current market conditions, making it an attractive and evergreen investment option.

How does Downside Protected Portfolio perform in different market scenarios?

Let’s explore how a hypothetical Downside Protected Portfolio with an estimated maximum loss of 3% and a current upside cap of 12% would perform in three scenarios.

Negative Market: In a negative market when the equity market drops significantly, for instance, the S&P 500 drops by 20%, this Protected Portfolio would typically incur a loss of around 3%, protecting your investment from further declines. 

Moderately Positive Market: In a moderately positive market, if the S&P 500 gains 10%, which is within the upside cap of 12%, this Protected Portfolio could potentially gain 5%, participating in the upside but at a slower pace than the index.

Very Positive Market: And in a booming market, where S&P 500 soars above 20%, this Protected Portfolio would likely achieve the upside cap of 12%.

As the gains reach closer to the current upside cap and/or depending on external markets, we re-optimise the portfolio and revise the current upside cap higher – learn more below about portfolio re-optimisation. 

Is the Downside Protected Portfolio right for you?

Here’s who the Protected Portfolio is best suited for:

For investors who are risk-averse and prefer to minimise potential losses while still capturing upside potential, a Protected Portfolio is an ideal solution. By incorporating built-in downside protection mechanisms, the Protected Portfolio offers a more conservative approach to investing in equities and provides investors a greater sense of security during market downturns.

• Investors waiting for opportunities

For those who have been on the sidelines and are currently holding excess cash, this portfolio offers an excellent solution. Transitioning to a Protected Portfolio can allow investors to enter the equity markets with greater confidence, knowing their potential losses are limited even if their timing may not be perfect.

• Investors invested in the US Equities 

If investors are currently invested in the US markets but are uncertain about the market’s direction, they can consider switching to a Protected Portfolio as a strategic move. By switching to a Protected Portfolio, investors can potentially benefit from future market rallies, up to a cap, without the stress of constant monitoring or the need to precisely time their exit and re-entry into the market.

How Downside Protected Portfolio compares to other asset classes? 

Compared to traditional asset classes, the Protected Portfolio tends to have significantly lower volatility, or price swings, than both equities and bonds. Based on our back-tested results, the Protected Portfolio showed resilience by significantly limiting losses during market downturns, especially when both equities and bonds were experiencing declines.

Consider March 2020, when the COVID-19 pandemic triggered widespread panic selling. The S&P 500 suffered a staggering 33.9% drawdown, and global bonds weren’t far behind with a 25.7% decline. In contrast, the Protected Portfolio would have weathered the storm with a minor loss of 3.8%.

This trend continued in 2022 as the Federal Reserve embarked on its most aggressive rate-hiking cycle in history. While the S&P 500 plummeted by 25.4% and global bonds dropped by 24.3%, the Protected Portfolio would have limited its losses to a mere 2.7%. 

These examples underscore the unique benefits of the Downside Protected Portfolio for investors seeking to navigate turbulent markets while still participating in the market. 

In addition to the downside protection, the Protected Portfolio would have yielded an annualised return of 5.0% over the past three years. While the annualised return was lower than the S&P 500’s during the same period, it is important to note that the return was achieved with significantly lower volatility. This means that the investors in the portfolio would have a smoother ride, avoiding the sharp peaks and valleys that often characterised the broader equity market. 

Where can the Downside Protected Portfolio fit? 

We believe that the Protected Portfolio can potentially fit in two places in an investor’s portfolio: 

1. Diversifier for investment portfolios 

The Protected Portfolio’s distinct characteristics of downside protection and moderate upside potential make it a valuable diversifier for investment portfolios. By limiting losses during market downturns, as demonstrated in 2020 and 2022, it offers enhanced portfolio resilience. The Protected Portfolio has low correlation with traditional assets such as bonds and equities. Adding this Protected Portfolio to an existing investment mix can effectively reduce overall downside risk and volatility, creating a more balanced and stable portfolio for the long term.

2. Lower risk/hedged equity exposure 

The Protected Portfolio offers an alternate defensive approach to capture some upside from equities with reduced downside risk and volatility. Syfe’s periodic re-optimisation even helps to lock in gains in the portfolio along with capturing further upside. So, instead of selling off during market downturns or waiting on sidelines for opportunities, the Protected Portfolio’s built-in downside protection and periodic re-optimisations allow investors to stay invested for the longer term.

How is the downside protection achieved?

The downside protection is achieved through the protection mechanisms built into the constituent ETFs. These ETFs use simple call and put options to achieve three key objectives: 

Layer 1 – Replicating S&P 500 Returns: The ETF buys a deep-in-the-money call option on the S&P 500, allowing it to mirror the index’s returns 

Layer 2 – Providing Downside Protection: The ETF also buys a put option, targeting a predetermined maximum loss, which corresponds to the Est. max loss level in the Portfolio. The put option acts as an insurance and helps to protect the portfolio from large losses in falling markets. 

Layer 3 – Financing the Protection: To cover the cost of the downside protection, the ETF sells a call option, which initially caps the upside level. This cap level corresponds to the Current upside cap in the Portfolio.

Syfe’s Investment Process 

Investors more often than not look for investments that offer a balance between risk and return and can help them ride through various market cycles with a peace of mind. The Protected Portfolio exactly seeks to solve the same, optimising for growth while limiting the downside losses.

Syfe’s investment team employs a rigorous process to construct and periodically optimise the Protected Portfolio. We conduct in-depth research on the ETF managers as well as assess various ETF tranches available in the market, considering factors such as downside protection, upside potential, maturity of options embedded within the ETFs, liquidity, expense ratio as well as market conditions. Based on this analysis, we select the suitable ETFs to build a portfolio with optimal risk-return (downside and upside) characteristics. 

We understand that the intricacies of ETFs and options can be daunting. That’s why we leverage our expertise to provide investors with a straightforward and unique approach to downside protection. 

Portfolio Re-optimisation 

In addition to curating the portfolio thoughtfully on the initial launch, Syfe would also periodically optimise the Protected Portfolio. This is one of the most unique features which not only allows investors to capture higher upside beyond the initial current upside cap but at the same time locks in and protects the portfolio gains. 

The Est. max loss and Current upside cap could be revised: 

Syfe initiated: Syfe would review the ETF universe usually on a semi-annual basis or if needed earlier when either the est max loss or the current upside cap no longer provide a favourable risk-reward balance. ETFs are evaluated through a comprehensive assessment of the following factors. If a new ETF tranche is more attractive than the existing constituent ETFs in the Portfolio, across the mentioned factors, we will initiate re-optimisation. 

The re-optimisation is therefore achieved by replacing the existing constituent ETFs with new ETFs generally offering a higher return cap and loss protection closer to prevailing market levels. Such re-optimisations help to reduce future loss potential and revise the current upside cap upwards to capture further growth. 

Option re-strike within ETFs: Each constituent ETF in the Protected Portfolio has a specific outcome period, typically one or two years. During the outcome period, the ETFs aim to provide a predetermined level of downside protection (Est. max loss) and a return cap (Current upside cap).

Upon the conclusion of the outcome period, each ETF will “roll over” its options, essentially replacing them with new options with the same exposure, downside protection level, and term. 

When these options are rolled over, the downside protection (achieved by buying a put option) will be recalibrated based on the ETF’s current price to maintain the same level of protection. The upside cap (determined by selling a call option) will be adjusted higher based on prevailing market conditions.

This periodical re-optimisation feature makes the Protected Portfolio an evergreen alternate portfolio for investors to invest in.

Key definitions and considerations  

Est. max loss: The estimated max loss figure (in USD) will vary depending on the time of investment in the portfolio, and will be fixed after the funds are invested. Though not guaranteed, the portfolio losses are expected to remain within this level. While unlikely, the portfolio may sometimes sustain a loss greater than the Est. max loss level during large market downturns. This may arise because in periods of extreme volatility, the embedded options in the constituent ETFs may not fully reflect sudden price swings, potentially resulting in temporary losses greater than the Est. max loss level.

Current upside cap: To reduce the cost of downside protection (Est. max loss), the portfolio sets a current upside cap on returns. The current upside cap figure (in USD) is the maximum gain the portfolio can achieve before re-optimisation. This also means that as the S&P 500 trends higher, the portfolio returns will lag against the index and will sacrifice some of the upside, especially when the S&P 500 surges within a short period of time. Nonetheless, subject to investor consent, Syfe’s periodical re-optimisation will revise this cap upwards and capture even higher potential gains.

Option dynamics: The Protected Portfolio invests into ETFs that utilise option strategies. These options will impact the returns of the portfolio – potentially reducing the returns on the upside, but also limiting the losses on the downside. Investors should understand how options work to better understand the portfolio’s potential performance. As the Protected Portfolio comprises listed Specified Investment Products (SIPs), investors need to fulfil the Customer Account Review (CAR) criteria to invest in this portfolio.

Path dependency: The Est max loss and Current upside cap will vary and are only fixed after the funds are invested. In addition, investment returns from the portfolio are not guaranteed and may vary based on the timing of an investor’s entry and exit from the portfolio position. 

Non-discretionary: The Protected Portfolio is provided on a non-discretionary basis. Unlike in a discretionary portfolio, we will only change the constituent ETFs and their allocation after obtaining your consent. This portfolio comprises listed SIPs and may not be suitable for all investors. 

Key Risks 

While the Protected Portfolio is built for defence and carries a moderately low risk profile, it’s important to understand that all investments come with inherent risks. 

Below are some key risks to take note of:

• Equity securities risk The constituent ETFs invest in S&P500 securities, and therefore the Protected Portfolio has exposure to the equity securities market. The Protected Portfolio’s value may decline if the S&P 500 index declines, but the magnitude of the loss is expected to be significantly smaller.
• Foreign exchange risk The Protected Portfolio is denominated in USD. If an investor’s base currency is not USD,  fluctuations in exchange rates can impact the investment returns.
• Management risk The Protected Portfolio is actively managed by Syfe. The Syfe investment team applies investment techniques and risk analyses in making investment decisions, but there can be no guarantee that the Protected Portfolio will meet its investment objectives. 
• Upside cap risk Investors are subject to an upside return cap and if the portfolio has increased in value to a level near to the cap, an investor investing in the portfolio at that price has little or no ability to achieve gains but remains exposed to downside risks, prior to periodic portfolio re-optimisation. Additionally, the cap may rise or fall from one re-optimisation to the next. The Current upside cap, Est max loss and the portfolio position relative to it, should be considered before investing in the portfolio.
• FLEX options risk The constituent ETFs utilise Flexible Exchange Option (FLEX) Options issued and guaranteed for settlement by the Options Clearing Corporation (OCC). In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the constituent ETFs could suffer significant losses. Additionally, FLEX Options may be less liquid than standard options. In a less liquid market for the FLEX Options, the constituent ETFs may have difficulty closing out certain FLEX Options positions at desired times and prices. The values of FLEX Options do not increase or decrease at the same rate as the reference asset and may vary due to factors other than the price of reference asset.

Disclaimer: Estimated max loss and current upside cap figures will vary depending on the time you invest in the portfolio. The estimated max loss is not guaranteed, and the portfolio may sustain a loss greater than the indicated figure, or its performance may lag S&P 500, for a period of time due to market events. There is no guarantee that the portfolio will be successful in providing the sought-after protection in capping the losses or in achieving its investment objective.

This portfolio is provided on a non-discretionary basis. Unlike in a discretionary portfolio, we will only change the portfolio constituents and their allocation after obtaining your consent.

This portfolio comprises listed specified investment products and may not be suitable for everyone. Investment involves risks, including the risk of losing part of your invested amount. Refer to our Investment Strategy to learn more about the portfolio and key risks.

Information in this communication is provided for general information only. Any references to past performance and future indications are not, and should not be taken as, a reliable indicator of future results. The information is current at the time of release. Syfe makes no representation and assumes no liability as to the accuracy or completeness of the content of this communication.