Adding value with derivatives

Funds Management

by Clive Tompkins

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MLC Derivatives Manager, Clinton Guelfi, speaks to MLC Research Manager, Rebecca Collins, about reshaping a portfolio’s risk-return profile using derivatives and how correlations between different assets allow for a range of strategies to be implemented that add value at little to no cost.

Rebecca Collins:
Hi and welcome. I’m Rebecca Collins, Research Manager for MLC and today I’m joined by Clinton Guelfi, Derivatives Manager at MLC. Thanks for joining us today Clinton.

Clinton Guelfi: Thanks Rebecca, nice to be here.

Rebecca Collins: So derivatives, they can provide a benefit to investors in portfolios. Can you talk me through that?

Clinton Guelfi: In the context of asset management, I think the main benefit of derivatives are that it allows us to efficiently adjust the risk reward profile, of a specific portfolio. It allows us to further tailor their portfolio to meet its objectives.

Rebecca Collins: As you just mentioned, there’s two sides, risk and reward. So what are some of the things investors need to consider, or we need to consider, before implementing derivatives in the portfolios?

Clinton Guelfi: The main thing that we need to consider is that the derivative meets its design objectives. Now we speak very closely with the portfolio managers, to have a predefined objective. And we consider this during the derivative structuring at the design phase, if you like. We then continue to monitor that the objectives are met throughout implementation, but then also throughout the monitoring phase of the derivative.

Rebecca Collins: So there’s a high level of process that sits over the top. Are there any other steps involved before derivatives are used inside a portfolio?

Clinton Guelfi: We have an overarching trading policy; so all derivatives must fit within that. And there’s also a significant investment committee hurdle that has to be overcome, before any derivative transactions can be implemented.

Rebecca Collins: Can you talk me through some examples where MLC’s used derivatives in clients’ portfolios this year?

Clinton Guelfi: One of the main things that we use derivatives for are risk mitigation. One way that we do this is through the purchase of equity put options. Now the exact way that we do this has varied over time. But the current way we implement this is such that it allows us to have protection, whilst also maintaining market relevance over the medium term, for a relatively low cost to the investor.

Rebecca Collins: Is it almost like an insurance on the equity market exposure, within the portfolio?

Clinton Guelfi: Exactly right, the put option acts like insurance for our portfolio valuations. Another way we do this is to take advantage of the correlation between global equities and currencies. Generally as global equities rise, so does the currency. Whereby as there are equity losses, these can be offset by gains in the currency. Now we don’t solely rely on this correlation.

So what we do is to utilise collar options to give us protection, against a rising Aussie dollar, but also providing benefit, should the Aussie dollar depreciate. Now we can execute these collars with a very favourable risk reward profile that has no cost, to our investors.

Rebecca Collins: But also allowing us to maintain our exposure to the global equity markets, at the same time?

Clinton Guelfi: Exactly right.

Rebecca Collins: Thanks for your time today Clinton, and thank you for joining us.