4 reasons why the Ranger Fund can enhance your core equity portfolio

Here are four reasons for considering it as a valuable compliment to a core Australasian equity portfolio.

Reason 1. Downside protection

1. The fund does not have to be invested in equities if we see no opportunities. This is useful when markets are expensive. The fund currently holds in excess of 30% cash and equivalents.
    
2. We can use derivatives to protect the downside. We are currently targeting a 1% investment in put options. This is effectively an insurance policy. If markets are benign this investment will result in roughly a -0.75% per annum headwind, which is effectively the insurance premium. If there is a major market meltdown this portfolio could deliver up to 20% total portfolio return.
    
3. We take a long-term, absolute return perspective when investing in companies. We are not looking to beat an index or a comparable company when we invest, we are looking to find a company that we expect will be worth a lot more in the future irrespective of markets.

The chart shows some of our put option research and trading. The blue dots represent 50-lot put option transactions on the ASX from 2013 to June 2018. The darker the dot the nearer the transaction to today. Note that there is a trend to transacting at lower volatility prices. This indicates that until late 2018, the market has been relatively benign and put option prices are reasonable. The red crosses show our transactions in the same period, and the arrows indicate what we would expect the prices to move to in the event of different scenarios. Scenario A represents a moderate bear market where equity prices fall 30% and implied market volatility increases to 30%. Scenario B represents a market meltdown where prices drop 50% and implied volatility rises to 50%.