Armstrong Investment Management has identified European dividend futures as a new opportunity for its IM Armstrong diversified real return fund.
The multi-asset multi-manager fund, which is the top-performing fund in the IMA cautious managed sector since launch on January 19, as at May 24, has exposure to European dividend futures through a Lyxor exchange traded fund.
The Lyxor Euro Stoxx 50 Dividends ETF tracks the estimates of future dividend payments by European companies through the Euro Stoxx 50 Dividend Points Futures index.
Armstrong IM has seen the recent sell-off of European dividend futures as a buying opportunity. The firm says European dividend futures have fallen by over 20 per cent in the past month and that much of this has been driven by the hedging of dividend exposure by structured product providers.
Armstrong IM managing partner Patrick Armstrong points out that if the market falls by a specific amount, many structured product providers are likely to receive a put option. This gives them the right, but not the obligation, to sell a security at a specific time at a specific price.
Armstrong says put options become more valuable when a company pays a dividend but structured product providers are only likely to receive a put option when markets fall, so they benefit from having long exposure to dividends. To hedge the risk of the value of their put option being hurt by dividends falling, they need to sell dividends. This has contributed to the depression in value of European dividend futures.
Armstrong says: “The Lyxor ETF is brand new and there are no other ETFs on the Euro Stoxx 50 Dividend Points Futures index yet. The alternatives are a listed future, or a swap with an investment bank, but the ETF is the most simple.
“We have also added a position in the F&C active return fund. This fund is often long dividends and actively manages exposure across dividends and volatility across markets. Its price was hurt by the recent selloff in dividends and we expect it will recover with dividends market and from falling volatility.”