Example of Return Layering in Global Equities
Imagine you have an investment portfolio focused on global equities. Here's how you might apply "Return Layering" to this portfolio:
Base Layer - Equity Growth:
You invest in a diversified set of global equity funds or stocks. This is your fundamental layer aiming for capital appreciation from the general growth in stock markets.
Second Layer - Credit Overlay:
On top of your equity investments, you focus on a credit overlay that offer attractive yields. This layer adds a steady income stream, enhancing your total return without needing the stock prices to rise.
Third Layer - Currency Gains:
You choose to invest in equities from countries where the currency is expected to appreciate against your home currency. This layer adds returns from currency movements, which can be significant, especially in volatile global markets.
Fourth Layer - Options Strategy:
You employ a covered call strategy on some of your equity holdings. By selling call options, you collect premiums which add to your return. This layer also provides a bit of downside protection since the premiums received can offset some losses if the stock price falls modestly.
The following is an example for $10,000 invested:
Base Layer Result: 5% growth from market performance = $500.
Second Layer Result: 3% from credit overlay = $300.
Third Layer Result: 1% from currency appreciation = $100.
Fourth Layer Result: 1% from option premiums = $100.
Without layering, you'd have just the base layer's return: $500 (a 5% return).
With Return Layering, your total return is $500 (growth) + $300 (dividends) + $100 (currency gains) + $100 (option premiums) = +$1,000, or 10% on your $10,000 investment.
This example demonstrates how "Return Layering" can potentially increase your overall return by efficiently adding different sources of income and gains, while still being a core global equities investment. However, each layer introduces its own level of risk and complexity, which needs to be managed carefully.