MEET THE MANAGER
Portfolio Manager Damian Hoang
Seeing Income Differently: An Options-Based Approach
Since joining Dynamic Funds nearly a decade ago, Portfolio Manager Damian Hoang has built a strong reputation for delivering attractive levels of income in a challenging low-yield environment. Today, Damian’s option-based mandates – including Dynamic Premium Yield Fund and Dynamic Premium Yield PLUS Fund – represent over $3 billion in assets at both Dynamic Funds and Scotia Global Asset Management.
MEET THE MANAGER
Portfolio Manager Damian Hoang
Seeing Income Differently: An Options-Based Approach
Since joining Dynamic Funds nearly a decade ago, Portfolio Manager Damian Hoang has built a strong reputation for delivering attractive levels of income in a challenging low-yield environment. Today, Damian’s options-based mandates – including Dynamic Premium Yield Fund and Dynamic Premium Yield PLUS Fund – represent over $3 billion in assets at both Dynamic Funds and Scotia Global Asset Management.
Over the past several years, Damian and his team have created a unique “quantamental” investment framework that combines qualitative fundamental stock selection with rigorous quantitative analysis that can assess a broad range of equities on a multitude of fundamental metrics. This is a key component of Damian’s investment process, helping to formulate his investible universe of stocks. An options-based strategy is overlaid to generate premium income and an attractive total return – but at lower risk levels than traditional long-equity strategies.
We recently spoke to Damian about his unique approach to options writing, the quantamental investment process and his latest offering, Dynamic Active Enhanced Yield Covered Options ETF (DXQ).
What makes your options strategy unique?
Damian: Over the past few decades, options strategies have been used by a lot of big institutional investors to generate income that is quite comparable to being long on the market, but at less than two-thirds of the risk. Although our framework has evolved, what has remained constant is that we use our options strategy to express our fundamental view. Unlike many other fund companies, we don’t write options just to collect income. When we write a put, we're expressing a view that we’d like to buy that stock at a discount. When we write a covered call, we're expressing a view that we are committed to selling a particular stock at a higher price – perhaps 8% or 9% higher – because we think that it's fairly valued. That fundamental view is backed by a rigorous combined framework of quantitative and fundamental analysis.
Dynamic Active Enhanced Yield Covered Options ETF (DXQ)
Strategy
The team’s goal is to buy quality companies with moderate growth and reasonable valuation as determined through the quantamental investment process.
Puts are written at a discount to where a stock currently trades and if assigned the shares are held until valuation approaches fair value then covered calls may be written.
Premiums are collected through the put and call option writing.
Long Equities
Build up of long equities through direct purchase or eventual put assignments
Equity exposure partially offset to manage beta
Covered Calls
Covered calls typically written when stock held has approached fair value
Obligation to sell stock higher
Cash-Covered Puts
Puts are written on stocks the team wants to buy lower (obligation to buy stocks on the dip)
Puts written at 7-12% discount to current stock price
Premium yield on each option averages ~10% annualized
You recently launched Dynamic Active Enhanced Yield Covered Options ETF (DXQ). How would you describe the portfolio?
Damian: First off, it’s going to be fairly concentrated with around 30 to 35 names. Large-cap household brands like Microsoft, Google, Pfizer, Eli Lilly, Costco, Walmart, etc. The blue-chip exposure will allow DXQ to collect some dividend income from its holdings, while the options writing strategy will generate additional premium income, while also providing some downside protection. We expect the initial distribution yield to be roughly 7.5%*.
Why did you choose the ETF format?
Damian: Since 2017, Dynamic Funds has been committed to expanding its ETF lineup and giving advisors a wider range of product choices – whether that’s ETFs, mutual funds, private pools or specialty funds. We know that there are a lot of advisors out there who prefer the lower cost structure of ETFs and the trading flexibility they provide.
I’d also say that there are a lot of options writing strategies in the ETF space, but many are passively managed or rules-based strategies, whereas DXQ is actively managed. We believe that our active Quantamental framework, combined with our proprietary options analysis and Dynamic’s trading infrastructure provide a really superior value proposition versus anything out there.
What are some of those active advantages of DXQ?
Damian: As a legitimately active product, we’re not constrained by an index or sector. We’re free to go anywhere within North America. If we find a global opportunity, we’re not going to shy away from that because that active management component gives us a lot of flexibility.
The other unique active advantage is about the risk management. In certain environments, we're going to be more aggressive in writing puts and generating more income and having more exposure to these names. Because we're not passively or rules-based managed, and we are not all about return, we can decide how much buffer on the downside we're comfortable with when we write options on names like Microsoft, Amazon, or Pfizer.
We're not beholden to any rigid investment risk management dictated from top down. It's all about what is the right risk-reward trade-off for the current environment within the Quantamental framework that we have successfully used for nearly a decade.
Finally, because DXQ is actively managed, we have the freedom to write options more opportunistically. Across our strategies, we look to opportunistically write dozens of options each day. Whereas most other options strategies simply write an option, let it expire, then they write the next one. We feel these passive strategies miss out on a lot of opportunities for additional income.
What makes DXQ so timely for the current market environment?
We would argue that we're in an environment right now where there's a lot of macro uncertainties – whether it's the Fed, inflation, the pandemic or the Russia-Ukraine situation. Given these uncertainties, we expect investing globally to be more challenging than what we have seen over the past 12 years or so, where we have probably seen the most significant bull market of our time. Today’s investing environment itself is more challenging, with more risks and the potential for a lot more volatility.
That landscape is really ideal for our investment framework because we can reduce risk, we can harvest the volatility to generate more income, and at the same time, we can potentially have a lot more downside protection than just being invested in stocks.
Where we would really shine is a market that is either slightly down or moderately up with a VIX between 15 to 35, which we believe is going to be a very familiar investing environment in the coming years.
For more information visit our website
* The yield is calculated based on a fixed, but not guaranteed, monthly distribution.
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments, including ETFs. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in units value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual fund investments and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Views expressed regarding a particular investment, economy, industry or market sector should not be considered an indication of trading intent of any of the mutual funds managed by 1832 Asset Management L.P. These views are not to be relied upon as investment advice nor should they be considered a recommendation to buy or sell. These views are subject to change at any time based upon markets and other conditions, and we disclaim any responsibility to update such views.
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