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One of the Oldest Alternatives Shops Expands Its Offerings

Same approach, different domain.

Mallory Horejs, 04/26/2012

Liquid alternatives are still a relatively new concept. Less than a third of the 320 alternative mutual funds tracked by Morningstar have a five-year track record. Within this nascent universe, however, Gateway fund GATEX is one of the most well-known. Launched in December 1977, this fund has had a generous head start on the majority of registered alternative products.

On March 30, 2012, Gateway Investment Advisers launched its second mutual fund offering, Gateway International GAIAX, with $20 million in assets. Managed by¬¬¬¬ Michael Buckius and Kenneth Toft, this fund employs the same options strategy that has worked for Gateway fund for more than three decades, but within the wider world of international equities. Given the longevity and consistent risk-adjusted returns of the firm's flagship fund, this new offering certainly merits a closer look.

A Well-Honed Process
Patrick Rogers has managed Gateway fund’s index options-based strategy since 1994. Rogers and his team generate profits by selling S&P 500 index call options that are at-the-money on average. To cover the calls, he selects a broadly diversified portfolio of stocks that resembles the index. When equity markets rise, gains on these stocks offset losses on the call options. Long puts on the index are used to hedge downside risk.

Rogers also strives to be tax-efficient--a rare practice in the realm of alternative mutual funds. By harvesting losses on individual stocks, he has avoided distributing any capital gains to shareholders since 2001.

This 3-star fund has certainly had its ups and down, but as of late, things are looking good--the hedged-equity strategy returned 3% last year, outperforming the S&P 500 Index (which rose 2.1%) and taking only one third of the market's risk (its weekly annualized beta was 0.34). The average long-short fund, on the other hand, lost 2.8%. As of March 2012, Gateway fund had $5.7 billion in assets, making it the largest offering by far in the long-short equity category.

Going International
Gateway's new international offering applies the same logic to six regional indexes: Australia’s S&P/ASX 200, Europe’s Euro Stoxx 50, Hong Kong’s Hang Seng, Japan’s Nikkei 225, Switzerland’s SMI, and the United Kingdom’s FTSE 100. The six sleeves are weighted according to their approximate weight in the MSCI EAFE Index and are periodically rebalanced. Certain countries (Singapore, for example, which constitutes 1.8% of the MSCI EAFE Index) are excluded because of small index representation and/or undeveloped index option markets. As in the flagship fund, tax efficiency is a priority.

Although the fund is brand-new, comanagers Michael Buckius and Kenneth Toft aren't new to this hedged equity strategy. Buckius joined Gateway in 1999 and has comanaged the firm's flagship fund alongside Rogers since 2008. Toft has served as a member of Gateway's investment management team since joining the firm in 1992. For this portfolio, Buckius focuses primarily on the European portion and Toft oversees the Asian allocations.

Reasonable fees also set this fund apart from other recently launched alternative mutual funds. Gateway Investment Advisers offers this strategy to investors through three share classes: A, C, and Institutional. These products charge prospectus net expense ratios of 1.35%, 2.10%, and 1.10%, respectively, and, like the firm's flagship fund, they are some of the most cost-effective options in the long/short category.

Mallory Horejs is an alternative investments analyst with Morningstar.

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