A new twist

Sunday, October 12th 2003, 11:16PM

Weekly Update: A new twist

Confession time. This is actually last week’s newsletter which didn’t get sent out for various reasons. However, because there were some really interesting stories last week, I figured I’d send it out today.

Two stories in particular got tongues wagging. One was a warning about CDO backed investments, the other was Tower’s Paul Bevin on these new-fangled investments like capital protected and absolute return funds combined with the salient warning that investors have to take market risk to be successful.

Bevin runs an interesting line that many of these capital protected funds are actually not a hell of a lot different to the sorts of funds life companies used to run for their whole of life and endowment policies. That’s a bit like saying that trendy shirt you are wearing today is just like one your grandfather had.

The comparison runs like this. Insurance companies have traditionally invested a good chunk of their money into low risk bonds so that they could be reasonable assured that there was always sufficient capital available to make payments. The remainder of the money into other investments such as shares.

As part of the process insurers reserved capital gains in good years to cover the downside in bad years.

Capital protected funds invest money in something like a zero coupon bond to ensure that the original capital is preserved, and go out and "play" with the rest.

The advance, in Bevin’s view, is that the risk in these new funds is shared across the market, while the risk in the insurance funds was shared across policyholders.

To read more about Bevin’s thoughts go to:
Gotta have beta to do better
Russell sounds CDO warning

Bouquet
This week there’s a bouquet to give out and it goes to BT Funds Management. It’s good to see that the company has moved reasonably quickly to rationalise lots of the funds which formally existed under the BT, Rothschild/Sagitta range. It’s also good to see that they are now including alternative assets into their balanced funds. One possible criticism is that they have put entry fees on some funds up. While the company argues that this is fully rebatable and that’s a decision for advisers, it, to some people, still gives a wrong signal.
Bigger, brighter and better

Other stories this week:
Brash isn't proposing big super changes
Means testing superannuation and tax incentives for savings are off Don Brash's menu.
Risk free rate proposal may progress
A discussion document on the “risk free rate of return” is expected from the Inland Revenue Department within the next couple of months.

Quote of the week:
"When you want a comment about the "risky nature of share investing" you ask a financial planner for God's sake - that's about as fair as asking the Pope how his sex life is. Even if it was great, it's not worth his while to tell you the truth."

Former trader Wayne Lochore lets the Sunday Star Times know what he thinks about an article on share trading. We wonder whether it will see whether the ink gets on the paper.

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