by Janine Starks
That positive reaction has been good news for Liontamer, New Zealand’s first specialist provider of capital protected funds. Seven new funds have been launched in the last year and a number are on the drawing board for 2004.
When it comes to innovation, it’s useful to watch the market offshore, but the main aim is to take the best ideas and add a NZ twist. Internationally, new ideas are quickly copied and improved upon. In countries such as Belgium (one of the largest markets in Europe) innovation has been around interest rate based investments or ‘floaters’ as they are termed. In the UK, the latest issues give gains when the market rises or falls – ‘bull/bear’ products. Asian products based around groups of individual stocks are all the rage. In New Zealand, we’re certainly not falling behind in the innovation stakes. Liontamer have issued accelerated growth products, wrapped protection around commodities and are now working on a new income fund to launch near the end of April.
EASYgrow 100 is the latest Liontamer investment on the table and is characterized by a 5 ½ year term and a simple structure. Investors receive a percentage of any sharemarket increases and protection from market falls. In this case, the fund provides 100% of the rise in the MSCI World Index.
The benefits of protection
There are a variety of reasons why protected investments play a valuable role in portfolio construction. Some are emotional benefits, such as peace of mind and the prevention of panic selling in market down-turns. But what are the more hard-core benefits? And why should protected solutions become a standard component in portfolios? Here are three reasons:
1. Advisers can increase a client’s exposure to equities. If a product is fully protected the credit risk is no different than a regular term deposit. Funds can be reallocated from traditional safe-houses into protected investments giving the benefit of equity returns without the same risk. Protected funds provide an alternative solution to deposits and debentures.
2. A reduction in volatility. Protected investments are a core holding and can take the place of index trackers or index-huggers. Lowering the volatility of core funds, allows you to use a wider selection of actively managed satellite funds.
3. Lock in the gains. When you move into a protected fund, you are effectively locking in any gains from current share market levels (or preventing any further losses). The capital invested forms a new base and this can’t be eroded. Likewise, at the end of the term, rolling over into another protected fund locks in a new higher base.
While these may be three pretty convincing benefits, what about those people who claim protection is a waste of time? Markets tend to rise over the medium to long term is one reason given. Others say volatility can be managed with a bit of old-style asset allocation alone. Some even suggest it doesn’t matter how bumpy the journey is, as long as you end up in the same place.
To counter this, advisers or portfolio managers need to have one fundamental belief; that they are not just managers of return – they are also managers of risk. We need to realise that risk comes in two parts and each has a different pain threshold. When a fund is making gains, clients tend to have a higher tolerance of volatility. When losses are being made and capital eroded, the tolerance is much lower. Whether you are a classic retail client or an institutional investor, lowering both types of risk is highly desirable. To a large extent, upside gains are not easily managed as most funds travel in the broad direction of the market. But downside risk is a different animal and it’s easily caged by using protected investments.
For those who like the numbers game, research from one of the leading investment banks, UBS, paints a strong picture for the risk/return payoff. The results shown in the table below show that protected strategies outperform. Other research evidence from Harvard is also extremely supportive.
|
Growth per year |
Volatility (risk) |
|
|
S&P 500 total index return |
8.6% |
16.3% |
|
Hedge fund of funds |
7.3% |
6.3% |
|
Capital protected structure |
8.4% |
5.9% |
Source: UBS Warburg (June 2003) "Fireflies before the storm", Global Equity Research AIS Report
For further information on Liontamer’s funds and a copy of the EASYgrow 100 Investment Statement, phone 0800 210450 or email
info@liontamerprotectedinvestments.comVisit our website at
www.liontamerprotectedinvestments.comSpecial Offers
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