Radically different fixed interest fund launched
Life insurer Fidelity has rolled out an alternative fixed interest fund which has been described as "radically different" and that aims to achieve returns of more than 10% annually.
Wednesday, December 8th 2004, 6:31AM
The Options Portfolio is run by Tyndall and invests in cash deposits, bills and other short-term financial instruments with a credit rating a notch or two above the minimum investment grade.
The assets are then used as collateral security for derivatives, in particular selling options on long-term Government Stock.
Most options are issued for one month and provide the institutional purchaser with a payout if interest rates move by more than a prescribed margin in one particular direction.
The size of the payout depends on the magnitude of the interest rate changes. The portfolio earns a premium for selling the options.
The fund’s returns are boosted as the premium is added to the interest which the assets are already earning.
Fidelity points out that the fund can make capital losses if interest rates move beyond the strike price. However, there is a stop-loss strategy in place limiting the amount of losses which can be made in a month.
The fund isn’t brand new – rather it’s been part of Fidelity’s Aggressive Fund. The Options portfolio is a standalone fund. The Aggrssive Fund pool, which has been running for 14 months, has generated returns of around 13% gross in its first year.
In one month it did lose money but the losses were minor, Fidelity says, and “did not reflect on the overall performance of the Aggressive Portfolio.”
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