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Absolute return funds expand with Kauri Notes Series II

One of the growing product segments in investment markets at the moment is what can be called absolute return funds. These are the funds which offer capital protection as well as exposure to market gains by investing in a range of underlying investments.

Friday, December 14th 2007, 12:30PM
The first group which invests in a range of indexes includes both Liontamer and more recently ABN AMRO with its Hindsight Securities. Investor's returns result where these indexes increase in value.

Man Investments and OM-IP has been the leading protagonist of the second group which invest in multi-manager hedge funds in this field, but they have been joined by Savings and Loans with its Kauri Notes and the Permal Group. New York based Permal, is one of only two independent Managers in the global top ten; it oversees the performance of over 150 separate fund managers each of which has as its objective to hedge its investors from declines in value at the same time as catching all the growth in market value. Permal has a 30 year successful track record in selecting only the best of these fund managers.

While Savings and Loans issued its first Kauri Notes earlier this year, this month it has rolled out Series Two, which now has both Kauri Income Units and Kauri Growth Units. Savings and Loans director Don Cowie says there is a clear advantage to including these types of investment into a diversified portfolio.

To support this position the company has produced a 12 page Occasional Paper looking at this investment class with a rigorous, quantitative approach using the Datastream research data base. It concludes that " the inclusion of the alternative asset class - in the form of hedge funds – in investment portfolios does enhance the risk adjusted returns to investors."

"The combination of hedge funds from each international investment strategy with US and international bonds and equities, is the most efficient investment portfolio for investors with all levels of risk tolerance."

Cowie says the time is right for these types of funds as world sharemarkets have reached the mature phase of a very long-bull run and investors can expect to see far more volatility and even negative returns. A recent survey indicated that international institutions invest about 10% of their portfolios into hedge funds.

Securities like Kauri Income and Growth Units which invest in the Permal multi-manager funds provide an alternative which has capital protection and a demonstrated history of strong investment performance should markets fall and offers upside too.

One of the key changes is that Series Two is open for a full year, rather than having a limited one-time subscription period.

The plan is that every two months new money raised will be invested into the program.

Another change from the first series is that these new investments are PIE compliant. Growth Units are treated as international shares and income units will, after April, have a maximum tax rate of 30%.

What hasn't changed is that the capital protection is provided by Merrill Lynch, which has a Standard and Poor's credit rating of A+, and both the Kauri Income and Growth Units invest into 6 leading Permal Funds all of which have A to AAA opinions provided by Standard & Poor's. The first 2 years quarterly interest payments on Income Units are also guaranteed by Merrill Lynch.

Most readers won't have heard of Permal Group as it has until recently focused on institutional investors. Permal is 80% owned by giant United States investment manager Legg Mason.

Cowie says Kauri Growth Units are somewhat similar to what Man Investments has done with the OM-IP series, with distinctive differences. Permal has no conflicts of interest as it optimises its Funds by using a multi-manager, fund of funds investment approach.

Permal is entirely dedicated to managing the resulting risk/returns profiles for investors, rather than doing the actual direct investment management itself.


Click here to read the summary of Kauri Notes Series II.

« Accessing the Water H2OpportunityKauri Notes - Higher returns, regular income »

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Credit Union Baywide 5.65 3.95 3.85 -
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HSBC Premier 4.49 2.25 2.35 2.65
HSBC Premier LVR > 80% - - - -
HSBC Special - 1.99 - -
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Westpac - Offset 4.59 - - -
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Median 4.55 2.79 2.99 2.80

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