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Forward Thinking Magazine : December 2010
insights Written by Gayle Bryant, journalist Many investors who owned capital protected products felt let down during the global financial crisis when they experienced different outcomes compared to what they might have expected. Some now ask whether a capital protection strategy can be justified. But with volatility set to be a feature of sharemarkets, such products deser ve fur ther discussion and consideration. Capital protection gained favour in recent years among those retail investors who were concerned that their investments would lose value if markets fell. Hence they took out capital protected products in order to remain invested in the market and take advantage of the leverage or gearing that generally accompanied the offers. The current landscape Macquarie’s Peter van der Westhuyzen says the perception that all capital protection products failed during the GFC is not correct. The issue, he says, is that there are a number of different types of capital protected products and it is important to understand how each of them performed as markets fell. “In simple terms, markets fell during the GFC, and that led to the underlying investments falling as well. Depending on the type of capital protected product, some investors have been exposed to the rebound as markets improved, whilst others have not.” he says. “Products based on a CPPI [constant proportion portfolio insurance] structure generally performed exactly as they were designed to do when the volatility hit, but the products are now substantially invested in cash, so consequently when the markets rebounded the investors didn’t participate in the upside. However, let’s not forget at the end of the product term, the original dollar should be returned to the investor to fulfill the capital protection promise.” The next generation of capital protection solutions 39