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Forward Thinking Magazine : December 2010
40 Investor education One need that has been identified for this next generation of capital protected products is the need to educate investors about how such products work in various market conditions. As with traditional capital protection products, investors should understand the trade-off associated with them. For example, the type of protection you receive from a capital protected product differs depending on the price paid. ‘Pick and mix’ flexibility According to van der Westhuyzen, the next generation of capital protected products will allow people to have more input into their portfolios. “Protection can be adjusted based on different markets and needs,” he says. “For example, a conservative investor may want protection to kick in early so therefore they would agree to pay a higher price. Another investor, however, may be comfortable with a larger exposure to market fluctuations and may prefer to wait awhile before the protection kicks in.” The flexibility offered will apply to what they want the capital protection for and how much protection they want. Investors may only want protection on a certain percentage of their portfolios - for example, 50 per cent. They may also only want protection over their international funds and not on Australian equities. van der Westhuyzen says the next generation will offer a feature rich environment which will increase the need for advice. “Previously a ‘set and forget’ strategy was common but, as investors found during the global financial crisis, the market changes quickly and they want to be able to change their portfolios and their type of protection quickly.” Macquarie Adviser Services CPPI is an automated investment process that moves investors out of equities and into cash as the market falls, and back in to equities when it rises. One of the issues with the CPPI structure is that if it moves into 100 per cent cash, then the investor is locked into cash for the remainder of the term and cannot participate in any sharemarket rebound, unless the portfolio is re- equitised or an alternative offered. The question now is: is there a way forward for these products? Given recent investor and adviser experience, can fresh thinking be applied to deliver new solutions and approaches that overcome some of the limitations of the existing offerings? Will this be enough to overcome the negative perceptions of the merits of capital protection and encourage advisers and investors to take another look? Fresh thinking While investors understand the value of capital protected products, particularly during times of falling markets as seen during the GFC, some remain wary of them. As a result, a new generation of products is being developed that aims to overcome the issues many investors experienced during this time. The best of these future products will be those that focus on flexible and innovative solutions, and can cater for a broad range of investor profiles, from accumulators to sophisticated investors. Macquarie Wrap’s Head of Product Management, Doug Chang says capital protected products do provide a solution in the market for those seeking protection, but agrees there have been limitations with some of the traditional products. “The next generation of capital protected products will overcome these limitations as well as be more able to be offered effectively through different investment platforms,” he says. “They will not be for everyone. But for those investors who are risk- averse and don’t have the time for their portfolios to decrease in value through volatility, they can be appropriate.”