by clicking the arrows at the side of the page, or by using the toolbar.
by clicking anywhere on the page.
by dragging the page around when zoomed in.
by clicking anywhere on the page when zoomed in.
web sites or send emails by clicking on hyperlinks.
Email this page to a friend
Search this issue
Index - jump to page or section
Archive - view past issues
Forward Thinking Magazine : April 2011
40 However, CPPI does not have to lock investors into cash, underlying investments or a specific term. This is more the limitation of the vehicles through which CPPI has traditionally been offered to investors. The main advantage of CPPI is its simplicity through a ‘one day at a time’ approach to protection. Another downside of traditional CPPI is that it is offered at a fund level with a set investment strategy and set terms. As investors cannot select their individual investments or specific terms, traditional CPPI may only be suitable for small proportions of their portfolio. Bond and call places an amount of the investor’s money in a bond to pay for the protected amount while the rest is used to buy a call option or futures contract. “The pros are that you know your participation level upfront,” Sarmiento says. “That is, you know if you will participate in 100 per cent of the profits or 80 per cent of the profits. The cons relate to the inherit complexity of options. Options can be difficult to value or break, in particular when we are talking about customised non-marketable options.” Dynamic hedging offers an investor certainty that a minimum amount of their capital will be protected. The investor pays a fee similar to an insurance premium for the protection and the provider assumes the investment risk on its balance sheet. The exposure is typically managed by hedging through derivatives. The investor also chooses the funds to protect but they cannot see the hedging behind it. Dynamic hedging will typically have product level rules around how much you can top-up your account, amounts payable on early withdrawal and around changing the mix of your underlying investments. While these products offer more flexibility than traditional CPPI or bond and call products, these features are still not ideal. “With dynamic hedging, some product features can make it more difficult for advisers to add value,” Sarmiento says. “There are also higher fees to compensate the issuer for the risk it assumes.” New generation The new style of capital protection being developed by Macquarie, client-tailored dynamic allocation, focuses on delivering maximum flexibility and transparency. According to Chang, its most attractive new features are that the client can select their own term, the specific assets they want to protect and the level of protection and then amend any or all of these over time. “What is generating a lot of feedback,” says Chang, “is the way the new generation of products are fully integrated on Wrap for reporting, transacting and selecting and changing protection parameters. “Advisers like the fact that this new offering is Wrap-based. Traditionally, an adviser would have most of his or her clients’ portfolios on a platform while any capital protected products were off platform. Now, everything can be together on the one platform. That makes for a much more streamlined process and greater efficiencies within the business.” Sarmiento says one of the main advantages of this next generation solution is there is no lock-in period. “The idea is to allow investors to turn protection on and off with minimum friction,” he explains. “This means no entry or exit fees, no lock-in periods and facilitating in-specie transfers. Investors should be able to select and change their investments, protection date and protection amount or turn off protection at any time without having to sell out of any assets.” Like traditional CPPI, client-tailored dynamic allocation provides protection by allocating, if needed, from managed funds into a zero coupon bond as the market falls. It can be allocated back into managed funds as the market rises again. Importantly, the additional flexibility means the client keeps full control of any cash allocation and can choose to modify the protection parameters or underlying investments to get back into the market anytime. Through Wrap, this is very easy to implement. “Transparency is also a design priority,” Chang says. “It offers Wrap reporting and transacting on protected holdings as per non-protected holdings. There is an online interface to create a protection portfolio and set protection parameters; no derivatives are used and there is consolidated reporting for tax.” Chang says with the new generation of protection coming, advisers can provide capital protection on all or some of their clients’ tailored portfolios more easily than ever before.