Investing With a Safety Net

Many investors remain understandably confused as to what to do with their savings or investments. On the one hand, cash deposits and fixed rate deposit funds are struggling to achieve an even slightly respectable return, whilst on the other, they just don’t have the risk appetite to invest directly in higher yielding stock market funds.

It is this quandary that has resulted in many investors looking to some form of capital protection within their investments, providing an element of exposure to market gains whilst maintaining a level of protection that gives them at least a little peace of mind. Of course counterparty risk, that is the risk of the institution providing the protection becoming insolvent remains, and one needs to take the strength of the institution into consideration before placing any investment.

The basic principle of most capital protected funds is that the majority of the investors money goes into an ‘active basket’ (the basket will normally have a specific focus, e.g. ‘Emerging Markets’ or, ‘Multi-Asset’), with an amount being used for investment into a capital protection solution; it is this element of the fund that is used to protect a proportion of the fund’s value (e.g. 80/90% etc).

On this basis, investors in such funds may not benefit as much from an increase in value of the active portion of the fund, as they would have done if they were instead invested in a traditional, 100% equity fund. However, the sometimes relatively small sacrifice of growth potential, in return for capital protection is what makes such funds so appealing to some investors, for example those that are approaching retirement and still want to retain some equity exposure but without full downside risk (e.g. pension funds not yet in drawdown), or those simply unsure about future volatility.

A typical protected fund, may target a specific geographic or sector, such as the emerging markets or commodities for example, and will offer investors a minimum percentage (often 80%) of the highest ever price achieved by the fund, underwritten by a major bank. This enables investors to lock-in profits and also provides a safety net if the outlook turned bleak.

In the same way that recent and predicted future volatility has given rise to capital protected funds, the same is also true of Multi-Asset funds. So-called because they invest in a range of asset types, the theory behind Multi-Asset funds rests on the basis that not one asset class (whether it be equity, fixed interest, property, cash, etc) rarely proves to be the better performer over consecutive years. Thus, unlike a traditional ‘balanced managed’ fund that is committed to maintain an equity/fixed interest mix regardless of market conditions, a Multi-Asset fund has the flexibility to invest according to the conviction of its manager.

Thus, by utilising the skills and resources of fund management experts with vast pools of resource and experience in each asset class, a fund can be constructed that provides exposure to the better performing assets of the time, whilst having the ability to resort to cash holdings when the outlook is especially bleak.

Of course these are only a few examples of the types of assets available to investors looking to beat low cash returns, and we would always recommend seeking professional advice from a fully regulated and experienced Financial Adviser before making any investment.

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