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Tuesday 16 February 2010

QROPS Advice: Spotlight on Protected Funds

Broadly speaking, recent market volatility has split investors into one of two categories; those that are willing to take advantage of the opportunities that market movements represent, and those that are unsure of the future and instead wish to focus, primarily at least, on preservation of their wealth.
Capital protected funds serve as a solution to each type of investor, providing exposure to the upside of equity markets, whilst maintaining a level of protection that gives the investor peace of mind in the knowledge that not all of their investment is at risk.
An 'Investment Sentiment' survey conducted towards the end of 2009 by the UK's Investment Management Association found that almost 70% of investors still want to put money into capital protected funds. For 2008 and 2009, sales by fund type, via an investment bond (as opposed to direct investment into the fund), show that such funds rank as the second and third most popular choice respectively.
The basic principle of most capital protected funds is that the majority of the investors' money goes into an active 'basket' of equity stocks (the basket of many funds available will have a specific focus, e.g. emerging markets), with an amount being kept aside for investment into a capital protection solution; it is this element of the fund that is used to protect a proportion the fund's value, the amount set aside determining the amount of protection available (e.g. 90%, 80% etc).
On this basis, investors in such funds should bear in mind that they will 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 relatively small sacrifice of growth potential, in return for capital protection is what makes such funds so particularly appealing to investors that are approaching retirement, or simply unsure about future volatility.
It is common practice for capital protected funds to be managed by two distinct parties; an investment manager to maximise growth from the active element of the fund, and a specialist provider of capital protection solutions. The latter will have experience in trading sophisticated financial instruments which, ultimately, provides the 'safety net' element of the fund.
Colin Graham of BlackRock, managers of the active element of the Hansard Multi-Asset Protector fund commented "Of the other positions held in the portfolio, the recent strong performance of the BGF (BlackRock) US Flexible Equity Fund has been driven by the Fund's focus on quality stocks, with an emphasis on healthcare and energy, at the expense of financials and consumer staples. Meanwhile, the performance of the BGF World Health and Science Fund was well supported by strong stock selection of the vast majority of sub-sectors, including healthcare providers and services.
While we remain focused on the improving economic outlook, our positions are relatively modest, reflecting the risks to these views and our anticipation of a moderate, rather than buoyant, prospective return environment. As such, and in the expectancy of ongoing economic and market volatility, we continue to allocate risk in a diversified fashion."

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