| The market becomes brisk after summer holidays. The IPO of China Merchants Bank draws great attention of local investors this week. Several newly launched guaranteed funds also attract retail investors, such as Man AHL Guaranteed Futures by Man Investment, KBC Japan Booster Fund, and Lyxor Absolute Korea Guaranteed Fund. Structured fund strategy and returns display a variety of characteristics that are different from traditional mutual funds. They are intended for active, experienced investors.Unlike traditional fund invests in either fixed income, equity or both, structured fund invests in index- linked products, energy derivatives, and even index futures. The performance of structured fund depends o n the characteristics of structured products. The typical portfolio of structured fund consists of fixed-income securities and stock options. A fixed-income security can ensure that investors will receive partial or their entire principal at maturity while stock options provide income potentials for investors. For example, capital protection rates of the above three guaranteed funds are 70%, 90% and 100% respectively while market participation rates differ among them. In addition to 90% capital protection as well as potential returns if any, Man AHL Guaranteed Futures offers investors up to a return of 10% of principal through the profit lock-in feature if the fund performs strongly. Suppose that the lock-in is 10% and the fund records a return of 25%, investors will receive a return of 15% at maturity. In contrast, when the fund posts a loss, investors' loss will be no more than 10% of their principal. KBC Japan Booster Fund carries a 70% principal guarantee while investors may receive returns linked to the performance of Nikkei 225 index through downside/upside participation rate. Investors' returns will accelerate/decelerate with index performance under this structure. If the index performance were positive, investors would receive a return equal to the multiple of index return and upside participation rate. In the event that index recorded a loss, investors would receive the multiple of index return and downside participation rate. However, investors' loss is protected against an up to 30% loss.Lyxor Absolute Korea fund offers a 100% three-year capital guarantee, which is linked to the absolute performance of KOSPI 200 index. In addition to full protection to investors' capital, this fund also offers investors a guaranteed minimum return of 6% over the investment period of three years if the average quarterly absolute performance of the index is less than 6% at maturity. In the event that the absolute performance of the index is greater than 6% at maturity, investors will receive all potential returns. The investment periods of all three guaranteed funds range from three to five years respectively. All of them provide investors different level of capital protection. In general, capital protection rate is negatively related to market participation rate. For example, investors of KBC Japan Booster Fund are subject to a loss of up to 30% of their capital while upside potential is 160%. Investors will receive higher return than index performance when market advances.Structured fund offers investors partial or full protection of their capital as well as equity market participation. Investors can diversify their portfolio to lower investment risk through structured guarantee fund. If a risk-averse investor is positive to Korea market, he or she may participate into such market through structured guarantee fund. However, investors should note that they may lose their principal if they redeem their shares before maturity. | ||
