Saxon Financial, a Canadian investment manager with USD11.7 billion under management, will close its first capital-protected fund at the end of the month and is considering follow-up offerings. BMO Capital Markets provided the guarantee on the five-and-a-half-year notes, dubbed Bank of Montreal Saxon Balanced Protected Deposit Notes. Investors receive 100% capital protection and a maximum participation of 200% in the Saxon Balanced Fund, through a constant proportion portfolio insurance structure. The maximum issuance size of the notes is CAD75 million (USD67 million).
Allan Smith, president and ceo of Saxon in Toronto, explained it was approached by BMO about the fund and chose to work with the dealer after talking to a few other firms for comparison. Saxon has previously sold mostly direct to investors, but is now starting to use brokers more often. BMO also appealed because it is a big distributor, he said.
The CPPI structure was tweaked for Saxon's investors to ensure that a minimum of 20% of the investor's capital is always exposed to the fund, even if its initial gap-risk cushion is used up. BMO and Saxon did extensive back testing to ensure the fund was suitable for CPPI. "We got comfortable looking at the laws of probability," said Smith. Saxon has a handshake with BMO for potentially two more of these notes over the next year, he added.