Structurers at Citigroup in London have created a capital-protected note that uses an inflation-linked formula to allocate and protect investment. In the structure, constant proportion portfolio insurance is used to dynamically move assets between a cash deposit and a basket of commodities, equities and bonds. Officials at Citi declined comment.
The CPPI formula is linked to the U.S. consumer price index and this determines the proportion of investment in commodities as opposed to equities and bonds. When U.S. CPI rises, more assets are invested in commodities; when inflation falls, investment in equities and bonds increases.
The note is targeted at investors who believe there is a high correlation between commodity returns and an increase in inflation, but a low correlation between commodities and equities and bonds, according to an official. The structure is being pitched to high-net-worth clients in Asia and may be rolled out in Europe, he added.
