Govett Investments, a major issuer of capital guaranteed products structured with options, plans to launch its first investment instrument that uses a dynamic trading method to provide the protection. Conrad Preece, associate director in London, said one of the reasons Govett is considering switching from using zero-coupon bonds and an option to Constant Portfolio Proportion Insurance (CPPI) because low interest rates have made option strategies less attractive.
In a CPPI structure if the value of the underlying asset falls below a certain level at the beginning of the investment period all the capital is moved from the target investment to AAA bonds to ensure the investors get their capital back at maturity. This leaves the investor with no exposure to this upside if the value of the target investment recovers, noted Mike Chadney, head of structured products and derivatives at Henderson Global Investors in London. Whereas with an option structure the only important value is at maturity, and how it gets to that figure is not relevant.
An advantage of the CPPI model is that its dynamic aspect means that if the underlying asset increases in value the manager can gear up its exposure, noted Preece.
CPPI has been used for several years on the continental European retail market but only used on a few occasions in the U.K. market.
