Schroder Investment Management is marketing a relative-value fund, structured with derivatives, in which investors win even if both equity baskets tank. The fund is thought to be the first of its kind because previous relative-value funds have required investors to pick a basket which increases in value more than another, whereas in this fund the investor still wins if both baskets suffer a negative performance as long as the favored basket falls by less, according to John McLaughlin, head of the structured investment team in London.
In the capital-protected fund, the asset manager selects a basket of stocks it expects will outperform another closely correlated basket according to industry sectors, explained McLaughlin.
To structure such a fund, Schroder buys bonds rated at least AA minus by Standard & Poor's or equivalent that pay annual coupons of 1.4% for the dollar note and 3% for the Australian dollar-denominated fund. Then, Schroder purchases a call option on the basket of stocks selected to outperform that includes the right to deliver the losing basket. Schroder selects new baskets at the beginning of each year and purchases call options at that time. Investors receive an average of the relative performance at the end of five years, capped at 20%.
This fund is aimed at retail investors in Singapore, but Schroder is planning to structure and manage similar funds in other regions in Asia. Although the manager would like to structure such funds in Europe, it would need to work with a distributor with a strong retail network in Europe. McLaughlin said there are no immediate plans for this. The fund will close May 21.
