Foreign & Colonial is launching a retail investment fund this month that will use listed and over-the-counter currency and equity derivatives. The fund, dubbed Blue, is a low-risk vehicle that will invest in low-coupon bonds and the Dow Jones Euro STOXX 50. Stephen Dolbear, director and head of derivatives in London, said it will hedge equity risk with futures and options and swap some of the foreign exchange risk on its bonds into sterling. Dolbear said it is likely to use OTC equity options when it wants to use a barrier option, or if it needs a maturity or strike not available in the listed market.
The fund was set up now because Foreign & Colonial is looking for ways to enhance return in an increasingly low-yielding environment, according to Philip Childs, director and head of U.K. retail investment in London. Blue aims to return 5%-5.5% with little capital risk. It is structured to pay out as part of the investor's capital gains tax allowance rather than as part of the investor's income tax allowance. This makes the 5.5% return equivalent to a 9% return for a U.K. taxpayer in the highest tax bracket. Childs expects to raise GBP30-50 million (USD43.89-73.15 million) by year-end.
Foreign & Colonial has GBP3.5 billion under management in structured products.
