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Derivatives

DWS Enters Novel Swap On Guaranteed Fund

DWS Investments has entered an innovative derivative structure to offer European investors capital protected exposure to global equity markets. In the structure, DWS buys cash bonds and converts the coupons to a floating rate. It then uses that floating rate to pay an option premium to Deutsche Bank in which it receives capital guaranteed participation in the equity index, according to Benedict Peeters, director in the structured products origination team at Deutsche Bank in London.

The main advantage of this structure is that it removes any risk of managing the guarantee from the asset manager, explained Peeters. Investors' capital is protected through both the credit quality of the fixed income portfolio and the CPPI (constant proportion portfolio insurance) structure which moves capital out of the equity basket and into low risk fixed income products if the value of the equities fall. Even if there is a sudden crash in the value of the equity it is Deutsche Bank that is on the hook to provide the capital protection rather than DWS. In a normal structure the fund manager would have to put its own capital behind the protection and buy catastrophe puts to hedge the gap risk.

Another advantage of the investment bank managing the CPPI, according to Peeters, is an investment bank is more set up for trading. It can use more financial instruments than the fund manager, as it is not bound by investment rules, and it will likely be able to trade at smaller bid/offer spreads.

The equity basket consists of a U.S., European and Japanese proprietary index. The Japanese index accounts for 20% of the exposure, with the rest evenly split between the U.S. and Europe. The stocks were chosen on the basis of price, dividend yield and growth, according to Peeters.

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