01/01/2019 Feature Articles Back to all News & Views
On 4 September 2018, Smart Investment Management’s Smartfund 80% Protected funds celebrated their third anniversary since launch. Yet having had the experience of being locked into a protected product during the global financial crisis, Michael Ohanessian, managing director and chief executive officer at Praemium, says he was initially reluctant to give them the go-ahead.

Advised to put his money into a five-year CPPI (constant protection portfolio insurance) product in 2007, which carried a 100% capital guarantee but only if held for the whole term, Ohanessian says the early signs were good when markets rose.

“At first I thought it was a free lunch and my adviser even suggested I should add some leverage,” he explains. “However, when markets went down in 2008, the strategy of the product was switched from investing in equities to fixed interest and I lost all of the upside that occurred through 2009, 2010 and 2011. I simply flatlined and could not get out.”

Given this experience, Ohanessian says when the team at Smartim approached him regarding launching a protected fund range he needed some convincing.

 

“I remember it clearly,” he says. “I was at home late one night when I got the call, and my first thought was not to overreact given what had happened before. However, over time they convinced me by explaining how these funds would be different.

“For example, there was no lock-in period, no penalty for getting out, and most importantly, when markets go haywire like they did in 2008, they don’t switch you out of equities into fixed interest.”

Structured as UCITS IV funds, the Smartfund range – which includes both the 80% Protected (Balanced and Growth) and the unprotected funds (Cautious, Balanced and Growth) – offer daily liquidity, meaning investors are not locked in and importantly face no penalties for selling out.

Each fund invests in a blend of different assets that can include equities, bonds, property, commodities, foreign exchange, alternatives and cash.

The 80% Protected funds are designed to protect against the fund’s value falling below a certain level. Using a protection component provided by Morgan Stanley, as the share price increases the protection level also increases. This has meant that since launch, investors have benefited from a continuous level of protection of 80% of the highest ever value of the fund.

“Unlike in my previous experience in a CPPI-based product, it means you can stay invested in equity markets and not lose your shirt, even if markets go down,” says Ohanessian. “Because there is a cost for the protection there may be some drag on performance, but the fact you get the upside when things recover was a compelling proposition and a real selling point for me.”

In terms of the protection, Ohanessian says the 80% protection is re-written every day, meaning that as markets rise the protection level ratchets up.

“We call it a high-water-mark approach,” he says. “This ratcheting effect means if you are in the funds long enough and markets are volatile, this 80% protection can become, over time, a genuine safeguard against your worst-case scenario.

“In fact, some of our earliest investors who invested from day one are actually protected above their initial opening position. It is a variation of the old expression of spending time in the market, this is spending time in the market but with the reassurance of knowing every time the market goes up, so does your protected position, locking in your returns.”

The 80% Protected funds are designed to protect against the fund’s value falling below a certain level. Using a protection component provided by Morgan Stanley, as the share price increases the protection level also increases. This has meant that since launch, investors have benefited from a continuous level of protection of 80% of the highest ever value of the fund.

 

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