Picking the right Structured Fund

One of the famous rules of investing is — never lose money. There is one kind of investment vehicle that are attractive to investors looking for downside protection, at the same time who would also like to see gains from upside movements in the markets.

Simply put it this way – you want to earn money when the market ist good. But you don’t want to lose money if the market goes down.

photo credit: MShades

In a volatile market like the current situation, a structured fund is being regarded as a safe heaven by most conservative investors.

What is a Structured Fund

From Investopedia:

A fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation. These funds use fixed-income securities to give the fund capital protection through principal repayment along with the added gain of interest payments. The fund uses options, futures and other derivatives, which are often based on market indexes, to provide exposure to capital appreciation.

A structured investment product is generally a pre-packaged investment strategy which is based on derivatives (ie. options etc) but which features protection of principal if held to maturity.

For example, an investor invests 10,000 ringgits, the issuer simply invests in a risk free bond which has sufficient interest to grow to RM10,000 after the 5 year period. For example, this bond might cost RM8,000 today and after 5 years it will grow to RM10,000. With the leftover funds the issuer invest in special derivatives needed to perform whatever the investment strategy is.

The two common elements in a Structured Product are:

1. A bond product or another element of capital safeguard.

2. An alpha generator – which is any financial instrument (i.e. a stock, currency, etc.)

Recently Launched Structured Funds

PNB Structured Investment Fund
Tenure: 5 years
Exposure: structured products issued by Deutsche Bank Malaysia, which may include bonds, stocks, equity-linked and hybrid products
Minimum: RM10,000
Service fee: 1.5% of NAV
Management fee: 1% p.a.
Trustee fee: 0.08%
Repurchase fee: 2.5% within 1st year, 2.0% within 2nd year, 1.5% within 3rd year, 1.0% within 4th year, and 0.5% within 5th year.

Takaful’s myAl-Afdhal Capital Protected Investment Plan
Tenure: 5 years
Exposure: syariah-compliant global equity and commidities
Minimum: RM7,000
Closing Date: June 15, 2008
Service Fee: 3.5% of NAV
Management FEe: 1% p.a. of NAV

Great Eastern Centennial Max Plan
Tenure: 5 years
Exposure: Euro and US equity index
Minimum: RM20,000
Service Fee: 5% of NAV
Management Fees: Nil
Repurchase fee: Nil

Prudential Jade Structured Fund
Tenure: years
Exposure: China
Minimum: RM1,000
Closing date: May 29, 2008
Service fee: 2.5% of NAV

RHB Commodities Capital Protected Fund
Tenure: years
Exposure: Over-the-counter option linked to the performance of futures contracts of four commodities
Minimum: RM5,000
Closing date: May 29, 2008
Service fee: 3.5% of NAV

AmAsia Star
Tenure: 3 years
Exposure: call options on a multi-asset index
Minimum: RM5,000
Closing date: June 25, 2008
Service Fee: up to 2% of the single premium upfront

Comparing Structured Funds

Because a structured fund is capital protected when held to the maturity of 3-5 years, some consideration to be made are:

Tenure: Will you need the money within 3-5 years? Some funds charge a repurchase fee or withdrawal fee before maturity.

Cost: The lower the service fee, the better it is. Some funds has management fees and also withdrawal fees. I would opt for the lower initial service fee if all other condition are similar.

Insurance protection: Some funds are managed by insurance companies and there is normally an additional 25% sum assured given to the fund holders. Fund managed by insurance companies can be nominated according to Insurance Act. If it is done right, your money will skip the probate, meaning faster for your family to get your money.

Exposure of derivatives: Do you want more exposure in commodities, global index, or currencies? It depends on your asset allocation.

For illustration purposes, I’ve done a simple comparison between Centennial Max Fund and PNB Structured Investment Fund.

The Centennial Max plan requires 5% service fee upfront, and no other hidden charges thereafter such management fees, trustee fees, policy fees, insurance charges etc. At the meantime, PNB SIF requires 1.5% service fee, 1.0% management fees p.a., 0.08% trustee fee p.a.
By assuming the average return of both funds is the same 6% p.a every year until maturity, we can calculate the “assumed” return when the funds mature. Please note that the table below is generated for assessing the cost of investment. It doesn’t represent the real investment return of the said funds.

The Centennial Max Plan might incur a lower investment cost in this case, thus giving a higher maturity benefit. Moreover, insurance benefit is provided at no additional cost.

Please bear in mind that cost of investment is just part of the big picture. You still need to consider the investment exposure of the fund.

Disclaimer:
Materials provided in this article are for information purposes only, and should not be considered an offer, or solicitation, to deal. How you choose to act on these information is entirely on your own.