Capital protection funds growing in popularity

FUND FOCUS: GUARANTEED FUNDS: Best performer YTD:Friends First Protected Equity Plus Fund +2.6% Worst performer YTD:Eagle Star Protected Dynamic -0.8%

WITH INVESTORS still nervous about putting money into equity-related products, funds which offer some element of capital protection have soared in popularity over the past two years.

However, when it comes to guaranteed funds, the cost of offering protection can eat away at returns.

According to Moneymate, in the seven months to July 30th, Irish gross domestic guaranteed funds have returned just 1 per cent on average, less than what might have been made in a straightforward deposit account.

Top of the 16 funds in this category is Friends First Protected Equity Plus Fund (S2), which is up by 2.6 per cent so far this year and has made gains of 12.4 per cent in the 12 months to July 30th.

According to Brian Flanagan, investment sales manager with Friends First, a key element behind the performance of protected funds is their asset allocation mix.

When Friends First launched this fund back in September 2008, it had an equity allocation of 75 per cent, with 25 per cent in cash. Now however, they are more evenly weighted, with about 50 per cent in equities and the rest in cash.

“If equity markets start to rise again, you can expect an increase in allocation to equities,” Flanagan notes.

The fund offers 85 per cent protection and is known as a “soft-protected” fund, because it doesn’t protect 100 per cent of the investor’s capital. Instead, the investor can only lose, at worst, up to 15 per cent of their initial investment.

Frequently with such funds, you pay for the element of protection with higher management fees, as is the case with the Friends First product.

The provider normally charges annual fees of about 0.75 per cent, but the charge for this protected fund is 1.1 per cent.

This week the worst performer is Eagle Star’s Protected Dynamic fund, which has lost almost 1 per cent so far this year and is flat over the 12 months to July 30th.

It invests in a combination of the Eagle Star Dynamic Fund and an Eagle Star Cash Fund, but at present has an allocation of 88 per cent to cash.