The maximum risk budget for the firm’s guaranteed funds is 10%, meaning assets defined as high risk by the firm can account for up to 10% of the portfolio, according to Isabelle de Malherbe, head of products specialists for structured solutions.
De Malherbe told FSA that she doesn’t believe another big market correction will force the firm to shrink the risk budget of its capital guaranteed funds in the coming months.
“That is why we kept our position and we didn’t cut the risk during the correction in October.”
In fact, she said the firm slightly increased the equity part of its protected funds (around 20 funds in total). It went to 20% equity allocation from 18%, mainly in the US market.
“The market was oversold and it was a good entry point,” de Malherbe said.
“The worst scenario would be if markets are bearish for a long period of time and there is no place where we can find value. But if they are bearish for a month or two, we can cope and don’t need to reduce the risk.”
While the “guaranteed” initial investment sounds appealing, the products carry risk. The product annual fees and inflation erode the initial investment. Therefore the return has to exceed these costs to provide a profitable outcome.
De Malherbe did not reveal fees for the firm’s Asia guaranteed funds. But the estimated ongoing charges for the Amundi Global Dynamic Allocation Protect 90 Fund, which launched in Hong Kong in early 2017, are 1.97% per year.
Wing Chan, Morningstar’s director of manager research in Asia, said in a previous interview that if investors can withstand volatility during the guaranteed period, there’s the question of whether they need to buy a protected fund at all.
Risk watching
To lower the chances of loss of principal, de Malherbe said her firm follows a strict risk control process. “We have an investment universe and for each asset class we estimate the maximum drawdown for this asset class, which is the maximum that asset can lose before we sell it.”
Also, a team of up to five people, each of them with several funds to manage, checks every day the first level of risk control for the funds.
“Then we have a risk department, which is the second level of control of risk management. If numbers don’t add up, then we have to cut part of the risk.”
Asian launches
In Japan this year, Amundi launched two funds that have a 100% guarantee of capital in US dollars for a six-year investment. The low inflation and low interest rate environment in Japan is amenable to guaranteed funds.
“Japan had a zero or negative rate for a long time and [local investors] still have a lot of money in cash,” said de Malherbe.
In Thailand, the firm also launched a baht-denominated guaranteed fund last month. According to de Malherbe, the Thai guaranteed fund has gathered $150m in assets.
The Thai portfolio is multi-asset – equities, fixed-income and forex, across geographies, she said. The fund does not promise to meet a specific target return, but to guarantee 100% of its capital after five years, she added.
Other funds from the firm available for sale in Asia have a 90% capital guarantee, including two domiciled in Hong Kong and one in Singapore.
