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Capital Protection
Most investment funds which offer capital guarantees utilize a bond as the underlying security. This is usually a bank bond, a corporate bond, a sovereign bond or an insurance wrap underwritten by a bond. All of these guarantees are subject to the performance of the bond itself and not the entity issuing the bond. In other words if the bond does not perform as well as expected, the investor will lose all or part of their capital. Since 2007 investors have lost hundreds of millions of dollars of their capital which they had assumed to be fully protected, by using Bonds as protection instruments.
Fidelis sought to overcome the inherent risks associated with bonds by designing a capital guarantee that had the highest ranking within a bank whereby the guarantee relied upon the creditworthiness of the bank itself. The senior ranking obligation of any bank is its Deposits. If a bank cannot pay interest or honor withdrawals on its deposits then the bank is in serious danger of being wound up. Therefore Fidelis sought a Deposit as the basis of its guarantee instrument.
However deposits on their own do not work as capital guarantees. While they do have the ability to capitalize interest, the interest is taxed every year and in most circumstances it cannot be reinvested into the fixed deposit account. In addition to this the maximum term deposit allowed by financial regulators in Australia is 5 years, while many investors require up to 10 year terms. Therefore the Term Deposit as a stand alone is not suitable as a capital guarantee.
In order to achieve the safety and ranking of a Deposit, the features and tax benefits of a Bond, our engineers designed a Structured Transferrable Certificate of Deposit (TCD) with formulas and policies that combined the required features of each instrument. Once completed, all of Australia’s major 4 banks were approached with this unique concept of a Term Deposit which performed the same as a Zero Coupon Bond.
After eighteen months of negotiations with one of Australia’s 4 pillar banks; this was able to be achieved and approved as a specialized Transferrable Certificate of Deposit to offer to our investors as a capital guarantee.
If the guarantee is to rely on the credit worthiness of the issuer (the Bank) then it is necessary to utilize one of the safest and profitable banks in the world. All of Australia’s big 4 banks are ranked on the list of the world’s top 20 safest banks and this particular bank is rated as AA (Stable) by S&P, it is rated as the fourteenth most stable bank in the world, and the special TCD offered is its senior, unsecured, and unsubordinated obligation. The TCD itself is rated AA (Stable) as a financial instrument and therefore the risk to invested capital is near zero. This newly designed process has been patented using this TCD as a Capital Guarantee.
The TCD is structured according to the term the investor intends to invest for. A portion of the investor’s capital is allocated to the acquisition of the TCD depending on the Term selected by the Investor, and the remainder of the capital is then deployed into the investment pool and allocated according the investment strategies of the Fund Manager.
