For many, the rule of thumb as to which structure you opt for generally relates to what you want to invest into. Capital protection over managed funds generally has to be with a CPPI or Dynamic Management type structure since you cannot buy options over a managed fund, whilst Bond + Call structures are generally linked to the performance of an index.

	CPPI	Bond + Call	Dynamic hedging
Performance based on	Managed funds	Index	Managed funds
Level of participation in gains of underlying investment	Disinvestment with falls or volatility in the market = less than 100% participation	typically 100%-150%	100%
Cost of protection	Much of the cost is implicit. Lower participation rates typically mean this is lower than Bond + Call or Dynamic Hedging	Much of the cost is implicit. Higher participation rates typically mean this will be higher than CPPI	Explicit costing can make this look relatively expensive. Should cost somewhere between CPPI and Bond + Call
Investment loan interest rates	Lower participation rates reduces volatility and the cost of borrowing to invest	Higher participation increases volatility and the cost of borrowing	Should work out somewhere between CPPI and Bond + Call
Ability to turn on/off protection	No, in-built for term of product	No, in-built for term of product	Yes

Some of the more well known examples of CPPI are Perpetual’s Protected Investment range (PPI Series) and Macquarie’s Fusion Funds, whereas Bond + Call structures are utilised by Commonwealth Capital Series and a variation of the structure by Man OM-IP.

We’ve written a factsheet for those readers looking for a more detailed explanation of the two structures which can be downloaded from www.fundsfocus.com.au/managed-funds/pdfs/Capital-Protection.pdf

Warren Buffet is also famous for saying "It's only when the tide goes out that you learn who's been swimming naked." With the unprecedented falls that we’ve seen recently, the tide has certainly gone out, and the capital protection mechanisms have been well and truly tested.

CPPI products that have been built of historical performance have not accounted for such dramatic falls in the market. Whilst the protection mechanism of disinvesting as the funds fall in value have worked, an anomaly of this type of structure means that funds that have moved 100% into cash can no longer have any exposure to equity performance. Perpetual’s awarded PPI Series are a case in point, the majority of funds launched over the last 18 months have cashed out, leaving investors sitting in cash for the next 5-6 years. Macquarie’s Fusion funds have the benefit of never completely cashing out, but once your holding is reduced to their minimum of around 3%, the underlying investment fund needs to rise by a factor of at least 2-3 times before you become fully reinvested again. Investors sitting in these situations would do well to consider cashing in and reinvesting.

Please don’t think CPPI is all doom and gloom, these products have done their job, investments made into these products haven’t fallen anywhere near as much as the underlying equity fund and the structure has allowed many to borrow 100% of their investment. However, this is definitely a shortcoming of this type of structure and we wouldn’t be surprised to see a radical restructure of the current offers out there in the hope of retaining clients who are cashed out so early.

By contrast Bond + Call products such as Commonwealth Capital Series, Macquarie Gateway, Macquarie Equinox and Man OM-IP’s range of funds have not disinvested and allow investors to fully participate in the market when it finally bounces back.

We feel that two of the more interesting offers currently available are the latest Commonwealth Capital Series Australia and Man OM-IP 220 2008.

Man OM-IP’s success has always been its ability to provide returns in both a falling and rising market. Using a variation of the Bond + Call structure, the products use a mixture of their core AHL fund to produce returns from trends in both rising and falling markets and a managed fund that helps to reduce the overall volatility of the structure.

Capital Series Australia is ideal for those that feel that with the market at such a low level, now is an opportunity to invest. This is a simple Bond + Call structure, giving investors gains from a rise in the ASX 200 and a Capital Guarantee from Commonwealth Bank.

Alternatively, investors looking to invest into managed funds or like the idea of being able to switch off their protection should look at Axa North which allows you to bolt on “protection”. The added benefit of being able to turn off, or reset the protection if investments rise significantly, is definitely worth considering.