NN Investment Partners (NN IP), the asset manager of NN Group, offers a wide variety of investment products and solutions across asset classes, geographies and styles, such as equity, multi-asset and fixed income strategies. The firm - which has its headquarters in The Hague, the Netherlands - is formerly known as ING Investment Management (ING IM) and manages approximately €187bn in assets for institutions and individual investors worldwide. NN IP also has a number of capital protected funds in its assortment including NN (L) First Class Protection, an open-ended Luxembourg domiciled investment fund which aims to participate in the upside of the Eurostoxx 50 while at the same time trying to maintain on a daily basis 90% of the highest net asset value (NAV) reached in the preceding 365 calendar days.
Ghilain Vermeiren (pictured), head of structured products at NN IP, spoke to SRP about the firm's actively managed capital protected funds, the difference between Ucits (Undertakings for Collective Investments in Transferable Securities) funds and medium-term notes and why NN IP has put the issuance of closed-end structured products, at least temporary, on hold.
"[NN (L) First Class Protection] places a strong emphasis on long term capital growth with low volatility and a downside protection," says Vermeiren. The fund has especially been designed for moderate defensive investors who aim to maintain a synthetic risk and reward indicator (SRRI) score of 3 which is comparable to a government bond fund, according to Vermeiren.
The firm's target is to offer an "appealing alternative" to bank deposits, according to Vermeiren. "The fund applies an active allocation between high grade euro money market instruments and European equity," says Vermeiren. "The allocation is determined by several factors namely its capital protection objective, risk control mechanisms and the active view of the strategists of NN IP. Due to these predefined choices we have capped the maximum allocation to equity at 50%."
ING (L) Invest First Class Protection, which has €114.38m assets under management (AUM) as of February 29, 2016, is a second generation capital protection fund which allows its protection level (floor) to vary over time. "More traditional or CPPI (constant proportion portfolio insurance) capital protection funds with a fixed floor can become 'cash-locked' in case of losses during a severe market decline," says Vermeiren. In that case, the required protection may result in a cash exposure of almost 100% with negligible exposure to equity i.e. low upside potential, according to Vermeiren. "When cash-locked, these funds will not be able to pick up when markets start to recover," he says.
The 'dynamic protection' feature of the fund aims to overcome this drawback over a traditional CCPI product by ensuring that, after a maximum of 365 days, the risk budget will be gradually raised, says Vermeiren. "This mechanism reduces the risk that the fund will lose out on future gains after a period of decline [...] however, there is a risk that the fund will have to lower its protection level."
Although the product is available in three different versions (I/N/P Cap EUR) the fund strategy does not differ amongst these share classes, according to Vermeiren, instead [the different versions] are more related to the market where the fund is available. "The fund distribution operates in different local markets and each market applies a different fee settings," he says. "For example, the Dutch market has zero rebate fund shares but this regulation is local and differs per country."
According to Vermeiren, NN IP has no plans to launch similar funds elsewhere any time soon. "Funds with protection objectives within the investment policy are rather sold to European investors," says Vermeiren. "When we observe appetite in other markets we will look into these opportunities."
In Europe there are not that many Ucits funds which aim to protect capital (under certain conditions and before deduction of costs) with AUM of more than €100m, according to Vermeiren. "However, there are many capital protected structured EMTN's sold by banks in Europe on a monthly basis," he says. "These products are often perceived to be similar like a fund but are actually a different animal. [NN (L) First Class Protection] has to comply with European legislation such as the Ucits regulation which emphasises on transparency, best execution, risk diversification and costs."
ING (L) Invest First Class Protection requires a maximum subscription fee of 5% while a management fee of 0.72% per annum applies. The funds custodian is Brown Brothers Harriman (Luxembourg) and the product is available in the Netherlands via NN IP's Fitvermogen execution only platform which focuses on clients with relatively small amounts of capital to invest.
Between June 1997 and May 2012, NN IP, under its then name ING IM, issued 140 closed-end capital protected structured funds with combined sales of €7bn of which 19 structured funds worth €387m are still live. "The last time that NN IP launched a capital protected fund was in 2012," says Vermeiren. "Our finite maturity funds diversified their fixed income part into short term euro money market instruments with high creditworthy counterparties," he says. According to Vermeiren, the decline in money market yields from positive territory into negative territory did deteriorate payoff conditions severely. "Hence, as we did not want to adjust the credit or market risk profile of our fund propositions it has been decided at NN IP to put a hold on new capital protected finite maturity fund launches," he says.
NN IP's products and services are offered globally through regional centres in several countries across Europe, the United States, the Middle East and Asia, with the Netherlands as its main investment hub.
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