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An adequate strategy from Adequity

Societe Generale Adequity has brought out the New Energy Protected fund, a capital protected Oeic that applies a constant proportion portfolio insurance strategy to the World Alternative Energy index and cash.

The WAEX index is compiled by the Sustainable Asset Management Group and calculated on a daily basis by Dow Jones. It comprises 20 stocks in areas such as solar power, wind power and energy efficiency that are liquid and are also the largest companies in their industry. The constituents are rebalanced quarterly and reviewed twice a year.

The fund offers full capital protection if shares are held for the full six-year term, but the Oeic structure provides the advantage of daily liquidity with no exit fees. In addition, investors will receive 80 per cent of the growth in the index.

SG Adequity believes the performance of the index looks promising because demand for energy is growing as traditional sources of energy are dwindling. As a result of this, finding alternative sources of energy has become a priority for governments in developed regions, which supports the alternative energy investment story.

According to SG Adequity, although the outlook for the index is good, the possible flip side of strong performance is volatility. To mitigate this, a constant proportion portfolio insurance strategy will be implemented by Lyxor Asset Management, a subsidiary of Society Generale.

The CPPI strategy aims to reduce volatility by temporarily reducing exposure to the index during volatile periods and tracking the index when volatility is at a normal level. To do this, volatility as measured by how rapid price movements have been over each month. If this one-month volatility is above 20 per cent, exposure to the index will be gradually switched into cash. In less volatile conditions, the fund’s exposure to the index can be increased by up to 150 to increase returns. Rebalancing the fund between the index and cash will occur monthly in accordance with the volatility levels.

To calculate the return above the original capital, the value of the WAEX strategy is taken on April 30, 2007 and compared with the average value of the strategy over each quarter during the last year of the term.

This product could be useful as a small part of an investment portfolio as it provides exposure to a sector that is growing in importance with the benefit of capital protection. However, its success in generating returns above the original capital depends on the CPPI method gaining exposure to the index at the right times and not staying in cash.


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