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Aviva aims to offer protected and collateralised products

Aviva Investors is hoping for an improvement in market conditions to allow it to offer structured products which are both capital-protected and fully collateralised.

The company says it has built up £200m in its structured range but it wants to offer products with attractive growth rates and no market risk. The products would be offered in line with Aviva Investors’ policy of using government bond collateralisation to mitigate the effects of counterparty failure.

Product development manager Robert Corbally says market conditions have not been supportive of capital-protected products during the financial crisis, with interest rates hovering at record lows. He says: “The cost at the moment is such that it would not be a competitive or attractive product.”

Aviva currently offers only capital-at-risk products, where if the index breaches certain limits, investors lose money.

Corbally says: “All the products we offer still have capital at risk if the FTSE 100 index falls below 50 per cent.”

Structured products use inv-estors’ capital to buy a derivative from an investment bank that delivers prefixed capital growth or income based on the performance of an index.

If the bank, known as the counterparty, collapses, the derivative can become worthless, as was the case for NDF, Arc, DRL and Meteor products that used failed US bank Lehman Brothers as counterparty.

However, when Aviva buys the derivatives, it insists that the counterparty hands it a port-folio of UK, US, Canadian, French or German government bonds as collateral, which is adjusted daily to match the daily value of the derivative.

That means even if the counterparty fails, investors can be repaid out of the collateral, alth-ough losses are possible if the collateral portfolio has been reduced to match falls in the value of the derivative.

Lowes Financial Management managing director Ian Lowes says fully protected, fully collateralised funds might be attractive to some investors but he is doubtful that groups such as Aviva can offer them with attractive rates. He says: “You have got to get something above cash returns but I am not sure where it is going to come from.”


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