Nomura believes investor demand for protected emerging markets is strong, as growth is recovering to pre-2008 levels and is expected to outperform the US.
Under the CPPI process, emerging market equity exposure will be increased when the performance of the funds is strong but reduced in favour of less risky cash holdings when fund performance is weak, thereby protecting 80 per cent of the highest fund value. This locks in gains as well as providing protection against falls of more than 20 per cent, but the investment is likely to terminate if the fund becomes 100 per cent exposed to the cash holdings.
The fund is linked to the performance of funds from Goldman Sachs, Legg Mason, Pictet, Pioneer Investments, Franklin Templeton and West LB Mellon. These funds are equally weighted constituents of the Nomura Global Emerging Markets index. They were chosen by Nomura as they all have track records of at least three years, minimum assets under management of $50m and a minimum S&P fund rating of three stars.
The funds will be rebalanced to their initial weightings once a year to preserve geographical and sector diversification, which will be attractive to some investors.
The CPPI strategy may provide peace of mind to investors who like the emerging markets story but want protection from volatility. However, Nomura does not intend to change the funds that make up the index and this could be a drawback if the funds underperform. Rebalancing back to the original weightings also limits scope for tilting the fund on a tactical basis towards outperforming regions and sectors.