100% Capital Protection – Myth or Real?

100% Capital Protection has got to be the most requested type of investment we at NEBA Financial Solutions get asked for. But is 100% Capital Protection, with a High Guaranteed Coupon really possible?

I think I have seen it all when it comes to daft Capital Protection products (both Funds and Structured Notes). That being said, it is possible to build a 100% Capital Protected Product with a 12% Guaranteed Coupon? Would you really want it though?  We have claims from Advisers and Distributors of Funds that their 10% P.A. Guaranteed Coupon & Capital Protected investment is “nothing like the last one”…….. that went bust.

Not all 100% Capital Protected Products are “Safe Investments”. Whenever you are presented with a Fund like this you must ask yourself what makes this a “Safe” or “Risky” investment?? So, I will attempt to give some pointers on how to identify whether or not it is a worthy investment for your clients or whether it will end up in the same “SAFE category” LM, Axiom, Kijani and many more were classed before they ran into challenges.

It is important to identify the strength of any Capital Protection

Think: What kind of return would you get by leaving your money in your High Street Bank? Typically, very low right? But ultimately most of us view the Bank as quite a safe place to keep our money. Even with your money in the Bank you are still exposed to risks e.g. inflation, counterparty, currency risk if you own multiple currencies and more. However, the risk of losing money deposited in your Bank is still quite low.

Most of us in this business try and enhance people’s growth greater than Banks do, whilst managing the investment appetite of our clients. But at what point is their money at risk?

Simply put, some investments are just more Capital Protected than others:

  • Govt Bonds from the UK are far more Guaranteed than Bonds from Argentina
  • An A Rated Bank is less likely to default then a CCC Bank (in theory anyway)
  • An insurance backed investment from one insurer is safer than a less secure insurer

If you read the Terms of some investments close enough you will notice many Banks switch the Capital Protection away from themselves to a riskier company. Why?? To enhance returns of course (e.g. Credit Linked Products). Without this they could only offer similar returns to your High Street Bank.

person touching macbook pro

So why can you get “good looking” Capital Protected products sometimes and not others? In 2008-10, there were many investments from A Rated Banks offering high returns, so they could 1: increase AUM 2: stay liquid and 3: try to survive a recession. You may remember that during these years many “safe” Banks went under. We are no longer in a recession, so these Banks no longer desperately need your cash as the danger to their business has mostly subsided. So, to get 100% Capital Protection and high guaranteed returns can only be achieved with a company that is in distress (or Credit Linked to such a company).

Investment Scenario 1: Standard Chartered

This year (2018), most people view Standard Chartered as a solid Bank with a good credit rating. But people don’t see what NEBA see as they don’t have the knowledge or tools. If you look at the graph below you can see the 5-year CDS of Standard Chartered. A CDS is essentially the purchase of protection against the potential default of their bond. Think of it as insurance purchased by the bank which becomes more expensive with a higher chance of default. When the Standard Chartered seemed distressed, the Graph spiked because the experts viewed it as having a higher chance of default.

Standard Chartered Bank 5Y CDS (*this is not the Share price):


As the graph spikes, investments based on the Credit worthiness of Standard Chartered pay higher returns to compensate for the higher chance of default. A short-term risk that paid off this time but has gone the other way for other companies many times. So, if a 100% Capital Protected product is offering a high return, it could possibly be because people think the Capital Protection is not very strong or worthless. The Bank/Fund would therefore be offering much higher returns to compensate for the additional risk to that protection.

Investment Scenario 2: Comparison between 2 Structured Notes 

Out of the two products below, which would you say is really the most Capital Protected?  1. The Conditional Protected product with a 50% protection barrier 2. The 100% Capital Protected product “issued” by an A Rated Bank in London but based on the Credit Worthiness of the National Bank of Greece (Basically if the National Bank of Greece defaults, your Capital Protection is lost along with your money).


Do I really need to answer?

Are 100% Capital Protection a Myth or Real? I would say Myth, as no matter what, the protection is always still conditional on other events happening or not happening e.g. like the company or Government’s ability to honour the protection.

Some things are just more protected than others!

I am always interested in seeing the “Capital Protected” products you have been sent from companies around the world. Send them to our team at structuring@nebafinancialsolutions.com

Visit www.nebafinancialsolutions.com to see our Structured Products and UCITS Funds http://www.nebafinancialsolutions.com/Risk-Rated-Portfolio-DFMhttp://www.nebafinancialsolutions.com/real-asset-fund

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