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Principle Protection / Guaranteed Min. Return

In times of great economic turmoil such as we find ourselves, investors stomachs sometimes cause them to become consumed with one objective; capital protection. This often results in bizarre, but predicable behaviour – like unpacking a carefully set up investment plan and selling your equity investments – usually at the very bottom of a market cycle.

For those clients, we recommend instead, some slight re-balancing of portfolios to achieve greater capital protection, rather than wholesale abandonment of equity positions. We don’t generally discuss individual investments in our newsletter, but in our constant search to provide our clients with the best advice possible, we have uncovered an alternative investment strategy that may be suitable as a portion for some client’s portfolios. The BDC (Business Development Bank of Canada) Managed Futures Notes is a relatively new investment opportunity. In a nutshell, it combines the alternative asset class known as managed futures, traditionally only available to institutional investors with a minimum return and principle protection guarantee by the Business Development Bank of Canada (BDC).

Managed futures invest in a pool of futures contracts managed by investment professionals. These managers trade in the global futures market as buyers and sellers of commodities (gold, silver, wheat, corn, crude oil, etc.), currencies and market indexes. They trade on 50 exchanges around the world and invest in about 200 futures contracts at any one time. Your investment return is based on how successfully the managers gauge the prices of the assets in the futures contracts. Although the risk of loss is high on any one contract, a pool of managed futures offers better risk-reward than an individual contract, but there are still no guarantees that you will keep your capital and make money. Sounds scary, and it is, traditionally investing in managed futures is not something we have recommended because of the uncertainty involved.

But the BDC recently modified these traditional securities to attract individual investors who want the growth potential of managed futures but prefer a capital guarantee. In short, BDC will guarantee the value of your original invested capital plus a small premium. Because it’s a Federal Crown Corporation, its debt is backed by the Government of Canada. If you hold the Series N-7 notes now being offered for the full term (7 Years, 11months), the worse you can do is get $108 back for every $100 invested. Past returns for managed futures have been impressive. According to figures released by Tricycle Capital Corp. managed futures have generated an average annual return of 13.31% from January 1980 to July 2002. However, the main benefit with managed futures is that they offer true diversification; they have historically provided price, stability and growth during periods unfavourable to stocks and bonds. If you are looking for growth potential and an investment that will reduce portfolio volatility – and the security of a minimum return guaranteed by the full faith and credit of the Government of Canada, this investment may be right for you. If you would like more information or our advice if this type of investment is right for you, don’t hesitate to give us a call.

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