UBS Research - Protected Products Outperform

We've recently come across a piece of research by UBS Warburg (76 pages long so we won't put you through the pain of reading it), but we've been in contact with the author Alexander Ineichen in London, so if you'd like a copy we'll pass it on. UBS did some extensive analysis of capital protected investments over a decent period of time and the research is recent - June 2003. To their surprise they found capital protected investments outperformed a standard tracker and hedge fund index when you looked at risk and return. While the returns were similar the risks are a lot lower, making capital protected investments a good diversifier in a portfolio. They admitted they expected the hedge fund to outperform. The basic numbers are below.

Most people who comment negatively on capital protected investments have usually not undertaken any extensive empirical testing, but just presume they will under-perform over the longer term. The motive of this type of comment is usually the protection of fees for active managers or fear of change. But in their defense, we strongly believe a good active manager deserves their fees –we just don't believe in charging annual fees ourselves, because our investments are passive and structured. Our argument is that you should combine protected investments with good active managers (core and satellite approach).

Returns and risk of the S&P 500 index, compared to a simple capital guaranteed structure, and hedge fund of fund index, over the period 1994-2003

• S&P 500 total index return: 8.6% growth per year and a volatility measure (risk) of 16.3%
• Capital Guaranteed Structure: 8.4% growth per year and a volatility measure (risk) of 5.9%
• Hedge fund of funds: 7.3% growth per year and a volatility measure (risk) of 6.3%

Source: UBS Warburg (June 2003) "Fireflies before the storm," Global Equity Research AIS Report