Savings Product Review: Fidelity Life Options Portfolio

Wednesday 1st February 2006

What's it called and what sort of a savings product is it? Fidelity Life Options Portfolio. It's a fixed interest fund that uses derivatives.

Who is the company behind it?
Auckland-based Fidelity Life promotes the fund. It proudly points out that it is the only New Zealand-owned life insurance company around. However the actual investment management is carried out by Tyndall, the funds management arm of listed company Promina.

Who is the target market?
The Options portfolio is a high risk/high return fixed interest fund that is suitable for people with a three to five year time horizon.

What return does it offer?
Fidelity say the fund aims to return 10% annually after tax and fees.

When was it launched?
August 2004. What other products is it like or is it competing with? We continue the theme of picking unique investments. There is nothing like this in the retail market.

Is it long term, short term or medium term?
The fund is open-ended, however people considering investing in it should have a medium to long-term outlook.

What is the unique selling point?
The way the money is managed and the possibility of high returns. The first part of the process is pretty normal, investing in cash, bills and other investment grade instruments. The second part is different. The manager buys derivatives in particular by selling options on long-term government stock. These options, generally around a month, generate extra income depending on what happens with interest rates. Conversely they can create losses. To mitigate the risks Tyndall run a stop-loss strategy.

How strong a stomach do you need for it? (in other words, what's the risk profile?)
The risk profile is quite high - thus the promise of good returns. Mitigating this is the likelihood that a fund like this should only make up a small portion of your portfolio. Its role should be to enhance the standard fixed interest returns in a portfolio.

What's the hitch?
The manager makes a series of wrong calls on interest rates, or rates move unexpectedly in the wrong direction. The structure, through an insurance bond is a little cumbersome.

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