KBC Capital-Protected Funds - KBC-Fondsen met kapitaalbescherming

 
KBC Capital-Protected Funds - KBC-Fondsen met kapitaalbescherming
KBC Capital-Protected
Funds

           KBC-Fondsen met kapitaalbescherming
Dear reader,
This brochure has been divided up into three
parts, each identified by a different colour.
That way, you will not have to read the entire
brochure if you are only looking for specific
information.
The blue part will clarify how a fund offering
capital protection works. Among other things,
it will explain why the price of such a fund
may fluctuate before maturity.
In the green part, the various fund types and
their specific characteristics will be explained
in detail. If, for instance, you are looking for
more information on click or Equiplus funds,
you will be able to find it here.
The orange part, finally, will provide answers
to frequently asked questions. Take the time
to read it through. Maybe you will find the
answers here to your own questions about
these funds.
We hope that this brochure will help you find
your way around the popular world of capital-
protected investment funds.
INTRODUCTION

  Why are capital-protected funds so popular?

  As a result of efforts by the European monetary              Other advantages, besides capital protection?
  authorities in fighting inflation and the decline in pub-
  lic deficits, interest rates in Europe have become much      Capital-protected funds meet the needs of many
  lower than they were in, say, the 1980s or 1990s.            demanding investors. The return they offer approxi-
  Investors, who were getting steadily diminishing             mates the results that can be achieved in the financial
  returns on their traditional bonds, started to look for      markets they track, without the capital invested being
  new sources of income or returns.                            put at risk.

  In the 1990s, they showed a growing interest in long-        In some cases, capital gains may also be locked in
  term investments in shares. However, the bullish years       before maturity, as with the popular “click funds”.
  were followed by a sharp downturn on the financial
  markets, particularly in certain sectors of industry, such   Capital-protected funds can also offer attractive buy-
  as telecommunications and technology.                        in opportunities (through reset or lookback options),
                                                               or guarantee a certain minimum rate of return (the
  Capital-protected funds offer investors an attractive        ‘Best of’ range).
  alternative to direct investment, especially investors
  who still have to learn the ropes. They teach them how       Still other funds aim to outperform the underlying
  to keep track of the financial markets and become            stock markets (EquiPlus funds).
  familiar with the risks – and not just the potential
  return - associated with shares, without putting their       Moreover, investments in capital-protected funds are
  capital at risk.                                             liquid before maturity, since prices for transactions in
                                                               these funds are set every two weeks.
  Since 1993, KBC has systematically launched capital-
  protected funds and during the more recent, riskier          This brochure aims to provide you, the reader, with a
  years, has even come out with numerous new types of          thorough explanation of the main types, features and
  capital-protected funds. As a matter of fact, KBC is far     workings of capital-protected funds.
  and away the market leader in these funds. KBC Asset
  Management – a KBC Bank subsidiary - also designs
  and develops these funds for other financial institu-
  tions around the globe.
HOW DO CAPITAL-PROTECTED FUNDS WORK? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

First objective: capital protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
   The fund’s fixed-income component
   How does it work?
   Interest rates influence the fund’s fixed-income component

Second objective: performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
  The fund’s option component
  How does it work?
  All kinds of factors influence the fund’s option component prior to maturity

The workings of capital-protected funds: money flow diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

BASIC TYPES OF CAPITAL-PROTECTED FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Equisafe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
  Features of the “classic” Equisafe formula
  The option component
  Interest rates and volatility influence the participation rate when the formula is designed
  Ways to increase the participation rate
  Ways to optimize the starting value

Click . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
   The ladder formula
   The “cliquet” formula
   Ways to increase the cap
CONTENCE

           EquiPlus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
             Features of the EquiPlus formula
             The option component

           Multisafe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
            Multisafe Currency X/Currency Y
            Multisafe Interest

           FREQUENTLY ASKED QUESTIONS                              . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
HO W DO CAPITAL-PROTECTED FUNDS WORK?

              Capital-guaranteed funds and/or funds offering a guaranteed return have
              two investment objectives:

              1. To give the investor his starting capital back in full or in part on the
              final maturity date (before charges).

              2. To pay the investor any capital gains made by the fund.

              There are various kinds of fund offering capital protection. Generally,
              100% capital protection is available, but sometimes – in only a very lim-
              ited number of cases – the rate of protection may be lower (90%, for
              example). In any case, all the capital-protected funds have a fixed maturi-
              ty date.
              The capital gain these funds make will depend on the change in the value
              of the “underlying” (i.e., a stock market index, shares, interest rates or
              currencies) on the final maturity and/or on interim maturity dates.
First objective: capital protection

The fund’s fixed-income component                                 How does it work?

In order to offer capital protection (usually 100%), all          The term investments are made at optimal rates of
the capital initially invested is put into risk-free, fixed-      interest: rates that normally apply for very large, pro-
income investments. This is the fund’s fixed-income               fessional investors. Every six months, the fund manag-
component.                                                        er reinvests the capital. Consequently, there is a six-
                                                                  month rate of interest, but it is a floating rate. Howev-
                                                                  er, in order to obtain greater certainty, a fixed interest
           100%                                  100% on the
      issue price                                final maturity   rate is needed. Consequently, the floating six-month
                                                 date
                                                                  rate is exchanged for a fixed rate of interest for the
                          fixed-income
                           vastrentend                            entire term to maturity (generally more than eight
                           component
                                                                  years). This is what is known as an “interest rate
                                                                  swap”. It yields a fixed amount of interest, regardless
                                                                  of changes in the interest rate. The present value of
          starting date                   final maturity date
                                                                  this interest amount is determined by discounting
                                                                  future streams of income. This discounted interest
Generally, the money is put into six-month time                   amount is then used to buy options, and these gener-
deposits that are subsequently renewed. This risk-free            ate the return (i.e., the capital gain) on the final matu-
investment ensures that you get 100% of your starting             rity date. (See part 2).
capital back (before charges) on the final maturity
date. Naturally, these time deposits yield interest in
the meantime, interest that might come to, say, 30%               Interest rates influence
over the entire term to maturity.                                 the fund’s fixed-income component

                                                                  A capital-protected fund is therefore, to a large
                                                                  extent, a fixed-income investment. As is the case with
                                         interest 30%
                                                                  other fixed-income investments, such as bonds, the
           100%                                  100% on the
      issue price                                final maturity   value of the fund is sensitive to fluctuations in interest
                                                 date
                                                                  rates.
                          fixed-income
                           vastrentend
                           component
                                                                  Influence of interest rates when
                                                                  the fund is designed
          starting date                   final maturity date
                                                                  If interest rates are high when the fund is set up (e.g.,
                                                                  7%), the interest amount will be high.
However, this interest is not paid out to the investor.           In this case, there will be more money available for
Instead, it is used to generate a capital gain.                   buying options, and the fund will be able to offer bet-
HOW DO CAPITAL-PROTECTED FUNDS WORK?

  ter terms as far as the return is concerned.                             Influence of changes in interest rates
  On the other hand, if interest rates are low (e.g.,                      prior to the fund’s maturity
  4.5%), these terms will be less favourable.
  The interest rates prevailing on the market when the                     As an investor, you have to remember that the net
  fund is set up therefore affect the terms, which the                     asset value of such funds may on occasion fluctuate
  fund can offer as far as performance is concerned.                       considerably prior to maturity. If, for instance, interest
                                                                           rates head up sharply two years after the fund was set
                                                                           up, the value of the underlying fixed-income invest-
                                                                           ment will go down – which is exactly what happens
                                                             7%            with bonds, too. As a result, the net asset value of the
                                         interest     4.5%
          100%                                                             fund will drop.
     issue price                                     100% on the
                                                     final maturity        This, however, is only temporary, since the effect of
                                                     date
                                                                           any interim loss in value will have disappeared com-
                          fixed-income
                           component                                       pletely by the final maturity date. Consequently, you’ll
                                                                           get your starting capital back, no matter what (before
                                                                           charges).
                                                                           The contrary also holds true, of course. If interest rates
          starting date                  final maturity date               fall before maturity, the fund’s net asset value will go
                                                                           up. But, again, this will only be temporary: on the final
                                                                           maturity date, the value of the fund will be back at
                                                                           100%.

   Market interest rate trend             Interest        6.50%                                    Explanation of the graph:
                                              rate                    1.                           1. An increase in interest rates
                     8-year rate = 5.50%                                                           2. will result in a loss in value of
                     and sudden rise to 6.50%                                  Time
                                                                      2.        axis               the fixed-income component
                                                                                                   3. but this loss will be only tem-
                                                                                                   porary
   Change in valuation of                                                              100%
   fixed-income component                 100%                        3.                           4. by the final maturity date,
                                                                               4.                  the fixed-income component
                                                                                                   will become less sensitive to
                                                                                                   changes in interest rates and its
                                                       Starting                        Final       value will move back up (dot-
                                                       date                            maturity    ted line) to the 100% mark.
                                                                                       date
Second objective: performance

The fund’s option component                                    How does it work?

Besides protecting your capital, the fund must also            The option component is designed by financial institu-
yield a return. This is referred to as the fund’s per-         tions specialised in complex options and other finan-
formance, i.e., the capital gain it achieves. In order to      cial derivatives (e.g., KBC Financial Products or another
achieve this capital gain, the fund may, for instance,         international derivatives broker). Using the interest
track the increase in a stock market index. Note, how-         income, the fund will buy the options from this coun-
ever, that the fund will not actually buy shares in this       terparty and thus become entitled to any capital gains
index, but share options. That’s why this is called the        made. Generally, the fund will buy call options, which
fund’s option component .                                      entitle it to buy shares at a fixed price. If the underly-
                                                               ing shares (or stock market index) go up in value, the
                                                               call option will also go up in value (= this is the capital
                                                  30%          gain the fund is seeking to achieve). With the call
                                Interest income
                                                               options, the fund can buy the shares for less than the
        25%
    discounted                                                 price they were quoted at when the options were pur-
      income
                          Fixed-income                         chased.

     options
                                                               So, the counterparty will sell the options to the fund
                                                               and get paid out of the periodic interest payments.
          Starting date                  Final maturity date

The fund will buy these options at the start, using the        All kinds of factors influence the fund’s
present value of the (expected) interest income. This is       option component prior to maturity
explained in the above graph. Over the entire term to
maturity, the fixed-income component may yield a               The value of the options is affected by such factors as
return of 30%, for instance. But because the fund buys         changes in share prices, the volatility (price fluctua-
the option at the start, account has to be taken of the        tions) of the shares concerned, and interest rates.
present value of the interest income. This comes to just       When do these factors have a positive impact on the
25%. This is the discounted or present value of the            option component?
future stream of income                                        - If the stock market goes up, the call options will be
                                                               worth more (see the diagram below).
                                                               - And this will also be the case if the volatility of the
                                                               shares increases.

                                                               Higher volatility means agitated markets and strong
                                                               price fluctuations.
HOW DO CAPITAL-PROTECTED FUNDS WORK?

  - If interest rates go up, call options will also increase
  in value.
  Note, however, that the effect of the options’ increase
  in value on the fund’s net asset value is offset in part
  by the fact that the increase in interest rates causes the
  fixed-income component to go down in value.

  Diagram: change in the value of the option component if the stock market goes up

     Discounted, the stream of interest at 30 %
     is worth 25%; that 25% is invested                                              interest   30%
     in call options
                                                         100%                                   100% on the
                                                         issue price                            final maturity
                                                                                                date
                                                                         Fixed-income

     Assume that the trend on the stock                  Trend, stock
     market is as follows:                               market index
     first a period of calm
     followed by a steep climb above the                           100
     starting value of the index at 100

     In this case, the value of the call option
     would develop like this:                            Value of
                                                         the option
                                                               25 EUR
The working of capital-protected funds:
money flow diagram

In a nutshell, the entire mechanism looks like this:

                                                           Investor

             Fixed-income                                                                   Option
              component                                1                                  component
                                                                      7

                                             2

                                             3                            4
              Time deposit                                  Fund                            Options

                                         6                                    5

Explanation of the above graph:
1 the investor invests capital in the fund
2 the fund puts the capital into a fixed-income investment
3 this generates interest income for the fund
4 the fund uses this income to buy (usually call) options
5 on the final maturity date, the fund will receive the capital gain realized on the options and
6 100% of the capital from the time deposit account
7 the investor will get his capital back on the final maturity date, along with the capital gain.
BASIC TYPES OF CAPITAL-PROTECTED FUND

              There are two main groups of capital-protected funds: equity-linked and
              non-equity-linked.

              KBC offers three basic types of capital-protected equity-linked funds:
              • Equisafe
              • Click (ladder and cliquet formula)
              • EquiPlus

              KBC also offers a wide variety of capital-protected non-equity-linked
              funds under the Multisafe umbrella.

              The difference between the above types of fund lies mainly in how the
              option component of these funds is constructed. Provided here is a brief
              explanation of the basic types of funds, but be advised that there are a
              number of variants.
Equisafe

Features of the “classic” Equisafe formula
                                                                 Equisafe formula
                                                                 • 100% capital protection at maturity
 Equisafe funds have the simplest structure. In addition         • 100% of the increase at maturity
to your initial investment, you will receive a certain                                                   You get 100% of the
                                                                                                         increase at maturity
percentage of the increase in the value of the underly-          180
ing on the final maturity date. This underlying may be:          170
- a single stock market index or a basket of stock mar-
                                                                 160
ket indices;
                                                                 150
- a basket of individual shares;
                                                                 140
- or some other combination.
                                                                 130
How much you ultimately receive will only be known
                                                                 120
on the final maturity date. When the fund is launched,
                                                                 110
however, how closely the underlying will be tracked
                                                                 100
will be specified as a percentage (for instance, 100%).
                                                                                     100 % protection
This percentage is called the ‘participation rate’.               90

                                                                  80
                                                                                                                 Maturity date
Example: An Equisafe fund offering 100% capital pro-                             Positive scenario

tection at maturity + 100% of the increase in the Euro-                          Negative scenario

pean stock market index, DJ Euro Stoxx 50.
The fund’s performance depends on two variables:
- the participation rate, which in this case is 100%;
- the underlying stock market index; in this case the DJ    There are two points of reference in the Equisafe for-
Euro Stoxx 50.                                              mula: the value of the underlying on the starting date
If this index goes up by, say, 80% before the fund          and its value on the closing date. No account is taken
matures (positive scenario), the investor will get a        of any increases or decreases in value prior to maturi-
gross return on the final maturity date of 80% (the         ty. The situation on the final maturity date is what
80% increase is tracked at a rate of 100%).                 determines the ultimate return.
If, by the final maturity date, the value of the DJ Euro
Stoxx 50 has fallen below the starting value, then          In order to avoid a situation where the final result
there will of course be no capital gain, but your capital   would be determined by a large, chance fluctuation in
will still be 100% protected.                               value at the start or on the final maturity date, the
                                                            starting and closing values are generally determined
                                                            on the basis of the average of a number of reference
                                                            values.
                                                            For instance, the starting value is generally arrived at
                                                            by taking the average of the prices for the first ten
BASIC TYPES OF CAPITAL-PROTECTED FUND                                                                          Equisafe

  days following the close of the subscription period,         may be lower than 100%. Calm financial markets, on
  and the closing value is determined by taking the aver-      the other hand, have a positive influence on the par-
  age of the prices for the last ten evaluation days prior     ticipation rate.
  to the maturity date.

                                                               Ways to increase the participation rate
  The option component
                                                               In order to offer an as high as possible participation
  In an Equisafe fund, an ordinary call option is pur-         rate, despite difficult market conditions, some funds
  chased with a long term to maturity, equal to the term       take a creative approach to make options less expen-
  to maturity of the fund.                                     sive and consequently increase the participation rate.
  A call option will entitle the fund to buy shares for a
  fixed price.                                                 Asian tail

                                                               Here, the closing value and/or starting value of the
  Interest rates and volatility influence the                  underlying is determined on the basis of the average
  participation rate when the fund is designed.                of prices on various days over a longer period of time.
                                                               Such periods may run from six to as much as twelve
  Influence of interest rates                                  months.
                                                               This technique not only makes the options cheaper,
  If interest rates are low, the interest income from the      but also ensures that the risk of a sudden drop in the
  fixed-income component will be smaller, and there            value of the underlying is mitigated to some extent. If
  will therefore be little money available to buy options.     the starting/closing value is determined on the basis of
  This will generally mean that there will be a lower par-     a single or just a few, consecutive stock market days,
  ticipation rate. The contrary also holds true, too, of       the odds of its being less favourable are greater.
  course. If interest rates are high, the participation rate
  may be as high as 130%.                                      Light formula

  Influence of volatility                                      This technique takes the worst performing shares out
                                                               of a share basket on an interim maturity date (gener-
  Volatility is the degree to which share prices fluctuate.    ally halfway to the final maturity date). On the final
  A high degree of volatility means agitated markets           maturity date, the best performing shares are also
  and strong price fluctuations. A high degree of volatil-     removed. Based on the remaining shares, the percent-
  ity also means expensive options. In this case, the inter-   age increase in the value of the basket is determined.
  est income available will not buy many of these expen-
  sive options. The participation rate, in this case too,
Example of the “Light” formula: KBC Equisafe Telecom
Invest X – participation rate 100%.
                                                                    Lookback formula
                                                                    • 100% capital protection on the final maturity date
At the outset, the basket contains 21 telecom shares.               • The capital gain = the closing value of the basket less the
                                                                    lowest value during the Lookback period if < starting value
On the interim evaluation day, the five worst perform-              (= 100), divided by the starting value
ing shares are removed from the basket. On the final
maturity date, the six best performing shares are like-
                                                                    Investment simulation
wise removed from the basket. A weighting of 10% is           150
given to each of the ten remaining shares.
                                                              140
The investor’s capital gain is 100% of the increase in
                                                              130
value of the ten remaining shares.
Without this technique, which results in fewer shares         120

determining the final result, it would not have been          110            New
possible to offer this sub-fund with a participation rate               starting value
                                                              100
of 100%.
                                                               90

                                                              80
Point-capped formula                                                        Lookback
                                                                             period                        Capital gain =
                                                                                                           (150 - 90)/100 = 60%
In this case, the price increase per share is limited, or
capped. In other words, to calculate the percentage
increase in the value of the basket, the increase in the
price of each share will, for instance, be capped at a
maximum of 100% on each evaluation day. These eval-
uation days occur at the end of the term to maturity.

Ways to optimize the starting value                         Best in or Lookback formula

The performance on the final maturity date is deter-        The performance of the fund on the final maturity
mined by the difference between the starting value          date in this case depends on the increase in the value
and the closing value of the underlying. There are for-     of the share basket relative to the lookback value. This
mulas for optimizing (read: lowering) the starting          is the lowest value of the underlying index/basket dur-
value after the launch of the fund. Formulas like this      ing a pre-determined period after the launch of the
are expensive, though, which means the participation        fund, the so-called lookback period. This is a technique
rate offered will be lower. Consequently, they will only    for optimizing the starting value.
be resorted to if stock market trends are uncertain on
the near term.
BASIC TYPES OF CAPITAL-PROTECTED FUND                          Equisafe

  Reset formula

  This formula also makes it possible to improve the
  starting value. The index will get a new (lower) start-
  ing value, if it falls by a fixed percentage (the reset
  level).

  Conclusion

  The features of an Equisafe fund can be summarized
  as follows:
  • the investor enjoys the benefit of capital protection
  on the final maturity date (before charges);
  • the investment result is linked to movements in a
  stock market index, a basket of stock market indices or
  a diversified basket of shares;
  • on the final maturity date, the change – increase or
  decrease – in the value of the underlying index or bas-
  ket is measured;
  • the capital gain the investor receives on the final
  maturity date is a certain percentage, 90%, for
  instance, of the increase in the value of the underlying
  index or basket;
  • if, on the other hand, the basket has gone down in
  value, the investor will receive his initial capital back,
  with no capital gain.

  ➠ Since the capital gain depends on a single reference
  point, i.e., the change in value on the final maturity
  date compared with the starting date, this type of
  fund is more suitable for the dynamic investor.
Click

Some investors find that the final maturity date is too                      age clicked in, the investor will receive the full
far ahead. They also want certainty regarding the cap-                       increase. This is referred to as a “ladder structure”,
ital gains that can be realized before then. The click                       since each “click” is a “rung” up on the ladder and
formula makes it possible for this need to be met.                           means more profit on the final maturity date.
Within the click fund family, there are ladder and cli-
quet funds.                                                                  Example: Ladder formula 10/20/30 up to 60%. A click
                                                                             fund linked to the DJ Euro Stoxx 50 index, based on
                                                                             the 10/20/30 up to 60% formula. Let’s assume the DJ
The Ladder formula                                                           Euro Stoxx 50 index has a fictitious starting index of
                                                                             100.
Features of the Ladder formula                                               • After two months, the index has gone up to 110: a
                                                                             10% capital gain is locked in.
The underlying index and/or share basket is tracked                          • In the following months, the index falls to 80, but
extremely closely during the entire term to maturity.                        this does not have any adverse effect on the 10%
Once the underlying goes up in value by a certain, pre-                      locked in.
determined percentage, that percentage will be                               • In a subsequent period, the index jumps up to 130,
locked – i.e., “clicked” - in. That means that this gain                     and an additional 20% gain is locked in (in two stages:
will accrue to the investor and be paid out on maturi-                       at a level of 120 and 130).
ty, even if the value of the index/basket subsequently                       • Even if the DJ Euro Stoxx 50 subsequently nose-dives,
falls below the clicked-in level. If the increase on the                     the investor will still receive a gain of 30% at maturity
final maturity date is higher than the highest percent-                      in addition to his initial investment (see the diagram
                                                                             above).
       Ladder formula
       • 100% capital protection at maturity                                 The option component
       • 100% on the increase in the index on the maturity date
       • Clicks at 10, 20, 30, 40, 50, and 60%, if reached before maturity

 140
                                              Click: 30%                     A click fund with a ladder formula makes use of ladder
 130                                                                         call options that lock or “click in” at specific levels.
                                    Click: 20%
                                                                             With the above 10/20/30 up to 60% formula, one lad-
 120
                    Click: 10%                                               der call option is bought with ladder “rungs” at 10, 20,
 110                                                                         30, 40, 50, and 60%.
 100
                                                                             Ladder options are more expensive than ordinary call
  90
                                                                             options with the same term to maturity (see the Equi-
  80                                                                         safe formula).
                            100% protection
  70                                                                         Moreover, the price goes up as more rungs are built
                                                                             into the ladder. This type of structure is thus more like-
BASIC TYPES OF CAPITAL-PROTECTED FUND                                                                                                      Click

  ly to be created when market conditions are                                    Example (explanation of the diagram):
  favourable (i.e., higher interest rates, low volatility).                      A fund with a cliquet formula on the Dutch stock mar-
                                                                                 ket (AEX index) with a 10% cap.
                                                                                 Each year, the level of the index is compared with its
  The cliquet formula                                                            level the preceding year.
                                                                                 If it has gone up, the increase will be locked in. If the
  Features of the “classic” cliquet formula                                      increase exceeds the pre-determined cap of 10%, 10%
                                                                                 will be locked in (interim periods 1, 3, and 8).
  With the cliquet formula, no gains are locked in when                          If the index has gone down, this will not count, and
  a certain percentage is attained, rather when certain                          0% will be locked in for this interim period (interim
  dates are reached. These dates – generally one a year –                        periods 2 and 7).
  are set when the fund is launched. On the final matu-                          If the index goes down in value during an interim peri-
  rity date, the investor will receive the sum of all per-                       od, the next period will start at a lower index value.
  centages locked in during the life of the fund. The per-                       This increases the chance of a better percentage
  centage that can be locked in each year is usually lim-                        increase being locked in at the close of the new inter-
  ited, and this maximum percentage is referred to as a                          im period.
  “cap”.

          Cliquet formula
                                                                                  KBC DISTRICLICK
          • 100% capital protection at maturity
          • the sum of the “clicks” for each interim period                       A very popular click fund, KBC Districlick offers dis-
          • any decline in value does not count
                                                                                  tribution shares; i.e., the gains it realizes are paid
   Clicks per                                                                     out after the close of each interim period in the
   interim period
   15%                                                                            form of a coupon.
                                                              Total
                                                              1: +10%             The maximum coupon is the cap percentage.
                                           Cap: 10%
   10%                                                        2:     0%
                                                                                  The cap for a Districlick sub-fund will – market con-
                                                              3: +10%
     5%
                                                              4:    +4%           ditions being equal – be slightly lower than the cap
                                                              5: +10%
                                                              6:    +8%
                                                                                  for a “classic” Cliquet fund, since paying out gains
     0%                                                       7:     0%           on the interim dates is more expensive than paying
            1       2    3     4      5     6      7     8    8: +10%
                                                                  +52%            gains out on the final maturity date.
    -5%                                                       (5.37%
                                                              yield to
                                                              maturity, before
   -10%                                                       charges)
The option component                                         cap will be lower. On the other hand, high interest
                                                             rates and calm financial markets (with a low degree of
For a cliquet fund, a single option is not purchased as      volatility) will have a positive influence on the cap.
with the Equisafe funds, rather a series of short-term
options are purchased, i.e., call spread options.            Ways to increase the cap
A call spread option is the combination of two ordi-
nary call options.                                           In order to be able to offer an attractively high cap,
• a call option is purchased with a strike price equal to    despite a low level of interest rates (or high degree of
the starting value of the index (e.g., 100 at the start of   volatility in the market), a broad cliquet structure is
each period).                                                sometimes used. Per interim period, any drop in the
• and a call option is sold with a strike price equal to     value of the underlying index/basket will be deducted,
100 + the cap (e.g., if the cap is 10%, the strike price     or in other words, a loss may be locked in for that peri-
will be 110%).                                               od. This loss too will be limited – to a so-called floor –
The number of call spread options that are concluded         which will be kept as low as possible; for instance, -3%
will depend on the term to maturity of the fund and          a year. However, the investor will still enjoy full capital
the number of interim periods. For instance, if a fund       protection at maturity.
has four interim periods, four options will be pur-
chased.                                                      Why lock in a loss?
                                                             Because if there is a limited possibility of a loss being
Interest rates and volatility influence the “cap”
when the formula is designed.                                       “Broad” cliquet formula
                                                                    • 100% capital protection at maturity
                                                                    • the sum of the clicks for each interim period
Influence of interest rates
In this case, too, the level of interest rates plays an
                                                             Clicks per
important role when the fund is set up.                      interim period

If the interest income earned throughout the life of          15%
                                                                                                                          Total
the fund is limited (given the low level of interest rates                                           Cap: 10%
                                                                                                                          1: +10 %
                                                              10%                                                         2:    - 3%
at that time), then there will not be much money avail-                                                                   3: +10%
able to buy options. In this case, the cap for click funds                                                                4:    +4%
                                                               5%
                                                                                                                          5: +10%
will be somewhat lower (e.g., less than 10% per annu-                                                                     6:    +8%
al interim period).                                            0%                                                         7:    - 3%
                                                                      1       2    3      4     5      6     7        8   8: +10%
                                                                                        Floor: -3%                            +46%
                                                              -5%                                                         (4.84%
Influence of volatility                                                                                                   yield to
                                                                                                                          maturity before
If volatility is high in the market, options will be         -10%                                                         charges)
expensive. In that case, it will not be possible to buy
many options with the interest income either, so the
BASIC TYPES OF CAPITAL-PROTECTED FUND                                                                                                       Click

  incurred, the options will be cheaper, and this will in     between a negative 3% and a positive 10%, for
  turn make it possible to offer a higher cap. This is        instance – instead of between 0 and 7 or 8% as is the
  referred to as a broad cliquet structure, because the       case with the ordinary cliquet formula.
  range within which the return may vary is broader –

    Variant: Best of cliquet formula                          Each year, the level of the index is compared with its
                                                              level the preceding year.
    The “Best of” formula is a variant of the ordinary cli-   If it has gone up, the increase will be locked in. If the
    quet formula. This not only allows investors to bene-     increase exceeds the pre-determined cap of 10%,
    fit from capital protection on the final maturity date,   10% will be locked in (interim periods 1, 3, and 8).
    it also gives them                                        In this example, a modest risk of loss is factored in
    • either a pre-determined minimum return;                 (broad cliquet).
    • or the sum of the percentages locked in annually, if    If the index drops in a certain year, a maximum of -
    this is higher.                                           3% will be locked in (interim periods 2 and 7).
    In other words, the investor receives the best of two     Since the sum of the percentages that have been
    options, hence the name.                                  locked in annually in this example (46%) exceeds the
                                                              pre-determined minimum return of 30%, the
    How does it work?                                         investor will receive a gain of 46% at maturity.
    With an ordinary cliquet formula, a series of call
    spread options are purchased, so that the sum of the
    amounts locked in annually can be paid out on the                 Best of cliquet formula
    final maturity date. However, with the “Best of” cli-             • 100% capital protection at maturity
                                                                      • minimum rate of return of 30%, for example
    quet formula, the interest income is not wholly                   • OR the sum of the clicks (i.e., amounts locked in) for each
                                                                      interim period, if higher
    invested in call spread options. Some of the interest      Clicks per
                                                               interim period
                                                                                                                          Minimum
                                                                                                                          30% or
    income is used to guarantee the minimum return.             15%
                                                                                                                          total
    This minimum return offered over and above the                                                                        clicked in:
                                                                                                       Cap: 10%
                                                                10%                                                       1: +10%
    capital protection comes at a price, of course. Since                                                                 2:    - 3%
    there is less money left for buying options, funds like      5%
                                                                                                                          3: +10%
                                                                                                                          4:    +4%
    this generally have a cap that is slightly lower.                                                                     5: +10%
                                                                 0%                                                       6:    +8%
                                                                        1       2    3      4      5    6      7      8   7:    - 3%
    Example (explanation of the diagram):                                                 Floor: -3%                      8: +10%
                                                                -5%
    A fund with the Best of cliquet formula tracking the                                                                       +46%
                                                                                                                          (4.84%
    DJ EuroStoxx 50, with a 10% cap and a minimum              -10%
                                                                                                                          yield to
                                                                                                                          maturity before
    return of 30%.                                                                                                        charges)
Conclusion

The features of a Click fund can be summarized as fol-
lows:
• the investor enjoys the benefit of capital protection
on the final maturity date (before charges);
• the investment result on the final maturity date is
linked to movements in a stock market index, a basket
of stock market indices or a diversified basket of
shares;
• in the interim, the gains are locked – or clicked – in,
which means that the gains will accrue definitively to
the investor.

The fact that gains are locked in before maturity
makes this type of fund particularly well suited for the
more defensive investor.

  Advantages of the ladder formula                          Advantages of the cliquet formula

  • If the index/basket goes up in value by a certain,      • Per interim period – generally once a year – any
    pre-determined percentage, that percentage will           increase in the value of the index/basket will be
    be locked in.                                             locked in.

  • Any percentages that are locked in will accrue         • If the index goes down in value during an interim
    definitively to the investor, even if the index/basket   period, the next period will start at a lower index
    subsequently falls below the value that was locked in.   value. This increases the chance of a better
                                                             percentage increase being locked in at the close
                                                             of the new interim period.

  • Each percentage locked in (i.e., “click”) is a “rung”   • The return on the final maturity date is the sum
    higher and means a bigger return on the final             of the percentages clicked in annually.
    maturity date.
BASIC TYPES OF CAPITAL-PROTECTED FUND                                                                                             Equiplus

   EquiPlus

  Features of the EquiPlus formula                                    KBC EquiPlus Digi-Opportunity X
                                                                      basket of 20 blue-chip shares

  KBC EquiPlus is different from the Click and Equisafe               • 100% capital protection in EUR at maturity
                                                                      • 5 interim periods
  formulas. The key feature of the click funds is the fact            • + 20% per interim period if none of the prices of the shares in
                                                                      the basket < 50% of its starting value
  that gains are locked in at certain intervals, while the            • + 0% per interim period if the price of at least one share < 50%
                                                                      of its starting value.
  key feature of the Equisafe formula is the participa-
                                                                      Investment simulation based on a basket of five shares
  tion rate. EquiPlus funds, however, concentrate on             70
                                                                                                                     Sum of the gains
                                                                 60      1         2          3         4      5
                                                                                                                     per interim period
  “outperformance”, i.e., on yielding a better return            50
  than the underlying investments (e.g., a share basket).        40                                                  Periode 1:    + 20%
                                                                 30                                                  Periode 2:    + 20%
  Hence the name, “EquiPlus”.                                                                                        Periode 3:    + 0%
                                                                 20
                                                                                                                     Periode 4:    + 20%
                                                                 10                                                  Periode 5:    + 20%
                                                                  0                                                  Totaal        + 80%
  The option component                                          -10
                                                                -20
                                                                -30
                                                                -40
  The fund seeks to outperform the underlying by using                                                Floor
                                                                -50
                                                                                                      -50%
  exotic options instead of ordinary options. These             -60
                                                                -70
  options are more complex than ordinary call options.
  One of the examples of an exotic option is a digital
  option.                                                      Example. KBC EquiPlus Digi-Opportunity X
                                                               KBC EquiPlus Digi-Opportunity X offers the investor
  Digi-Opportunity, the most common type of EquiPlus           100% capital protection on the final maturity date
  fund uses such options. A digital option (referring to       (before charges) and a capital gain that is dependent
  computer digits 0 and 1) is an all-or-nothing option. If     on the change in the value of a basket of 20 blue-chip
  a specific condition is met, the investor will make a tidy   shares.
  profit, if the condition is not met, there will not be any   The capital gain will be determined at the close of
  (or only a very limited) return.                             each interim period (there are five). It will depend on
                                                               whether or not one of the following occurs:
  In the Digi-Opportunity type of fund, one digital            If none of the prices of the shares in the basket falls
  option is purchased per share in the basket. So, if a        below 50% of its starting value during the period, a
  basket contains twenty shares, for example, twenty           return of 20% will be locked in for that period.
  individual options will be purchased. Every day, the         If the price of at least one of the shares in the basket
  prices of the underlying shares are checked to see if        falls below 50% of its starting value during the period,
  they are above a certain level.                              a gain of 0% will be locked in for that period. In that
                                                               case, the share that has fallen most from its starting
                                                               value at the close of the interim period will be
                                                               removed from the basket. This means that the weakest
share will no longer adversely affect the fund’s per-
formance in subsequent interim periods.

Conclusion

The features of an EquiPlus fund can be summarized as
follows:
• the investor enjoys the benefit of capital protection
on the final maturity date (before charges);
• the investment result on the final maturity date is
the sum of the gains achieved for each interim period;
• these gains will depend on whether or not a certain
condition is met during the interim period;
• if that condition is met, the investor will make a tidy
profit, if it is not, there will not be any (or only a very
limited) return.
• with formulas such as this, the capital gain realized
on the final maturity date may be higher than the
increase in the value of the underlying index/basket.

Given the typical “all-or-nothing”/”a lot-or-a little”
structure of these funds, an EquiPlus fund is more suit-
ed for the dynamic investor.
BASIC TYPES OF CAPITAL-PROTECTED FUND                                                                                     Multisafe

   Multisafe

  KBC regularly comes out with capital-protected funds
                                                                      Multisafe Currency X/Currency Y
  whose performance is not dependent on shares, but
                                                                      • 100% capital protection at maturity
  rather on other financial instruments. Most of these                • 1 EUR = or > 1 USD: 7%
                                                                      • 1 EUR < 1 USD: 0%
  funds are marketed under the name Multisafe. The
  possibilities and variants on this type of fund are          1,05                                               Relevant
                                                               1,04                                               percentage:
  legion.
                                                               1,03                                               1:        + 7%
                                                                                                                  2:        + 0%
                                                               1,02
                                                                                                                  3:        + 7%
  The most common formulas are those based on the              1,01                                               4:        + 7%
                                                                                                                  Total    + 21%
  exchange rate between two currencies (Multisafe cur-         1,00
                                                               0,99                                               (4.88% yield to
  rency X/currency Y) and formulas whose performance                                                              maturity, before
                                                               0,98                                               charges)
  depends on the interest rate trend (Multisafe Interest).     0,97
                                                                           1           2           3          4

  Multisafe Currency X/Currency Y                             Example. KBC Multisafe USD/EUR X
                                                              Besides preserving - on the final maturity date - the
  Features                                                    value of the initial amount invested (before charges),
                                                              this fund seeks to achieve a gain. which depends on
  With this type of fund, the investment result is            the movements in the exchange rate of the euro (EUR)
  dependent on the currency market. Based on move-            relative to the US dollar (USD) during each interim
  ments in the exchange rate between two currencies, a        period.
  certain percentage gain will be locked in per interim       If the EUR/USD exchange rate is higher than or equal
  period. The sum of the gains for all interim periods will   to 1 USD at the close of an interim period, a gain of 7%
  be paid out on the final maturity date by way of            will accrue to the investor on the final maturity date,
  return.                                                     regardless of the actual exchange rate trend during
                                                              this interim period. If, however, the EUR/USD exchange
  The option component                                        rate is lower than 1 USD at the close of the interim
                                                              period, no gain will be locked in.
  Digital options are also used for the Multisafe curren-
  cy formulas. A digital option is an all-or-nothing op-      Conclusion
  tion. If a specific condition is met, the investor will
  make a tidy profit, if the condition is not met, there      The features of a Multisafe Currency X/Currency Y
  will not be any (or only a very limited) return. As a       fund can be summarized as follows:
  result, the exchange rate is checked periodically to see    • the investor enjoys the benefit of capital protection
  whether the condition has been met. If so, a certain        on the final maturity date (before charges);
  return will accrue to the investor, otherwise, there will   • the investment result is dependent on movements in
  be no return.                                               the exchange rate between two currencies;
besides his initial investment, the investor will receive   the option (the fund) to make sure it earns a minimum
the sum of the gains locked in per interim period on        amount of interest, thereby assuring this product’s
the final maturity date;                                    “Best of” feature.
• these gains will depend on whether or not a certain       The second option enables the investor to benefit
condition has been met during the interim period;           from a higher return if the underlying interest rate
if the condition is not met, no gain will be locked in.     goes up. Via a simple call option on the underlying
                                                            interest rate, 100% of the increase in that rate can be
Given the typical all-or-nothing structure of these         offered. Sometimes the participation rate is lower
funds, a Multisafe Currency X/Currency Y fund is better     (90%, for instance), depending on the market condi-
suited for the dynamic investor.                            tions that prevail when this product is designed.

                                                            Example. KBC Multisafe Interest X
Multisafe Interest                                          The investment result on the final maturity date is
                                                            dependent on movements in the ten-year EUR (swap)
Features                                                    rate. When the fund is launched, a floor of 6.25% is
                                                            fixed. This floor is locked in as the minimum gain that
With a Multisafe Interest fund, the result is dependent     will accrue to the investor.
on the interest rate market. For instance, it may be        Each year, at the start of each interim period, a certain
dependent on movements in the ten-year euro swap            return is locked in, i.e., the best of either 6.25% or the
rate (an interest rate used by financial institutions in    ten-year euro swap rate in effect at that time.
their dealings with one another). This formula com-
bines the technique of locking in gains annually with
                                                                  Multisafe Interest X
the “Best of” formula.
                                                                  • Per interim period, the underlying interest
At the outset, a minimum percentage or floor is set.              • Minimum rate of return for each interim period: e.g., 6.25%
Each year, at the start of each interim period, a gain is
“locked in”. This may be either the floor or the ten-       12%
                                                                                                                     Relevant
                                                            11%                                                      percentage:
year euro swap rate for that moment, whichever is           10%
                                                                                                                     1:      + 7.00%
higher.                                                      9%
                                                                                                                     2:      + 6.25%
                                                             8%                                                      3:     + 10.00%
                                                             7%                                                      4:      + 7.00%
                                                                                                                     5:      + 6.25%
The option component                                         6%
                                                                                                                     6:      + 6.25%
                                                             5%                                                      7:      + 6.25%
                                                             4%                                                      8:      + 8.00%
                                                                                                                     9:      + 9.00%
The return offered by a Multisafe Interest fund comes        3%
                                                                                                                     10:    + 12.00%
                                                             2%
from a floor option and a call option on interest rates.     1%
                                                                                                                     Totaal + 78.00%
                                                                                                                     (5.93% yield to
In other words, two options are purchased! A floor           0%                                                      maturity, before
                                                                   1    2    3   4    5    6    7    8   9   10      charges)
option is an option designed to limit the risk of a
downtrend in interest rates. This enables the buyer of
BASIC TYPES OF CAPITAL-PROTECTED FUND                           Multisafe

  If this interest rate is lower than the pre-determined
  floor of 6.25%, the floor will still be locked in; in other
  words, the investor is sure to receive a return of at
  least 6.25%.
  The result on the final maturity date will be the sum of
  all gains locked in for all the interim periods.

  Conclusion

  The features of a Multisafe Interest fund can be sum-
  marized as follows:
  • the investor enjoys the benefit of capital protection
  on the final maturity date (before charges);
  • the investment result is dependent on the interest
  rate trend;
  • the return the investor receives on the final maturity
  date is the sum of the percentages locked in per inter-
  im period;
  • the return locked in per interim period will be either
  the pre-determined minimum rate of return or the
  interest rate prevailing at that time (whichever is high-
  er); the investor will therefore always get the better
  of the two.
  • thanks to the minimum rate of return, the investor is
  protected in case interest rates fall;
  • if interest rates go up, the investor can benefit from
  this, too.

  This formula with a pre-determined minimum rate of
  return makes Multisafe Interest particularly suitable
  for the highly defensive investor.
FREQUENTLY ASKED QUESTIONS
1 Where can I find information on the net                     3 Do I get the same guarantees regarding
asset value of a fund?                                        capital protection and minimum returns if I
                                                              buy into the fund after the fixed subscription
The net asset value of all capital-protected funds is cal-    period?
culated twice a month: on the first banking day follow-
ing the 16th of the month and on the first banking day        Yes, you get exactly the same guarantees.
following the last day of the month (the days on which        But bear in mind: the capital protection only applies to
it is calculated are specified in the prospectus). This net   the starting value of the fund during the subscription
asset value is published in the Financieel Economische        period. If that starting value is 1,000 EUR, for instance,
Tijd, in L’Echo, in certain other newspapers and on Tele-     and you buy into the fund later on at a price of
text. It is also available on the following Web sites -       1,200 EUR, then only the 1,000 EUR is guaranteed. In
www.kbc.be and www.kbcam.be - along with a dia-               other words, you will be risking 200 EUR.
gram, product information, and the prospectus.                If a minimum rate of return is set for a fund as well,
                                                              then, on the final maturity date, you will receive the
                                                              minimum rate of return calculated relative to the
2 Do I have to keep units in the fund until                   starting value during the subscription period and not
the final maturity date or can I sell them                    relative to the amount you paid if you bought into the
before then?                                                  fund after the subscription period.

You do not have to keep your units in the fund until
the final maturity date. Units or shares in these funds       4 What charges will I have to pay if I sell
are actively traded at fair prices, which are accurately      before maturity?
calculated based on the components of the fund (valu-
ation of the fixed-income component and the option            If you sell before the fund’s final maturity date, an exit
component). Any sales of shares before the final matu-        fee of 1% will generally be charged. Lower charges
rity date are settled at the next net asset value.            (0.5% instead of 1%) may apply on sales of shares in
Orders placed between the 1st and the 15th of the             certain sub-funds during fixed periods. The exact
month will be settled at the net asset value calculated       terms and conditions will be set out in the prospectus
on the 17th (or the next banking day).                        available in your bank branch and on the Internet at
Orders placed between the 17th and the next to the            (www.kbc.be or www.kbcam.be). The amount of these
last banking day of the month will be settled at the          charges is used to unwind the construction (partially),
net asset value calculated on the 1st (or the first bank-     so that the remaining investors in the fund are not
ing day) of the following month.                              adversely affected.
N.B.: the guarantees regarding the capital protection         When growth (i.e., “capitalization”) shares are sold,
and rates of return are only valid on the final maturity      you will also – besides the exit fee – have to pay 0.5%
date.                                                         in stock market tax (max. 375 EUR) (e.g., for KBC Equi-
FREQUENTLY ASKED QUESTIONS

  safe, KBC Click, KBC EquiPlus).                               other party buys the shares that make up the stock
  On the fund’s final maturity date, too, you will have to      market index.
  pay this stock market tax.                                    Most markets/exchanges* are sufficiently liquid so
  When income (i.e., “distribution”) shares are sold, no        that purchases of this magnitude will not affect pricing
  stock market tax will be due (e.g., KBC Districlick).         on those exchanges (in other words, there will be no
                                                                marked increase in the index following such purchas-
                                                                es). Actually, shares must be sufficiently liquid before
  5. What factors determine the net asset value                 they can be included in a specific market index.
  for secondary pricing purposes (valuation of                  With share baskets, only a small percentage of the cap-
  the fund prior to maturity)?                                  ital invested is put into any one share. The various par-
                                                                ties to the contract ensure that all the shares in the
  The value of a capital-protected fund prior to its matu-      basket are sufficiently liquid.
  rity date may fluctuate and may be affected by all
  kinds of external factors. The option component is val-       *On smaller markets, this could be a problem; as a
  ued prior to maturity at the effective value of the           result, they are not often chosen as the underlying for
  option. Factors such as the price trend of underlying         a click fund.
  shares, market volatility, the residual life of the option,
  etc., all play a part in this.
  The value of the fixed-income component is greatly            7 How can I be sure that I am getting a fair
  influenced prior to maturity by interest rate fluctua-        price? Could the financial parties not be
  tions. However, the influence of interest rates will          manipulating prices?
  have disappeared completely by the final maturity
  date. (See also p. 8).                                        When a capital-protected fund is designed, KBC Asset
                                                                Management will ask for prices from various profes-
                                                                sional counterparties. These are major, reliable finan-
  6 Do banks with their click funds                             cial institutions (so-called investment banks). Of the
  (sometimes involving large sums of money)                     prices offered, the best are of course selected, which is
  have any impact on the pricing of the                         in the investor’s interests. By allowing competition
  underlying stock markets/shares?                              free rein amongst the various counterparties, KBC
                                                                Asset Management can get the best terms for its
  Click funds are launched on underlying markets                investors. The net asset value prior to maturity is also
  (exchanges) that are sufficiently liquid. A click fund is     calculated objectively on the basis of market prices.
  able to offer the terms set out in the prospectus by          Every 16th and last day of the month, KBC Asset Man-
  entering into contracts with a number of other parties.       agement will ask for prices from all the counterparties
  With click funds that track a stock market index (the DJ      with which it has entered into contracts on behalf of
  EuroStoxx50 for the EMU/S&P500 for the US, etc.), the         the funds. The counterparties will quote both a buying
and a selling price. Since the counterparties do not         9 The underlying index/share basket has
know whether KBC Asset Management plans to buy or            gone up in value, but this is not reflected in
sell when they quote their prices, they will be objec-       the net asset value of the fund; on the
tive. These market prices are used, after being              contrary, the net asset value has actually
checked, to determine the funds’ net asset value. One        gone down. Why is this?
way these prices are checked is by comparing them
with prices calculated by KBC Asset Management               The net asset value of a capital-protected fund does
itself, since KBC Asset Management has sophisticated         not depend solely on changes in the value of the
mathematical models at its disposal that enable it to        underlying index/share basket. Other factors also play
come up with a price that is in line with the market.        a part, the interest rate trend in particular is very
Consequently, pricing is transparent.                        important.
                                                             In order to ensure that capital protection can be pro-
                                                             vided, the sum invested is put into a fixed-income
8 Who bears the risk of capital protection as                investment (= the fixed-income component).
such?                                                        Interest income from this fixed-income investment is
                                                             not paid out but is used rather to buy options (= the
KBC, as the counterparty for capital-guaranteed funds,       option component).
provides a moral capital guarantee. By bearing the           The fixed-income component reacts just like a bond to
risks associated with the funds itself, KBC is required to   any increase in interest rates prior to the maturity
develop a whole system of controls to keep these risks       date. It will go down in value, and this will have a neg-
to a minimum. The main risk for investors is in fact the     ative effect on the net asset value.
risk they take in respect of KBC Bank – a bank with a        Consequently, it is entirely possible for the underlying
high credit rating (AA3 from Standard & Poor’s) – and        index/share basket to go up, while the fund’s net asset
not the risk run in respect of the underlying fund.          value goes down, owing to an increase in interest rates
Moreover, the structure of these capital-protected           (see p. 8).
products is such that the capital guarantee does not
entail a major risk, since the fund’s portfolio consists
primarily of risk-free time deposits. Only the interest      10 Why are the gains that are locked in
on those deposits is invested in so-called swaps (see        before maturity not reflected in the net asset
p. 10). The capital on the time deposits itself is not       value? Will I get the amounts locked in if I
touched. In this way, there are always enough liquid         exit the fund before the final maturity date?
assets in portfolio to provide the protection offered.
The Belgian Banking and Finance Commission (BFC)             Gains locked in are not always immediately reflected
supervises everything closely and requires that such         in net asset values calculated prior to the maturity
funds provide capital protection of at least 90%.            date. There are three main reasons for this:
                                                             • the capital protection: in order to make sure the
FREQUENTLY ASKED QUESTIONS

  nominal capital can be returned to the investor at             you receive the sum of the amounts locked in, in addi-
  maturity, the bulk of the amount invested is put into          tion to your starting capital.
  fixed-income investments. This component is conse-
  quently sensitive to fluctuations in interest rates on
  the financial market. When funds are valued before             11 A low level of interest rates when the
  the maturity date, the fixed-income component might            product is developed means less attractive
  be worth less on account of an increase in interest            terms being offered. Why is this? What can
  rates. This decline in value may (partially) offset any        be done about it?
  capital gain realized on an interim valuation of the
  fund.                                                          If interest rates are low, there will be less interest
  • the options: in order to ensure an increase in the           income available to generate significant capital gains
  value of the underlying by the maturity date, options          (participation rate, cap, etc.) via the option compo-
  are used. These will reflect the increase in the value of      nent.
  the underlying perfectly on the final maturity date,           Under these conditions, two features may be adjusted:
  but if this is several years in the future, the value of the   • Interest income may be increased: the simplest way
  options will only reflect movements in the value of the        to do this is to lengthen the term to maturity so that
  underlying to a limited extent.                                the interest income goes up.
  • the present versus the future value: what will be            • The option component may be made cheaper: there
  worth 100 EUR on the final maturity date, will not of          are a number of ways to lower the cost of the option
  course be worth that seven years earlier. Because of           component, such as an Asian tail, or the light, point-
  the interest income that has still to be earned, 85 EUR,       capped or broad cliquet formulas.
  for instance, might be worth 100 EUR in seven years’           These formulas were explained in detail on p. 17 and
  time.                                                          22.

  Before the final maturity date, these factors may
  sometimes result in rather unexpected net asset val-           12. What happens to the dividends generated
  ues. Regardless of whether a capital gain has been             by the underlying basket of shares?
  locked in or not, these three factors may prevent it
  from being reflected in the net asset value. Still, the        The investor will not receive any dividends from shares
  net asset value always reflects what the individual            in the basket. The dividend income goes to the other
  components of the fund are worth at that point in              party that set up the option structure. If this were not
  time (before maturity).                                        the case, the structure would be more expensive, since
  If you sell the fund before maturity, you will accord-         the other party would miss out on this dividend
  ingly receive the net asset value in effect at that time;      income and would have to compensate for this by
  this does not include the amounts that have already            some other means.
  been locked in. Only on the final maturity date will
13 How come some funds can offer a                            With cliquet funds, the increase in the value of the
minimum rate of return and others cannot?                     underlying is seldom fully paid out or locked in. This
                                                              would make the options far too expensive. By setting
Whether or not a fund can offer a minimum rate of             a cap, the option becomes considerably cheaper, since
return is decided when the fund is designed. In order         the cap limits the periodic price increases.
to achieve a minimum rate of return, part of the inter-       When the fund is designed, the cap percentage is of
est income from the fixed-income component has to             course determined by the conditions prevailing on the
be used. This of course affects the terms the fund            market at that time. If interest rates are high and
offers (participation rate, cap, etc.). Since there is less   volatility in the market is low, a higher cap can be
money left for buying options, funds like this general-       offered than if interest rates were low and volatility
ly have a slightly lower participation rate or cap. Still,    high.
these funds meet a real need of many – more defen-            That is why identical products (with the same term to
sively oriented – investors.                                  maturity, the same underlying index, the same curren-
                                                              cy, etc.), which are launched at different times, may
                                                              have a different cap.
14 Why do capital-protected funds generally
have a long term to maturity (more than
eight years)?                                                 16. What about the exchange risk associated
                                                              with the underlying shares (e.g., US shares)?
With a long term to maturity, the capital is invested for
a longer period of time and there is more interest            When equity-linked funds (those linked to a basket of
income. Consequently, more money is available for the         US shares, for instance) are designed, KBC may decide
option component, making it possible to offer more            to accept the exchange risk associated with the under-
attractive conditions than if the term to maturity were       lying shares. In that case, the effective return will be
shorter.                                                      paid out in USD on the final maturity date, which
With funds offering a minimum rate of return, there is        means the investor will be taking a USD risk.
an additional reason. If the term to maturity of the          Generally, however, KBC will opt for formulas that pay
fund is longer than eight years, the capital gain will be     out any increase in value on the final maturity date,
exempt from withholding tax.                                  without offsetting the exchange rate effect. In this
                                                              case, the exchange risk will be hedged; the investor
                                                              will not incur any currency risk. In formulas KBC
15 Why is the full rise in value not locked in                designs for (highly) defensive investors, for instance,
with cliquet funds; in other words, why is                    exchange risks are generally excluded.
there a cap and how is the cap percentage                     Whether or not the exchange risk associated with the
set?                                                          underlying shares influences the fund’s performance
                                                              on the final maturity date is always expressly stated in
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