Fiona Anderson
Sun
INVESTING I The British Columbia Securities Commission has issued an investor alert about an increasingly popular investment vehicle known as principal protected notes, or PPNs.
PPNs offer potential returns based on the performance of an underlying investment, and guarantee that, on maturity, the investor will at least get his principal back.
But the guarantee is only as good as the guarantor providing it and the security backing the guarantee, B.C. Securities Commission spokesman Andrew Poon said in an interview.
“If the guarantor goes out of business, or the security provided is inadequate, then that guarantee on your principal may be worthless.”
And as more PPNs come on the market, there has been a “significant growth in the sale of principal-protected notes to retail investors, and the development of increasingly complex structures that may pose investment risks,” Poon said.
The non-guaranteed portion of the investment will vary in risk, the Canadian Securities Administrators (CSA) — the organization of provincial and territorial regulators — said in a notice also issued Friday. In some cases, the underlying investment is a hedge fund, or managed futures, the CSA notice said.
“Understanding the facts about PPNs can help investors identify some of the risks they may face when investing in these products,” Poon said. “And knowing the risks before buying is just one of the key elements in making an informed investment decision.”
According to the investor watch, PPNs take a portion of the money invested and place it in a long-term note that will yield the total amount of the investment at maturity. The rest is invested in a variety of products that will produce the return on investment. If the guarantee holds up, the worst the investor can do is earn nothing on his investment. However, the money is often locked up for several years, and trying to withdraw the money before maturity may negate the guarantee, the commission warned.
© The Vancouver Sun 2006
