Making a Case for Covered Writing Trusts

Despite wrong perception that distribution is guaranteed, these investments can be attractive

Article by Richard Kraft

Much has been said and written about the problems associated with covered writing trusts. Most of the discussion has been negative, particularly with principal-protected covered writing trusts. The talk centres around their ability to deliver the targeted income as defined in the prospectuses.

Analysts who follow the principal-protected covered writing trusts evaluate them in terms of their performance thresholds, defined as a fund's "hurdle rate." That is the minimum return the fund must achieve to deliver the distribution target.

This pint is crucial. One of the problems is the perception among investors that the distribution is guaranteed. The income objectives are targets not guarantees. The only thing guaranteed with these structured products is the return of principal either 10 or 12 years from date of issue.

This discussion took centre stage recently when Mulvihill Capital Management Inc. vice president Donald Biggs resigned. Biggs was a main player in Mulvihill's structured-product division. At the same time, Mulvihill, the leading investment...