Introduction – Janine Starks
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Transcript of Introduction – Janine Starks
Introduction – Janine Starks
Order of events for today:
• Who is Liontamer – our background• Beyond New Zealand – the UK picture• What is a structured product?• Nuts & Bolts – how a product gets built• What alters pricing?• A case study – accelerated growth vehicle• Who needs protection over the longterm? The evidence• Rethinking portfolio construction• What makes a good product?• Benefits for wholesale investors
About Liontamer
• First specialist provider of capital protected investments in
New Zealand• Issue retail products and also manufacture products for other
providers or specialist investors• A talking point – why are we called ‘Liontamer’• Set up as an Australian unit trust• Our New Zealand Management Team – brief backgrounds
Laetitia Peterson Michael Lodge Neville Giles Janine StarksManaging Director, Head Investor Head of Investment Director of Distribution Relations Solutions
Our extended teamSupported by leading industry professionals: • Morgan Stanley – A+ rated Investment Bank who structure
products and provide the underlying Equity Linked Notes
• Morgan Stanley Capital International – calculate and own MSCI indices. Liontamer has a licensing agreement with MSCI
• New Zealand Permanent Trustees – Statutory Supervisor who looks after the interests of unit-holders. They are very supportive of new innovative products
• Bell Gully – NZ Legal & Tax Adviser
• PricewaterhouseCoopers – NZ Auditor
• BK Registries – NZ Registrar, based in Ashburton and a NZ success story
• New Zealand Guardian Trust – custodian & JPMorgan – sub-custodian
Structured Products Market Gross Sales 1994 - 2003
010002000300040005000600070008000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
6.2B
3.2B
0.7B
• Average growth +38% a year since 1994
• Market has grown more than 10 fold in a decade
• Sales have doubled in last 5 years
• 306 products issued by 68 providers in 2002
• Products sold throughout bull and bear markets
Snapshot of the UK – annual sales (£)
Source: www.structuredretailproducts.com & Janine Starks
What’s a protected investment?
An investment where your capital is protected from falls inthe price of any asset – fully or partially
• Generically called ‘structured products’ as they don’t have to offer any protection at all.
• Alters the risk and return payoff of a traditional fund. Created using ‘derivatives markets’ e.g. Options
• Scope in the wholesale or professional investor market
1. Lower or raise portfolio risk – predominantly lower2. Achieve risk/return payoffs not possible with
traditional funds 3. Used to gain exposure to assets not normally
invested in as risk can be controlled
What do investors get?
A fixed formula of returns• Linked to a sharemarket index, individual stocks,
commodities or bonds• You receive a fixed % of the growth in the index
e.g. 70%, 80%, 100% or 150%+ ‘participation rate’• No dividends on growth• Can have income products, fixed income • Term – generally 3-10 years
A fixed formula of risksa) Fully protected at maturityb) Partially protected with ‘hard protection’c) Partially protected; ‘soft protection’ using ‘knock in options’d) No protection; lose 1:1 on the markete) Geared downside risk; lose >1:1
The Nuts & Bolts
$60 put in zero coupon bond for fixed term
Interest accumulates back to $100
$40 buys an options contract on the index. ATM call option
$100 investment – how we create capital protection + growth
‘Options contract’ – the right to buy the index in 8 years time, but at TODAY’S level. No obligation to buy.
Example: MSCI index trading at 922 today1. 8 years - index trading at 700 = 25% loss. So we do nothing.2. 8 years - index trading at 1660 = 80% profit x participation rate x $100
Provides capital protection at maturity
Gives a % of sharemarket growth on our full $100
investment
What changes product pricing? It’s not wizardry!
1. Interest rates rising and falling
Rising rates, less in zero, more money to buy options gives more participation
2. VolatilityLike insurance e.g.25 yr old driving Ferrari or a 55 yr old in a Ford Increased vol = more expensive options = less growth in index
3. Differential between NZD and USD interest rates wider the better for hedging back into kiwi. Gives a pick up
4. Length of term – longer term more participation5. Any averaging of index levels – gives higher participation6. Level of fees – should be no annual management fees7. Credit risk – products structured into an Equity Linked Note eg
Morgan Stanley A+ (S&P)
Product scope enormous
Return structures• Uncapped call: % participation in upside• Cliquets: +/- quarterly returns• Digital: fixed return based on asset not falling• Lock-ins: lock-in % of profits on the way up • Callable structures: close early• Geared call spread: accelerated upside with cap • Reverse convertible: fixed or variable income
Protection structures• Hard Protection • Soft protection – created using knock-in options• CPPI – Constant proportion portfolio protection, imitates
options • No protection – e.g. recent product 132% Eurostoxx• Geared downside - increased risk, for increased returns
MSCI XINHUA
FTSE EUROSTOXX
KOSPI
TOPIX
SINGLE STOCKS
GLOBAL TITANSGOLD PROPERTY
COMMODITIES SECTORS
NASDAQ
BIO TECHS
Case study of an innovative product
SUPERgrow 150First accelerated growth structure in NZ
• 150% x growth in MSCI Index• 100% growth cap (9% compound return)• 40% protection from market falls• 1% annual return each year• Fixed term of 8 years• Morgan Stanley equity-linked note
Cap at double your money+
Protection from market falls up to 40%
+1.5 x MSCI
How does geared growth work?
Time0%
+100% Maximum Gain
Minimum Return+8%
Year 1 Year 8
• 61 x 1.5 = 92%• Plus 8% income• Total return = 92+8=100%
+69%
Example : Index rises 69%Client gets geared growth above 8%
Soft protection-40%
-20%
Why invest in accelerated growth vehicles?
Two main reasons:1. Recovery – accelerated returns, speeds up the recovery
of losses from the bear market2. A hedge against low to medium growth - a
mediorce return will become a superior return Type of institution / investor who invests:• One which doesn’t believe in a raging bull market• Or, does believe in the raging bull, but can’t afford to
ignore the range of possible outcomes
Prudent to insulate portfolio with investments that: • Outperform when low or average levels of growth • Stay stable in adverse conditions
Who needs protection over the long-term?
UBS RESEARCH Alexander Ineichen – ‘Fireflies before the storm’
Report forsees a change in the industry from managing assets to managing risk. Absolute return funds are the fireflies• Argument superiority of asymmetric returns over symmetric• Symmetric = long only tracking fund• Asymmetric = not available in ‘nature’, artifically managed
to meet investors risk preferences. E.g. structured products or hedge funds
Investors are loss adverse: volatility on the downside is not the same as volatility on the upside!
Who needs protection over the long-term?UBS RESEARCH Alexander Ineichen – ‘Fireflies before the storm’
Figures 1994 to June 2003
Quote: “It probably is pretty safe to assume that those private investors who have been in guaranteed structures during the bull as well as the bear market that followed, are likely to never do anything else again” FIREFLIES BEFORE THE STORM JUNE 2003
S&P 500 Capital guarantee
Hedge fund of funds
Annual returns
8.6% 8.4% 7.3%
Risk (volatility)
16.3% 5.9% 6.3%
Who needs protection over the long-term?
Zve Bodie & Dwight Crane: Harvard Business SchoolPension Savings
1. Employee starts saving at age 25, retiring at 652. Benchmark investment is inflation adjusted US Treasuries3. Approx 12% of wages invested each year
6 investment alternatives looked at:• US Treasuries• S&P 500 index full investment• 60/40 equities / bonds• Age adjusted with equities declining nearer retirement• 1 year capital protected investment rolling over• 5 year capital protected investment rolling over
100,000 scenarios of stock prices and inflation rates used to study each strategy
Who needs protection over the long-term?
PORTFOLIO VALUES AT AGE 65INVESTMENT STRATEGY
AVERAGE VALUE$000 USD
% OF RESULTS BELOW TARGET
100% US TREASURIES
$446 0%
100% S&P $856 34.3%60/40 EQUITIES/BONDS
$654 28.6%
AGE ADJUSTED $618 26.5%1 YEAR PROTECTED $581 10.8%5 YEAR PROTECTED $950 11.6%
SOURCE: BODIE/CRANE HAVARD BUSINESS SCHOOL WORKING PAPER #98-070
Re-thinking portfolio construction
Quote “Although structured plans have been around for many years, in one form or another, they have only recently become recognised as a specific asset class in their own right”. Michael Aaron – Technical Director of a UK IFA
Cash Low risk Capital secure structures
Bonds Spectrum
Structured investments
Pooled equity funds Medium risk Capital at risk structures
International equities / hedge funds
Direct shareholdings
Alternative investments High risk
Research and product comparisonsTips – what to look for in growth products
Capital Security?
Participationrate?
Growth cap?
Index?
Term?Averaging
?
Index Measure
?
Charges?
Tax Efficiency
?
Wrapper?
10 Tips
Benefits for wholesale investorsSlice and dice risk & return
• Superior long-term risk adjusted returns• Ability to reduce risk or alter the risk/return equation • Ability to invest higher than prescribed %’s in equities • Ability to get exposure to assets or markets not normally
selected, because the risks were too high• More flexibility with remaining investments. Core
satellite approach• Diversification – hybrid, elements of shares and bonds• A passive investment – requires little monitoring• Low costs – no annual fees• No currency risk (if you choose)
Heading Goes Here
• Points go here• Points go here• Points go here• Points go hereThank you…
Disclaimer: Liontamer Investment Management Pty Limited makes every effort to check the accuracy of information in this presentation. Opinions are reasonably held at the time of publication. However, no responsibility can be taken for any error or omission at the time of publication or due to subsequent changes occurring. This presentation is for information purposes only and is intended for professional advisers, not private investors. It is not intended for personal investment advice or a recommendation to invest. Advisers and investors should read the Liontamer investment statement and/or prospectus carefully and satisfy themselves that investments referred to are appropriate for their circumstances and portfolio. Past performance should not be used as a guide to future performance. Information about taxation of Liontamer investments does not constitute taxation advice to individual investors and is indicative of the likely tax treatment only. Liontamer is not responsible for any changes in tax law or interpretation which might adversely affect the returns for investors. Investors should consult their tax adviser on the tax implications of investing, with regards to their specific circumstances.