Transcript Slide 1

Financial Planning Chapter SIG Presentation:
Portfolio Strategies using ASX Listed Securities
28 May 2010
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Agenda
•
ASX Market Developments
• AQUA Market
• ASX Trade
•
Exchange Traded Funds/Commodities
• Features, benefits & risks
•
Portfolio Construction using ETFs
• Generating Alpha with sector ETFs
•
ASX Instalment Warrants
• Features, benefits & risks
•
Instalment Strategies
• Off-setting income and expenses
ASX Trade
•
Introduction of new market services
- Trade Match – current ITS
- Pure Match – low latency execution facility
- Volume Match – order crossing mechanism
•
A number of new order types will also be introduced as
part of the initiatives
•
ASX Best will provide a smart order routing system to
ensure that clients obtain the best execution
•
Changes will begin to be implemented 3rd quarter 2010
ASX AQUA Market
• Flexible market service and rule framework to facilitate the
quotation of a wider range of products
• Tailored to fund managers, investment banks and product
structures
• Three broad categories of product that can be quoted:
- Managed Funds
- Exchange Traded Funds
- Structured Products
• Increased transparency, product distribution and price discovery
ASX AQUA Market
Equity and Derivative
Equity
Companies
BHP
A-REITs
Westfield
LICs
AFIC/ARGO
ETFs
Spiders
iShares
Equity Listing
Rules
Hedge
Funds
Wallace
ARF
Long-Dated
Equity-linked
products
Equinox
Derivative
Capital
protected or
Structured
Investment
Products
Instalments
ALPS
Warrant Listing
Rules
New AQUA Listing
Rules for funds
ASX Trading system (ITS) &
ASX Settlement system (CHESS)
Call/put
Warrants
BHP call
Features of ETF / ETCs
•
•
•
ETFs - invest in a basket of securities that make up
an index or sector
ETCs - track the physical price of a commodity and
provide direct exposure to the underlying asset
Characteristics in common:
•
•
•
•
•
•
•
Have transparent portfolio holdings
Have an open-ended structure
Can have on exchange market makers
Trade at or close to Net Tangible Asset (NTA) backing
Trade intra-day on an exchange like any other share
Covered by National Guarantee Fund (NGF)
Low MERs typically much less that 1%
How ETFs work
Secondary Market
Primary Market
ASX
Market Maker
Trades Like
Stock
Creation or
Redemption of
Units
Fund
ETF and LIC price movements
Share Price Relative to NAV
20.0%
Premium
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
Discount
-15.0%
-20.0%
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Listed Investment Company
Mar-07
ETF
Mar-08
Mar-09
Mar-10
Benefits of using ETF / ETCs
•
•
Buy a market in one transaction or build a
diversified portfolio with a few transactions
Reduced portfolio administration costs
• Eg 200 stocks =
• One tax statement
• One CHESS statement
•
Grow portfolio value without sector/stock skew
• DRP distributes dividends across index in proportion
• Regular – annual/quarterly contributions distributed across
index in proportion
•
Reduced administration for SMSF Trustee
• Accounting costs
• Audit costs
• Advice costs
Risks of using ETF / ETCs
• Will not out perform a market it covers
• By definition an index is the weighted average performance of
its underlying constituents
• An ETC will always track the price of the commodity
– up and down
• Offshore ETFs and ETCs over commodities priced in
non - AU$ currency are not hedged
• Impact of market direction in concert with the relative
performance of AU$ needs to be considered eg. GOLD
• Income
• ETFs not fully franked
• ETCs do not provide income just the prospect of capital gain
• Sector focused ETFs may be disadvantaged by
negative sentiment towards the sector
ETFs – Whats Available?
Total US
EAFE
EUR
350
S&P
500
R2000
MIDCAP
400
SMLCAP
600
SOUTH
KOREA
JAPAN
CHINA
TAIWAN
HONG
KONG
EMERG
MKTS
Ex -US
SING
GLOBAL
100
S &P
S &P
S &P
ASX 200 ASX A-REIT ASX 50
-Domestic
- International
ASX 300
6 ASX
Sectors
Portfolio Construction Using ETFs
Core & Satellite Approach Using ETFs
Core & satellite
6 trades on ASX
+ low on-going MERs
International
(All World Ex US)
(VEU)
MER
25bps
100 Global
Stocks
(IOO)
Core holding of
S&P /ASX 50
(SFY )
Listed
Property
(SLF)
MER
28bps
AYF
*Exposure to 2373 shares
MER
85bps
Gold
MER
39bps
MER
40bps
MER
40bps
Portfolio Composition
Jan - 2008
Jan - 2010
Commodities GOLD, 10.00%
Commodities GOLD, 15.56%
Fixed Interest AYF, 5.00%
Fixed Interest AYF, 4.16%
Property - SLF,
5.50%
International Shares
- IOO, 24.50%
Property - SLF,
2.76%
Australian Shares SFY, 49.87%
Australian Shares SFY, 55.00%
International Shares
- IOO, VEU,
27.65%
Total returns: 2008 & 2009
– January 2008 – December 2008
• Capital value (capital invested $100,000):
– Portfolio - down 22%
S&P/ASX50
S&P/ASX200
MSCI world
down 39%
down 42%
down 42%
– Since January 2009
• Capital value (capital invested $100,000):
– Portfolio - up 21%
S&P/ASX50
S&P/ASX200
MSCI world
up 23%
up 24%
up 17%
• Income received (23 months after MER fees & before tax)
– $6,750 (grossed for franking)
6.7% ROI
Generating Alpha using Sector ETFs
Sector ETFs
• Sector ETFs allow you to generate Alpha in a clients portfolio
• You can minimise stock specific exposure
• You can Diversify away company risk and concentrate on
cyclical and structural forces that drive sector performance
• Gain exposure to companies you may not invest in
• Take advantage of cyclical movements across sectors
• Automatic reweighting of the index – So poor performing
stocks will be removed from the index/sector.
Why use Sector ETFs?
Many traditional managed funds can’t add stock picking alpha
% o f Fu n d s th at O u tp e rfo rm th e In d e x
%
50
45
40
35
30
25
20
3 -y r
5 -y r
15
10
5
0
A u stra lia n E q u ity
In ter n a tio n a l E q u ity
So u rce : S& P
A u stra lian Bo n d s
Key Drivers of Stock Prices
A major reason is that company fundamentals account
for only a small part of short to medium returns
Stock Drivers
% change in stock price explained by market, then sector and the residual
120%
100%
80%
60%
40%
20%
0%
Jan2003-Jan 2010
Stock
Sector
Market
Sector Rotation Model
Sector Performance
S&P/ASX Sector Indices
Jan 2000 - Jan 2010
Energy
700
600
Resources
500
Metals & Mining
400
Financials ex AREITs
300
Financials
200
S&P/ASX 200
100
Industrials
0
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Creating a portfolio across sectors
S&P/ASX 300
(VAS)
MER 43bps
MER 27bps
S&P/ASX 200
Financial
x-A- REITS
(FIX)
S&P/ASX 200
Industrial
(IDD)
MER 43bps
Market Cycles
S&P Global
Consumer Staples
(IXI)
S&P/ASX 200
Energy
(ENY)
MER 48bps
S&P ASX 200
Resources
(RSR)
MER 43bps
MER 43bps
Sector ETFs Summary
• Provides instant, low cost portfolio diversification
• Receive all the benefits of owning the underlying shares
(opportunity for capital growth and income)
• Take a sector approach to investing; remove the need for
stock-specific research
• Standard & Poors does all the index analysis for you
• Opportunity to outperform the market benchmark by taking
advantage of market cycles using sector rotation
ASX Quoted Instalments
Leverage without the risk of a margin call
Instalments Background
• First Instalment listed in 1996
• Now over 1700 Instalment warrants listed
• Very similar to the privatisations of CBA and Telstra which involved
instalment receipt structures
•
However there are a number of differences with the IR structure
• Instalment warrants are issued by a warrant issuer and not a government or
listed company (RBS, Macquarie, UBS, Citi, CBA, Westpac)
• Issuers of Instalment Warrants “lend” the final instalment payment to
investors making it optional
• this means investors pay funding costs (pre-paid interest and borrowing
fees).
Instalments Overview
• Instalment Warrants are a tool used to enhance share
ownership by allowing the investor to purchase shares in two
part payments.
• There is no obligation to make the Final Instalment Payment.
- time to decide whether to take ownership of the share
• Investors continue to receive the benefits of share ownership.
- full capital appreciation of the shares
- receipt of full share dividends
- franking credits
Instalments & Margin Lending
Instalments operate in a similar way to margin lending however…
• Investors are not obligated to make the final Instalment
payment (ie the “Loan”).
• Hence, the final instalment payment is not regarded as debt.
• Instalments can be thought of as a low-risk margin loan that:
- is ASX listed,
- can be traded just like shares,
- does not involve indebtedness
Can be used by
SMSFs
- does not require repayment
Warrants Classification for Advisers
• Under the Corporations Act, warrants may be
defined as a ‘Security’, a ‘Derivative’ or a
‘Managed Investment Warrant’.
Securities
Derivatives
• All types of warrants
issued over shares
• Trading warrants
• Some capital
protected and
structured investment
warrants
• Some Structured
investment warrants
such as capital plus
Managed
Investment Warrant
• Instalments issued
over ETFs, A-REITs
and some
Infrastructure funds
Types of Instalments
There are three main types of Instalments:
• Regular – Provides short-term exposure (1 -3 years)
- Dividends received as cash
• Rolling – Long term exposure (1 – 15 years)
- Dividends received as cash
• Self-funding – Long term exposure (1 – 10 years)
- Dividends used to pay down loan
Pricing of Instalments
Traditional Structure: Regular, Rolling and Traditional Self funding Instalment
Funding Cost
($0.50)
Instalment
Price
$5.50
•Funding cost  Prepaid Interest on loan
provided
 Loan protection (put
option)
 Borrowing Fee
Capital
($5.00
•Capital contribution
$10
Loan
Amount
$5.00
XYZ Share
XYZ instalment
Loan
(limited
recourse)
($5.00)
Capital component:
loan to the investor
Pricing SFI Variations
Stop Loss – SFI
Capital
Component
Investor Pays:

$5.00
$10.00
XYZ
Share
Price
Loan
Amount
Stop Loss Level $5.50
XYZ Share Price
Issuer Funds:

$5.00

XYZ Share
XYZ instalment
Capital up-front (First Payment)
Instalment Payment – non-recourse loan to
the investor
Interest is capitalised daily to the Loan
Risks of Instalments
• Underlying fails to perform
• Increased leverage increases risk of loss
• Limited Life of warrants
• Extraordinary event
• Expected move in underlying does not occur during the
life of the warrant
• Instalment terminates
• Liquidity risk
Instalment process
Instalments can be purchased either:
1.
on market via SEATS, or
2.
off-market via the Offering Circular
Issuer sells Instalment
(Investor buys Instalment)
Issuer buys the share
Benefits of shares flow
from the Security Trust
to the investor
Issuer places share in
Security Trust on behalf
of investor
Why use Instalments?
Benefits
Strategies
•
•
•
•
•
•
•
•
•
•
•
Part pay for shares
Diversify existing portfolio
Enhanced dividend yield
Greater franking credits
Eligible within a SMSF
Pre-paid interest deductibility
Leverage
Cash extraction
Dividend yield play
Maximising SMSF caps
Enhanced earnings
shelter
Building a portfolio using Instalments
 The scenario:
 In March 2009 an SMSF investor wishes to invest $25,000
into a portfolio of shares with broad diversification
 The investor wants long term exposure and market return
 The investor has also has set aside $20,000 to trade the
market in the short term.
 A possible solution:
 Using the STW ETF the investor can obtain a diversified
portfolio in one transaction.
 They could also use the Dividend yield play strategy to
potentially earn income in the short term.
Building a portfolio using Instalments
Core Investment
Portfolio $25,000
Core holding of
Australian Equities
ETF v Instalment
over ETF
Mar-Jan10
Satellite
$?????
Trading
$20,000
Feb 09
BHP,CBA
RIO & QAN
Satellite
1.
Satellite
2.
Satellite
3.
May 09
WBC,ANZ
NAB & IPL
Nov 09
CSR,NAB
WBC & ANZ
Sep 09
BHP,CBA
TLS & WES
Core Portfolio Beta + Benefits
NB – Figures have been rounded for ease of illustration
Investment
amount
Price/unit
02/03/2009
Units Purchased
Expense
Interest*
STW ETF STW Instalments
$24,996
$24,990
$30.52
$13.53
819
1847
nil
-$2,365
Income dividends $0.74 & $0.66
franking credits1. @76%
Gross income
$1,147
$339
$1,486
-$1892
$2,586
$764
$3,350
After deductible expense*
$1,486
$1,458
Tax on net income @ 15% 2.
Excess franking credits 1-2
$223
$116
$219
$545
Earnings & contribution
Off-set
$773
$3,633
$17.07 x 7.50%pa
Interest at 6.00%
is deductible.-$473
added to cost base
Next Steps – ASX Tools and Resources
• Online Education
- Fact sheets
- Online courses
- Podcasts of events
• Model portfolio studies – www.asx.com.au/portfoliostudies
- Using instalments
- Using ETFs
- Interest rate securities
• Find a planner program
Upcoming events - National
Options – 2 June Webinar
Interest Rate Securities – 16 June Webinar
SMSFs – Adviser session 20 July
Register at:www.asx.com.au/events
www.asx.com.au/keepmeposted
for specific dates and locations or to log-on for the webinar
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