Transcript Document

Introduction – Janine Starks
Order of events for today:
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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
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Who needs protection over the longterm? The evidence
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Rethinking portfolio construction
•
What makes a good product?
•
Benefits for wholesale investors
About Liontamer
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First specialist provider of capital protected investments in
New Zealand
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Issue retail products and also manufacture products for
other providers or specialist investors
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A talking point – why are we called ‘Liontamer’
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Set up as an Australian unit trust
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Our New Zealand Management Team – brief backgrounds
Laetitia Peterson Michael Lodge
Managing
Director, Head
Director
of Distribution
Neville Giles
Investor
Relations
Janine Starks
Head of Investment
Solutions
Our extended team
Supported by leading industry professionals:
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Morgan Stanley – A+ rated Investment Bank who structure
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Morgan Stanley Capital International – calculate and own
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New Zealand Permanent Trustees – Statutory Supervisor who
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Bell Gully – NZ Legal & Tax Adviser
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PricewaterhouseCoopers – NZ Auditor
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BK Registries – NZ Registrar, based in Ashburton and a NZ success
•
New Zealand Guardian Trust – custodian & JPMorgan – sub-
products and provide the underlying Equity Linked Notes
MSCI indices. Liontamer has a licensing agreement with MSCI
looks after the interests of unit-holders. They are very supportive of
new innovative products
story
custodian
Snapshot of the UK – annual sales (£)
• 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
Structured Products Market
Gross Sales 1994 - 2003
6.2B
8000
7000
6000
5000
4000
3000
2000
1000
0
3.2B
0.7B
1994 1995
• Products sold throughout
bull and bear markets
Source: www.structuredretailproducts.com & Janine Starks
1996 1997
1998 1999
2000 2001
2002 2003
What’s a protected investment?
An investment where your capital is protected from falls in
the 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.
2.
3.
Lower or raise portfolio risk – predominantly lower
Achieve risk/return payoffs not possible with
traditional funds
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
•
•
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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 risks
a) Fully protected at maturity
b) Partially protected with ‘hard protection’
c)
Partially protected; ‘soft protection’ using ‘knock in options’
d) No protection; lose 1:1 on the market
e) Geared downside risk; lose >1:1
The Nuts & Bolts
$100 investment – how we create capital protection + growth
$60 put in zero
coupon bond for fixed
term
Interest
accumulates back to
$100
Provides capital protection
at maturity
$40 buys an options
contract on the index.
ATM call option
Gives a % of sharemarket
growth on our full $100
investment
‘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 today
1.
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
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. Volatility
Like 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 participation
5. Any averaging of index levels – gives higher participation
6. Level of fees – should be no annual management fees
7. Credit risk – products structured into an Equity Linked Note eg
Morgan Stanley A+ (S&P)
MSCI
XINHUA
KOSPI
COMMODITIES
SECTORS
BIO TECHS
SINGLE
STOCKS
Product scope enormous
Return structures
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Uncapped call: % participation in upside
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Cliquets: +/- quarterly returns
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Digital: fixed return based on asset not falling
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Lock-ins: lock-in % of profits on the way up
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Callable structures: close early
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Geared call spread: accelerated upside with cap
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Reverse convertible: fixed or variable income
Protection structures
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Hard Protection
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Soft protection – created using knock-in options
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CPPI – Constant proportion portfolio protection, imitates
options
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No protection – e.g. recent product 132% Eurostoxx
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Geared downside - increased risk, for increased returns
TOPIX
GOLD
FTSE
NASDAQ
PROPERTY
EUROSTOXX
GLOBAL
TITANS
Case study of an innovative product
SUPERgrow 150
First accelerated growth structure in NZ
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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
1.5 x MSCI
+
Cap at
double your
money
+
Protection from
market falls up
to 40%
How does geared growth work?
Example : Index rises 69%
Client gets geared growth above 8%
+100%
Maximum Gain
+69%
+8%
0%
Minimum Return
Year 1
Year 8
Time
-20%
Soft protection
-40%
• 61 x 1.5 = 92%
• Plus 8% income
• Total return = 92+8=100%
Why invest in accelerated
growth vehicles?
Two main reasons:
1. Recovery – accelerated returns, speeds up the
recovery of losses from the bear market
2. A hedge against low to medium growth - a
mediorce return will become a superior return
Type of institution / investor who invests:
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One which doesn’t believe in a raging bull market
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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
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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
S&P 500
Annual
returns
Risk
(volatility)
Capital
guarantee
Hedge fund
of funds
8.6%
8.4%
7.3%
16.3%
5.9%
6.3%
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
Who needs protection over
the long-term?
Zve Bodie & Dwight Crane: Harvard Business School
Pension Savings
1.
2.
3.
Employee starts saving at age 25, retiring at 65
Benchmark investment is inflation adjusted US Treasuries
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 65
INVESTMENT
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
Bonds
Spectrum
Structured investments
Pooled equity funds
Medium risk
International equities / hedge funds
Direct shareholdings
Alternative investments
Capital secure structures
High risk
Capital at risk structures
Research and product comparisons
Tips – what to look for in growth products
Benefits for wholesale investors
Slice and dice risk & return
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Superior long-term risk adjusted returns
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Ability to reduce risk or alter the risk/return equation
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Ability to invest higher than prescribed %’s in equities
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Ability to get exposure to assets or markets not
normally selected, because the risks were too high
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More flexibility with remaining investments. Core
satellite approach
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Diversification – hybrid, elements of shares and bonds
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A passive investment – requires little monitoring
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Low costs – no annual fees
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No currency risk (if you choose)
Heading Goes Here
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.
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Thank you…
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