Portfolio Diversification with a Reduction in Risk

September 28, 2018

I was at a party recently, having a chat with a new friend, and he mentioned that he had become a Whisky investor. Now this might sound ridiculous to most of us, but in fact, Whisky ranks in the top 4 of Alternative Investments for private individuals to invest in. The other 3 in no particular order are: cars, wine and watches. That being said, there are others that are currently providing high returns, such as art, stamps and coins.

So, during the chat I had with this gentleman he explained that he had 2000 bottles of Whisky, which are very well protected in his home. He does occasionally dabble in the pleasures of the amber liquid, but the primary goal of the collection was a future return. Nice to be able to make your passion an investment opportunity!

I have no doubt that we all would love to be able to have similar investment opportunities, be it Vintage Cars or Wine collections, but we are not all able to commit our hard-earned cash to these types of Hobbies/ Investments.

At Harbour, while we don’t provide advice to our clients regarding which brands of whiskey to buy, we do believe in alternative investment solutions such as Structured Products, to diversify your portfolio.

What is a Structured Product?

The basic explanation is Capital Protection over a specific timeframe, with a geared return, this means whatever the return on the portfolio is, this is amplified usually by 1.5 or 2 times. What we are wanting to offer our clients here is a reduction in risk with the upside of geared returns.

There are several offerings in the market. Investec and Absa have come up with great opportunities for our clients over the recent years.

At the moment we have 2 very appealing offerings and we are comfortable that both institutions should be able to honour their guarantees:

Investec – USD Investment:

Optimal Investment Growth Basket Limited (“OIGBL”)

For a minimum amount of USD 14,000, Investec is pleased to launch an offshore investment designed to offer capital preservation and growth in US Dollars.  Investors have the potential to double their equity market returns as well as receive 105% principal protection over 5 years – all in US Dollars. This is better than what you will achieve sitting in a bank offshore, for a similar risk profile!

This payoff is neatly packaged in an offshore listed share which can be purchased as follows:

  • Offshore allowances (or any SARB approved allowance)
  • Disclosed foreign assets
  • International assets held by non-South African Investors
  • Foreign Portfolio Investment Allowance (Asset Swap)

Product Characteristics:

  1. A targeted 5 year equity investment linked to a basket of offshore indices namely 20% Nikkei 225; 40% S&P 500 ®; 25% EuroStoxx 50® and 15% iShares MSCI Emerging Markets ETF. The return will be paid to the investor in USD.
  2. Preservation of Principal Amount + 5% minimum return in USD, if held to maturity. The principal protection and minimum return of this product is subject to the performance by Investec Bank Limited of its obligations under the subordinated bond that is issued to OIGBL.
  3. 2 times the growth in the basket’s performance from 5% and up to 27.5% from the initial basket’s level. If the basket’s growth is 27.5%, then the maximum return from the investment in the Shares is 50%. i.e. 2* (27.5% – 5%) + 5%=50%, which equates to an annualised return of 8,45% per annum in USD.
  4. Minimum investment of USD 14 000 (B class shares)
  5. Liquidity on a willing buyer, willing seller basis. Potential early redemption of the Shares at a price at which the Company can liquidate underlying assets.

ABSA – ZAR Investment:

SA Fixed Return and Global Protected Growth

This is a split tranche Investment wrapped inside a 1Life endowment.

Should you Invest R1 000 000, then:

  • 50% (i.e. R500 000) will earn a Guaranteed Return of 38.25% over a 3 year term, Tax Free. This is 12.75% p.a. simple interest. You will get back R691 250.00 after 3 years.
  • The other 50% (i.e. R500 000) is invested in an Offshore Equity Index, Commerzbank Risk Premia Equity Index; this portion of your investment is locked away for 5 years.

Product Characteristics:

  1. Your money is 100% protected. You cannot lose this Capital amount over the 5 years.
  2. The Equity Index has 100% exposure to offshore markets.
  3. The investment is an Asset Swap, which means that although the money remains in SA, the investment is exposed to the US Dollar/ Rand exchange rate.
  4. The Returns are unlimited. Your investment returns up to 75% are Tax Free, anything after that is subject to tax inside the endowment. If you exit the investment before the 5 year term, there will be penalties.

Example Scenarios (ABSA Structured Product):

Example 1: R500 000 Invested

  • Returns 0%
  • R500 000 returned to you.

Example 2: R500 000 Invested

  • Returns -25%
  • R500 000 returned to you.

Example 3: R500 000 Invested

  • Returns +43%
  • R715 000 returned to you.
  • The growth of R215 000 is Tax Free.

Example 4: R500 000 Invested

  • Returns +80%
  • R900 000 returned to you.
  • Of the R400 000 growth, R375 000 is Tax Free, and R25 000 is taxable.

I think it’s important to reiterate  that Structured products should not make up your entire portfolio, and they are not for everyone, but they are a nice diversification in an Investment Portfolio, especially given the ongoing volatility in all markets.

If this interests you, please don’t hesitate to contact your Harbour Wealth Financial Advisor. They will be happy to take you through the specifics of the investments and see if they are suited to your needs and risk profile.