Old-school appeal
Vimal Chagan must have had a wonderful time when he was Firstrand’s ambassador plenipotentiary to India, where he no doubt became a confidant of Prime Minister Narendra Modi and was regularly brought into delicate negotiations with the Chinese. He had a blank canvas in which to look for businesses to buy and start up.
So I was surprised to see him in Braamfontein, where he will spearhead Liberty’s return to the structured product market. Around the turn of the millennium these products were all the rage. Private investors had few other foreign investment options — the allowance was just R200,000 in 1998. Many of these products, however, were missold as they promised a return equivalent to 150% of the growth in, say, the Dow Jones but neglected to mention that there was no benefit from rand depreciation. If the Dow Jones was up 20% in dollars that is all the client got, never mind that it was up 35% in rands.
The Liberty Advanced Global Equity T1 Portfolio won’t qualify as a world first. In fact it has been designed to look familiar to people who like old-school structured products. You might have expected Chagan to look at emerging markets-based products but instead it is a plain 50% S&P 500 in the US, 50% Euro Stoxx.
Liberty hopes to raise R1bn in this product, which has a minimum investment of R150,000. As a life product, and unlike a unit trust, the product offers enhancements. For a R1m investment there is a 1% enhancement, more than enough to pay your broker what he deserves to earn in commission — and over R3m there is a 2% enhancement.
The strike date at which the product goes live is December 7, the anniversary of that mother of all strike dates, the attack on Pearl Harbour. Until then your money will doze in the safe but dull environment of the Stanlib money market fund.
Chagan says there are three outcomes for clients. If the combined indices have a positive return, which is below 10%, the return will still be 10%, and if it is over 10% the full capital gain is earned. As usual in structured products, all dividends are forfeited to pay for options that underpin the guarantee. And you can never actually lose money, at least in nominal terms, because if markets fall the money invested is still given back in full.
Five-year options
To get these benefits, though, clients have to remain in the product for five years. There are quite a few more options available now to people happy with a five-year lock-in. You could invest in private equity which will be uncorrelated to listed markets. And general partners of private equity firms have far more influence over their investments than managers operating in the listed market. Haven’t you ever wondered why rapacious high-margin merchant banks like structured products so much? They provide the kind of profits they like: fat and untransparent.
At least with Liberty the product is taxed inside an endowment wrapper, at a preferential rate of 30%. And you don’t have to include it in your tax form, unlike a banking product.
Chagan says the investment at Liberty has the chance to grow in line with the performance of the largest companies in the US and Europe, but also provides a safety net against market volatility. It will, of course, cannibalise the global mutual fund range run for Stanlib by Columbia Threadneedle. Markets are at a low point so the chances of them being lower in nominal terms in five years looks remote.