Structured products are always more popular after market crashes than before — when they actually offer the most protection.
Nevertheless, in these current market conditions where fear is rife, Absa’s new range of structured products that guarantees investors’ capital may encourage investors back into the markets a little sooner rather than later.
Over the past two years, structured products have been one of the best investments an equity investor could have made as they protected capital when equity markets halved. However, the risk does sit with the institution that issues the guarantee, which is usually a bank. In this case it would be against Absa’s balance sheet, and Absa is the largest bank in South Africa.
Interestingly, despite the collapse of major financial names, Brian MacMillian of Absa Capital says globally no major bank defaulted on their guarantees to clients. So the risk of a guarantee not being upheld is relatively small.
Absa Index Performer Plus
For retail investors who want to put their toes back into the equities market, but who also want to sleep well at night, the Absa Index Performer Plus may be a good option.
The three-year structured product provides a 100% guarantee on the capital invested and is linked to the Top 40 Index. The investor will receive market returns up to 55% over the three-year period. That represents a maximum 15% compounded return per annum.
In other words if an investor invested R50Â 000, should the market fall over that period, they would receive R50Â 000 back and the loss would be the opportunity cost of not earning interest over that period. If the market is up 30% during that period the investor would get back R65Â 000. If the market is up 100% the investor would only receive R77Â 500, compared to a direct investment in the market, which would have returned R100Â 000.
Pros and cons: The pros of this product is peace of mind and it’s marginally riskier than a fixed deposit. The most the investor stands to lose is the interest that would have been earned in a fixed deposit, yet the investor has exposure to the upside of the stock market.
Its minimum investment of R20Â 000 makes it more accessible for the retail market than other structured products.
The negative is that although there are no fees, the investor forfeits all interest and dividends. It is also not to be compared to the growth from a pure equity investment as the upside is capped. You are also locked into the investment for three years.
This is for investors who are looking for a growth investment that has the potential to outperform a fixed deposit.
Salient details: The product can be purchased through an Absa branch or on the Absa website. The current tranche is open from May 4 to June 12. The next tranche will be available from early July.
The minimum investment is R20Â 000 and there are no additional fees.
Future developments: Absa will soon be launching a new product that will provide interest and capital growth. Although details could not be published at this stage, it looks like a good investment vehicle for retirees looking to maximise both interest and growth with a capital guarantee.
Protected Index Plans
For high-net-worth individuals, Absa has launched the Protected Index Plans (Pips). These products will be listed on the JSE so investors will be able to price the value of their investment more easily while trading out of the investment before the three-year period has expired.
There are currently three products in this range:
100% capital guarantee with 55% upside. This is similar to the retail product except that it is a listed instrument.
90% capital protection with 65% upside. Here the investor accepts a lower guarantee in return for a higher cap on market returns. In other words if you invest R100Â 000 and the market falls 5%, you would only receive R95Â 000. However, if the market returned 65% over the three-year period you would receive R165Â 000.
80% fence option. In this option you receive protection for the first 20% fall in the market. For example, if during the period the market falls 10%, your full capital invested is guaranteed. If the market falls 25%, you lose only 5% of your capital. The upside is a gearing effect rather than a direct one. For every 1% rise in the market, you would receive a 1.15% return. So if you invested R100Â 000 and the market is up 50% over the period, you would receive R157Â 500 compared to a direct market investment, which would only have paid out R150Â 000.
Pros and cons: These investments allow investors to take a bit more risk for a greater upside potential. You can price your investment daily and you are able to trade out of the investment before the three-year period with Absa as the market maker so you are guaranteed to be able to sell.
Although you are able to trade out of the product during the period, the product has been designed to be held to expiry and the guarantee may not apply if the product is not held for the full term. The early termination price may not fully reflect the performance of the index over the period as the pricing takes cognisance of not only the index level, but also the time to expiry as well as both interest rates and volatility in the market. For example, if the market had rallied by 50% within two years and you wanted to cash out, you may only receive a return of 35%. You would then be taking a bet that the market would fall by more than 15% within the following year. Like the retail product you forfeit interest and dividends.
This is a product for investors who can afford some downside risk, but still want to limit their losses while participating in the upside of the market returns.
Salient features: The minimum investment is R100Â 000.
Tranches are issued monthly on the 20th of each month and listed the following week. The return is based on the index value on the date the investment is made.
Gearing and caps on new investments would change on a monthly basis depending on interest rates and volatility.
Investments can be done through selected brokers or through Absa.
Future developments: Currently Absa Capital provides additional asset classes within these structured products on a bespoke basis.
However, the plan is to extend these products to the high-net-worth market. You will be able to invest in commodities and foreign indices with a capital guarantee.