Structuring portfolios for good returns

One of the relatively new tools available to investors and advisers are the structured investment products, such as those offered by the likes of boutique manager Liontamer.

Monday, April 19th 2004, 8:48PM

One of the relatively new tools available to investors and advisers are the structured investment products, such as those offered by the likes of boutique manager Liontamer.

In researching this article, and reflecting on the history of new products an interesting observation occurs. That is often it takes a while for a new product or manager to become accepted, but once accepted they play a mainstream role in a planner’s toolbox. (This is also true on the insurance side of the industry too).

Examples of this are NZX listed investment companies like Infratil which used to trade at large discounts until only recently, Fisher Funds and Walker Capital Management, which all admit the first few years are tough will it takes time for the market to accept them, and Tower’s GAM-managed hedge fund which had been in the market for years until becoming an “accepted” product.

Structured investment products seem to fit into this camp too.

They are a relatively new innovation in the market – despite being widely used overseas – and it seems while some planners are using them there is another significant group that are on the cusp of putting them into mainstream use.

Moneyonline director John Commins says he has used the Liontamer products and reckons there is a real place for them in an adviser’s toolbox.

He says they are an alternative to an index fund, however are much better as an investor gets to participate in the upside but don’t have any downside risk.

Two of the issues advisers do need to think about, and be comfortable with, are the protection (and who is providing it) and the underlying assets along with the cost of the protection.

To date most of the products which have been rolled out in New Zealand have had their performance, or assets, tied to a mainstream index such as the MSCI. However it seems there is also a place for investments which are linked to another index or bundle of assets.

An example of this is Liontamer’s recently closed, COMBIgrow 100+ which is linked to the commodities market. Although figures haven’t been released it appears to have been a good hit with advisers. Some spoken to said they had used it and others say they should have used it.

For the record the COMBIgrow 100+ offered investors 100% capital protection, and a return based on how well a basket of underlying commodities do over the three year life of the fund. The fund also has a sweetener in the form of an “accelerated upside.” What’s an accelerated upside?

Liontamer’s head of investment solutions Janine Starks explains: “ If the price of the basket has risen at maturity, you’ll receive not only 100% of the rise, but an additional amount of acceleration as well.”

The fund was aiming for between 120% and 160% of the rise in the basket. The exact level of acceleration was to decided once the fund closed.

The other issue advisers and investors need to consider is where the protection comes from. To date most of the structured products in New Zealand have used things like equity-linked notes issued by large, highly rated, investment banks such as Barclays and Morgan Stanley. These are essentially an unsecured debt security fully repayable by the issuer at maturity.

While they don’t offer a capital guarantee as such the level of protection is high as the issuer has high credit ratings. One of the things that has appealed to advisers like Commins is that the Liontamer products are reasonably straight-forward and quite transparent.

Often it seems to take some time for advisers to start embracing new products and providers when they come to market. Liontamer, is well-regarded by the planners we spoke to as there people are known and respected in the industry, it has been innovative and it is sticking to its niche – structured investments, unlike some other firms which rolled out products as it seemed like a short-term marketing opportunity.

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