KNOCKOUT: Creating coupons from equities
KNOCKOUT Series 1 is a new fund brought to you by Liontamer Investments. It's the first launch of a knockout fund in the New Zealand market – a concept that has proven hugely popular with investors all across Europe. As with Liontamer's other funds, it is based on market performance, but this time the objective is to provide a high potential coupon, which will be paid even if a particular sharemarket has low or zero growth.
Friday, August 8th 2008, 4:18PM
Plus there is an opportunity for the fund to mature early, in each year of the five year term. Liontamer designed KNOCKOUT Series 1 specifically for New Zealand investors as a new and exciting way to potentially enhance portfolio returns in an otherwise low return environment.
How does it work?
Investors have the potential to earn a 12% coupon rate per
annum which builds up over the five year term of the investment
(not compounded). Payment of the coupon is dependent on
the performance of a basket of Europe's 50 leading blue chip
companies, as measured by the Dow Jones EURO STOXX 50
Index. If the level of the index is the same or higher than its
starting level in a year's time, investors will earn the 12% coupon.
Even better, the fund will close early (that's the 'knockout') with
a full return of capital.
If the index doesn't maintain its value, investors simply stay invested for another year and the same test applies. Each year Liontamer compares the index to its starting level on the anniversary of the fund. Investors get five opportunities (one each year) to earn the high coupon and achieve a knockout (maturity of the fund). If this happens at the end of Year 2 the coupon jumps to 24%, if it happens at the end of Year 3, it's a 36% coupon, Year 4 is 48% and Year 5 is 60%. For each year they stay invested, the coupon jumps up in value to compensate for the longer term.
Jumper units
KNOCKOUT Series 1 has a great new feature called 'jumper
units'. As described above, if the fund doesn't close early, investors
simply stay in for another year. The coupon investors could earn
at the end of each year jumps up in value by 12%, reaching the
maximum of 60% in Year 5.
Investors need to be prepared to
stay invested for the full five years; however, the fund will actually
mature as soon as they are eligible for a coupon payment.
Jumper example
For simplicity, let's say the sharemarket index starts at a level
of 100 when the fund starts:
In this example, the index is below its starting level at the end
of Years 1 and 2, so there is no early maturity or coupon paid. In
Year 3 it rises to a higher level triggering a coupon payment of
36% and a full return of capital to investors.
What level of capital protection is there?
As an example, if the index continuously falls
in value, to a low point of –40% at the end of Year 5, investors
still receive a full return of capital (but no coupon payment). If
the index breaks the 50% safety-net during the term, the return
of capital tracks the performance of the index, just like any
ordinary sharemarket tracker fund. Any loss mirrors the loss in
the index.
Who provides the capital protection?
With any form of capital protection, the financial strength of
the bank providing it is important. This is because the bank is
legally liable to repay the investment amount to the fund if the
conditions of the protection are met. It is very important for
investors to ensure the bank has a strong credit rating. In this
case, KBC Bank has an AA- credit rating from Standard &
Poor's (similar to most well-known NZ banks).
How will the fund be taxed?
Those
who qualify as de minimis investors (i.e. have $50,000 or less
invested in overseas shares) may derive a tax-free capital gain on
the sale of their units to Liontamer on the maturity (including
early maturity) of the fund, depending on their individual
circumstances.
As an example, if the 12% coupon is paid at the end of the first
year, we have calculated the gross return required on a one year
deposit (on an investment which is not equity-linked) to match this
coupon (assuming the FDR method is applied by non-de minimis
investors in the year the coupon is paid):
Important note: For taxation advice relevant to your personal
circumstances, we strongly recommend that you talk to a tax adviser.
About the sharemarket index
Full details are contained in the Investment Statement and registered Prospectus,
provided by Liontamer Investment Management Pty Ltd (ABN 23 104 174 325).
Copies can be obtained from Liontamer Adviser Relations on 0800 210 450.
*100% capital protected where an Early Maturity Event occurs, and at final
maturity unless the Final Index Level is less than the Starting Index Level and the
Index Level has fallen below the Capital Protection Threshold (50% of the Starting
Index Level) on any Observation Date. There is a more detailed description of
the conditional capital protection in the Investment Statement (including an
explanation of the terms used above) and the limited circumstances when capital
protection may not be available.
# None of KBC Bank NV, KBC Asset Management NV or KBC Group NV
guarantees repayment of the investment amount or any returns on the investment
nor do any of them accept any liability to investors. However, as the Fund Asset
Provider, KBC Bank NV is legally liable to pay to Liontamer as trustee of the fund
certain amounts. Neither KBC Group NV nor any other member of the KBC Group
guarantees the obligations of KBC Bank NV.
Order Investment Statements and fact sheets on
0800 210 450
or email adviser_relations@liontamer.com Special Offers
The jumper units also have an excellent level of capital
protection in place*. Investors stay fully protected, so long as the
sharemarket index remains at, or above, half of its initial starting
level (measured at monthly observation points). This provides
substantial protection from falls of up to 50% in the index from
the starting level.
This fund will own investments that are capital protected by
KBC Bank, who is the 'Fund Asset Provider'. Capital protection
is conditional on the index remaining at, or above, half its initial
starting level at each monthly observation point during the term.
As at 31 March 2008
Liontamer believes that the determination which it has obtained
from the IRD allows investors in its trusts (which meet certain
criteria) to apply the Fair Dividend Rate (FDR) method to
calculate their taxable income from their investment. Generally,
the FDR method applies to investors with more than $50,000
invested in offshore equity investments. If you choose to use this
method, tax is payable each year on a maximum amount of 5%
of the total market value of your offshore share portfolio.
The coupon return is linked to a European sharemarket index;
the Dow Jones EURO STOXX 50 Index. This is the leading blue
chip index for Western Europe, and provides a good representation
of the leading companies in that area. The index covers 50 stocks
from 12 European countries: Austria, Belgium, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal and Spain. It currently includes such well-known giants as
Nokia, AXA, L'Oreal, Suez, Total, and Unilever.
Liontamer's parent company KBC Asset Management
(KBCAM)# has a lot of experience in European markets and
the company's main offices are based in Belgium, in the heart of
Europe. Based on KBC's experience in Europe and extensive
regional research, we believe that the medium-term outlook of the
European sharemarkets is positive.
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