Structured products are by no means a new concept but for many South African investors this may seem an unfamiliar investment – particularly in a world where unit trusts are common.
However, specialist bank and asset manager Investec has a structured products team that has launched an investment product that offers South African investors the opportunity to potentially generate double-digit rand returns linked to the growth of the S&P 500 index.
An investment in the Investec S&P 500 Rand Autocall provides investors with capital protection, and the opportunity to earn up to 70% (14% per annum) return over the full five-year term, even if the index has only shown a small gain.
So what is it all about?
This product gives South Africans exposure to the US economy through the S&P 500. Returns are however made in rands. This investment is not accessible to everyone. You have to invest a minimum of R50, 000 in the S&P 500 Rand Autocall product and if you want to invest more you have do to so in R10,000 denominations.
Investments can be made through your IFA or stockbroker. Investors will pay an upfront fee of 1.25% in year one and 0.75% in years two and three (incl. VAT), which will be paid to the broker.
The Investec S&P 500 Rand Autocall is a five-year product; however, it can expire early (automatically called or Autocall) if the index level closes higher on any of the automatic redemption dates (paying 42% after three, 56% after four or 70% after five years respectively). At the earliest of these points, the investment will redeem early, and will pay back the investors’ initial investment plus a return of 14% per annum.
How is my capital protected?
There’s 100% downside protection in rands up to a point. Provided the index does not fall by 40% or more at maturity (the final valuation date) you will get 100% of your money back. If, however, it does fall more than 40% come valuation time then you will lose money.
Investec tested the past performance of the S&P 500 from 1928 to 2016 and according to its records the product would have given you a positive return after year three, 75.9% of the time, a positive return after year four, 4.4% of the time and a positive return at maturity (year five) 4.9% of the time.
“Interestingly,” said Brian McMillan, head of retail sales at Investec Structured Products, “when we tested the S&P 500 Rand Autocall over the last 75 years we found that the product would have autocalled after three years 83.1% of the time.”
What tax will you pay?
If you decide to sell the before a period of three years has elapsed in you will be subject to paying income tax on any profits. If you keep your investment for longer than three years, you will only be subject to paying capital gains tax.
Is it the right time to have exposure to the US market in any way?
Well, Investec points out that the US financial conditions have eased since January 2016 on account of a weaker US dollar, a narrowing of credit spreads and a rise in the S&P 500. Further, the US economy's strengths, jobs and low interest rates have supported the equity markets and S&P 500 in particular.
Investec further reassures that volatility (the ability for shares to go up and down) in the stock market has also been significantly lower than levels seen over the turbulent first few weeks of the year, this is largely due to Fed dovishness.
You’re effectively taking a gamble that the S&P 500 will be up in three to five years’ time at a certain point, said Will Keevy a financial planner and head of insurance at InsuranceBusters. “This is a bullish product and structured products do have a place in investors’ portfolios. However, investors have got to remember that this product is basically a tracker of the S&P 500 and that they are not directly invested in it. This 42% return is not a guarantee and this is the maximum growth that Investec will give you.”
“The S&P 500 is the largest index in the world and gives a fair representation of the US market. The US is also one of the few major economies in the world to have seen positive stock market growth so far this year. The US economy has again demonstrated its resilience in recent years, and linking this product to the S&P 500 gives investors the potential to earn attractive returns,” explained McMillan.
How is my capital protected?
In order for investors to experience a capital loss, the S&P 500 would have to end down by more than 40% at the end of the five-year term. While history cannot predict the future, investors can take comfort from the fact that this capital protection would have been sufficient to shield investors from any losses if they had held this product over the last 75 years.
A further built-in product feature is an automatic redemption - known as an “Autocall” – which acts as a capital protection mechanism as well as a coupon enabler that can significantly amplify returns in various scenarios.
The S&P 500 Rand Autocall is open for investment and will close on Thursday 14 July 2016. The product matures on 20 July 2021 and automatic redemption dates are set for 22 July 2019 or 20 July 2020. For more information visit www.investec.co.za/autocall
Handy investment tip: If you cannot afford to put R50, 000 into a structured product with Investec you can always invest in a unit trust. Click here to apply through Justmoney.