INstreet Synthetic Calls
Investors looking for leveraged access to investments could consider INstreet’s Link Series. In essence, these operate in the same way as a 2 year call option, ie providing you with $100k of exposure for $11,800 ($11,075 through Wealth Focus).
On this basis, if the underlying strategy returns 20% over 2 years, investors will receive $20k on their $11k outlay.
One strategy is to structure your own 2 year capital protected product by putting $88k into a 2 year term deposit, which at 6.4%pa will yield $100,750, and investing $11k into Link Series.
Another interesting slant on this type of investment has been to consider the $11k the same as paying a 5.5%pa interest for a $100k loan.
We note that JB Global use a relatively similar strategy in marketing their “100% Investment Loan”
It is also worth noting that these structures are considered securities and not derivatives, and are therefore eligible for investment by nearly all SMSFs. INstreet note that around 90% of their applications are from SMSFs!
We expect to see more of these types of structures emerge as market confidence returns and SMSFs become more sophisticated.
INstreet currently offers access to a 2 or 3 year investment over the ASX 200, a 2 year strategy over a trend seeking absolute return fund and a 1 year strategy that allows investors to benefit from a fall in the ASX 200.
HFA Octane Asia
HFA have recently provided investors in the Octane Asia Fund with an option to re-participate in market returns. This is through a synthetic call option with UBS, asking investors to pay $0.14 for each $1 exposure (payable over 4 years).
Although we welcome this approach over that taken by Perpetual in their re-participation offer last year, we feel that investors considering this would be better served to look at INstreet’s Link ARC Series 2. The UBS option has a very long averaging period on entry and exit, leaving investors only 2 years where returns are not being eaten away by averaging.
The real benefit for clients is by having the cost spread out over 4 years, they can re-participate in stockmarket returns for relatively little up-front outlay.
Our view is if you can afford it, consider some of the alternatives out there such as INstreet’s Link Series. If you can’t UBS’s offer is better than doing nothing.
Cashing in and walking away with this product does not look to be a viable option at this stage as the break costs are considerable. See our guide to CPPI Redemption.