Kiwis flock to Liontamer

The Press | Tuesday, 19 June 2007

Some investments come with a money-back guarantee. But do you get value from 'capital-protected' funds like Liontamer and OM-IP? John McCrone investigates.

Most people like the idea of having their cake and eating it too. So it is no surprise that Liontamer capital-protected funds have gone down a treat.

This is the proposition. You invest a $5000 minimum stake for five years. At the end of five years you collect back the $5000. That is guaranteed, even if the stock market crashes.

But hopefully the market will have gone up. And then you will earn 1.5 times the percentage increase. So if the markets rise 30 per cent over five years (hardly unreasonable), you make 45 per cent – $5000 turns into $7250.

A little more appetite for risk? Liontamer has a second option where your initial stake is 90 per cent protected for a four-year lock-in period. And the earnings multiplier becomes two.

If the markets bomb, you are guaranteed to get $4500 back. But for every 1 per cent of growth, you now get 2 per cent back.

How do they do it? No losses and extra juice on any wins. Little wonder that mum-and-dad investors have been piling into Liontamer since it was launched in 2003 by seasoned traders Laetitia Peterson and Janine Starks.

About 7000 people have $200 million tied up in 23 Liontamer funds. Last month a Belgian bank took a 51 per cent stake in this Kiwi success story. And now the pair are expanding their business to include custom-built Liontamers for small groups of investors with a few million to spare.

It is not just Liontamer pulling in the punters with capital-protected investments. The 10-year-old OM-IP series offered by Australia's Man Investments continues to sell well here.

And this year there has been a surge of new entries. Fidelity Life launched its Fidelity Capital Guaranteed Bond, Goldman Sachs JBWere crossed the ditch with its Keystone Fund series, and Westpac Bank has announced it plans a capital-protected KiwiSaver option.

Overseas, capital-protected funds based on "structured" investments are already a huge story. Yet they get mixed reviews.

Critics like Wellington investment manager Gareth Morgan are instinctively suspicious, saying these highly packaged deals play on the hopes and fears of naive investors.

For a start, the insurance they offer is not quite what it seems. Take inflation into account, chewing away at the value of a dollar by perhaps 2 per cent a year, and getting only 100 per cent of your money back after five years is really the equivalent of stomaching a 10 per cent loss.

Then the baffling complexity of the products gives the providers every chance to stack them high with fees, while also concealing the level of risk being taken to achieve the advertised rewards.

So let's go under the covers of a Liontamer fund to see how it works.

The latest Liontamer fund is the Global Series 3, which opened to investors in May and closes in July. Ms Starks, who spent six years developing structured products for Chase de Vere in Britain before returning to New Zealand to set up Liontamer with Ms Peterson, says each Liontamer fund is tied to some particular market story. For example, last year's Global Series 2 invested in 10 global brands – such as Nestle, Pepsi, Siemens and L'Oreal – that could be expected to benefit from the rise of consumerism in emerging Asian economies.

Other Liontamers have sold themselves on hopes of a rebounding Japanese stock market, or rising commodity prices.

Ms Starks says future Liontamers may be even more narrowly focused. She says with water shortages looming as a world- wide issue, she likes the idea of a fund focusing on water infrastructure firms.

Global Series 3 happens to be a broad- based investment. It will simply make a "spread of the market" play by averaging the return of five international stock market indices, including the United States, Britain and Hong Kong.

The fee structure for Liontamers is standard across the range and is what you might expect for a packaged product of its kind. There is an upfront fee of 3 per cent to enter, topped up by a 2 per cent brokerage fee, which is not so obvious, as it is paid out indirectly.

With financial advisers standing to take 5 per cent of the money being paid into a fund, there should usually be room for negotiation for those bold enough to ask.

Then, completely hidden from the investor, is whatever Liontamer makes in fees for putting the deal together.

Ms Starks admits that this is where Liontamer turns a dollar. However, she says the comparative simplicity of its structured approach means that it suffers a lot less fees drag than many other offerings in the market.

What is the deal then? Well, it breaks into two parts – an insurance policy and a market bet.

Ms Starks explains that for every $100 invested, Liontamer will set aside $70 and put it into a low-risk "zero coupon" bond. This underwrites the 100 per cent money- back guarantee. Over the five-year life of the fund, interest on the fixed-term bond will build so that it is worth exactly $100.

With the other $30, Liontamer buys a call option.

This gives the right to buy a basket of named stocks in five years at today's prices. So it is a way of getting profits from future market increases without owning the shares.

At the moment, $20 can buy you 100 per cent exposure to the future growth in the global indices, Ms Starks says. You get all the profit, regardless of whether the markets rise 1 per cent or 1000 per cent over the five years. Of course, with $30 to spend, you can buy yourself 150 per cent exposure, so taking 1.5 times the profit. This is where the extra juice comes from.

Ms Starks says for investors happy to insure only 90 per cent of their original stake, then the cost of the guarantee falls to the point where a four-year bond can be bought for $60, leaving $40 to be spent on call options, thus delivering double the market return.

This is the beauty of structured products, Ms Starks says. You may pay extra fees, but every dollar is being made to do more work.

THE GLOBAL Series 3 fund is benefiting from unusually favourable market conditions, she says.

First up, the high interest rates causing such woes for the New Zealand economy have also driven the cost of zero coupon bonds to new lows, leaving more dollars to go into the call option.

Ms Starks says call options also offer singular value this year. The global markets have had a good run, and low volatility has brought down the price of derivative-style market bets.

Earlier Liontamer funds had to juggle the figures rather differently. They had to lock in investors for up to seven years for the underpinning bond to earn its money back. Or they left only enough free cash to purchase an 85 per cent exposure to the market – giving a not quite so exciting earnings multiplier of 0.85.

"We are right in the sweetspot with things at the moment. We've never been able to offer this much before," Ms Starks says.

The Liontamer story sounds all upside. So why are some experts still sniffy about such capital-protected products?

Hamilton financial adviser Nigel Tate, a member of the Lodestar group and board member of the Institute of Financial Advisers, says though he does not sell the Liontamer products, this is mainly because they have been around only a few years and have not got a sufficient track record.

Mr Tate says there have been many capital-protected products in the past that were indeed dogs, being high-fee vehicles tied to poor investments. Liontamer does not look like one of those.

But the funds are packaged to appeal to naive investors. Mr Tate says would-be customers should start by forgetting about the capital guarantees. Over a five-year period, any competently constructed investment portfolio ought to perform well enough to make this kind of protection an unneeded luxury. "The fact that it's got the capital protection is a bonus. But the chances of it being used are slim. So you wouldn't base your decision on it."

Instead, Mr Tate says investors should concentrate on the quality of the market bet and whether it fits into their particular investment strategy. Here Liontamer might well offer something for the smaller investor. For those wanting exposure to niche markets like the emerging economies, or access to a global index tracker fund, a Liontamer deal could prove a cost- effective route.

Colin Austin, of Auckland financial adviser DecisionMakers, agrees.

DecisionMakers does sell Liontamer. But Mr Austin says a sophisticated investor would treat the capital-protection element as largely a marketing gimmick. There are other ways of achieving the same ends without becoming locked into a fixed-term product.

However, such funds can prove to be a convenient way to diversify. And perhaps the money-back guarantee gives mum- and- dad investors the confidence to enter what they see as riskier terrain.

Investors just need to remember that 1.5 times, or two times, nothing is still nothing, Mr Austin says. So forget the slick packaging. Focus only on the worth of the underlying investment.