Ms Starks has recently returned to New Zealand after six years in Britain with independent financial advisers Chase de Vere, where capital protected investments were seen as "mainstream" client advice. Capital protected investments, also called structured products, are called that because the returns investors receive and the risks they face are fixed at the investment's beginning. The most common protected investment has two main features
- An investor's capital is fully protected at maturity - you cannot get back less than you put in.
- Investors receive a fixed percentage (the participation rate) of the growth in a share market index. If the participation rate is 80 per cent, the investor receives 80% of the rise in the share market. It is possible to receive 100% of the rise.
Liontamer's investors buy units of a trust, and the pay-off they receive mirrors the performance of equity-linked notes provided by Morgan Stanley, one of the world's largest securities firms, based on its MSCI (Morgan Stanley Capital International) index. The MSCI comprised 1549 companies in 23 countries, with a market capitalisation of $US12.1 trillion. New Zealand is represented by 15 firms as 0.09% of the index's weight.
If the MSCI were to rise, say, from 1000 to 1500 over the term of the fund, an investor who put $10,000 would receive $15,000. If the index dropped below 1000 over that time the investor would still get their initial $10,000 back.
Dividends, which would be earned on the index (now about 2% gross a year), are used to pay for the capital protection. The fund pays a small level of annual income - 1% a year - regardless of what happens to the index.
iontamer's products were the stepping stones between low-interest secured deposits and riskier equity markets and index-driven funds, Ms Starks said. "If you were in a normal actively managed fund and the market went down 40%, you would have paid money to lose money, whereas with us, you would have paid money to get your capital back."
But she warned that although provision existed for investors to sell their units before maturity, through quarterly exemptions, it was unwise, and no reputable adviser would recommend it.
"The capital protection only applies at maturity. In some circumstances, pulling out before maturity may result in big losses."
Today, Liontamer will launch two new products:
- Easygrow 85 offers a return of 85% of the growth of the MSCI index over an eight-year Term with 100% capital protection and a gross annual income of 1% of the investment.
- Supergrow 150 offers a return of 150% of the growth of the MSCI index in the same period, with the same income and is also 100% capital protected, as long as the index does not fall 40% or more. If it does, and has not recovered at maturity, losses are on a one-for-one basis like a standard index fund. The maximum return is capped at 100% return on investment.
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