Tim Samway

Despite decades of evidence to the contrary, investment managers and commentators persist in holding a short term view of the market that’s unlikely to be in the best interests of ordinary investors, says boutique Aussie equities specialist, Hyperion Asset Management.

“The recent falls in the ASX are a case in point, with the extent of the interest and concern around short term movements indicating that some investors and commentators are missing the point,” said Tim Samway, Hyperion’s Managing Director.

“And the point is, with very few exceptions – such as professional traders or speculative investors – equities investing is a long term game. Treating it as anything else is one sure way to erode gains, which is the last thing that most Australians, who just want to build a long term, secure retirement, need.”

Mr Samway said that intensified focus on day-to-day stock movements can prevent investors from achieving their long term investment goals. He cautioned both investors and their advisers to make decisions about their holdings on the basis of quality, long term performance data rather than fluctuations which may seem significant on any given day but, over time, may be meaningless.

“The simple fact is that stocks cannot be expected just to rise and rise. The nature of the market is that they will rise and fall. The purpose of sound investing is to ensure that, over the long term, the rises outweigh the gains. Preferably significantly,” he added.

Mr Samway went on to say that the reasons for the current mood of short termism and market navel-gazing were probably many and varied – but that none of them was sufficient on the evidence to divert investors from a long term path.

“Whether it is the shorter news cycle, the increased sensitivity to market news since the GFC, a heightened sense of awareness about superannuation outcomes – or a combination of these factors, the noise that surrounds this kind of unhelpful and often ill-informed market “analysis” remains just that – noise,” said Mr Samway.

“Instead, investors who want a long term, secure retirement should be focusing on strategies that incorporate a robust investment process that will secure long term sustainable returns and preservation of capital. Ultimately this means investing in growing businesses with superior economics, at an attractive price.”

Mr Samway said that the key factors Hyperion looks for are a high return on equity, a proven track record of success, low gearing and organic, sustainable growth.

“What is frustrating about the current climate is that Hyperion’s focus on the long term is one with which most superior investors and commentators agree. So we thought it time to go on the record and call for some calmer, more informed discussion that may even add genuine value to the debate – and to client portfolios – which is surely what we are all here for.”

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Kevin Bertoli

PM CAPITAL has said that at times of geo-political or environmental disruption it is common for investors and markets to over-react and retreat from conviction positions or abandon a logical investment strategy.

According to the Portfolio Manager of PM CAPITAL’s Emerging Asia Fund, Kevin Bertoli, investors need to look beyond the headlines and daily events and follow a well thought out strategy. Mr Bertoli said analysis of disruptions shows that for the most part, they are short lived, and that short-term events should not cause major concern for long-term objectives.

“The daily news headlines out of China regarding its economic data, or the potential problems in the banking sectors create fear and uncertainty for investors. Geo-political tensions arising from issues like we are seeing in the Ukraine also fall into the same category.”

“However, during such times it pays to hold your nerve and remain focused on longer term outcomes.  This is particularly the case when it comes to emerging markets.”

Mr Bertoli said the reality is that the share market is far more volatile than the underlying businesses it represents, and this is more prevalent in times of crisis.

“Anxiety around geo-political issues will always have a short term impact on the market. However, history shows us that the underlying earnings power of the businesses the market represents, for the most part, are relatively unaffected by these events. The herd mentality of the market has a way of pricing near term events as if they are permanent in nature.”

“The cost of decisions influenced by short term global events can be large if it means an investors sells up or fails to go ahead with a logical strategy of investing based on the quality of the underlying businesses. In fact it is these occasions that investors can actually take advantage of the market underpricing quality companies, and can use this volatility to buy businesses at a discount to intrinsic value.”

“If you have a longer term investment time horizon, events which only impact markets for a temporary time should not sway investment decisions. Investors need to look down the road, and understand that the earnings growth potential of these businesses over the next three to five years is what will drive real share price appreciation.”

Mr Bertoli said the Asian market in particular is very volatile and sensitive to macro events.

“Near term economic data in China has the potential to disappoint. However, if you look deeper and understand the factors driving each individual business it highlights that there are sectors of the economy that are still growing. Consumer spending remains healthy and there are quality businesses driven by this long term positive trend in spending that we want to be long term owners of. It is this growth story we want to exploit over the long term. Geo-politic disruptions will not change this view.”

“At the same time, the financial markets in many Asian economies are under-researched compared to markets in the west and can represent excellent buying opportunities for those investors willing to take a bottom-up approach, which is exactly the PM CAPITAL formula for analysing and investing.”

According to its latest report, this formula has seen the PM CAPITAL Emerging Asia Fund deliver a total return, since inception in 2008, of more than 190%, outstripping its benchmark by more than 170%.

“Look for underlying trends and long-term structural opportunities, such as the rapid rise in consumer consumption in Asia and take a bottom-up approach to access superior risk reward situations that are not widely on offer in Australia, which will also help portfolio diversification.”  Mr Bertoli said.

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Global investment services firm Russell Investments is encouraging investors to think outside term deposits and cash and look for income alternatives such as high dividend paying shares which can boost returns, provide capital growth and be more tax effective.

Russell’s High Dividend Australian Shares ETF (RDV), launched in May 2010, has just completed its first financial year. Despite a difficult market environment, RDV was able to deliver on its goal of earning a higher dividend yield than the broad market, while still maintaining an element of capital growth. It returned 6.2%, with a 5.4% dividend yield, or 6.6% yield once grossed up for franking credits. The yield for the broad market over the same period was 4.3% – over 100 basis points below RDV.

“RDV’s performance shows investors don’t have to sacrifice their capital growth to get a good income return and this should be a reason to diversify out of term deposits or cash,” said Scott Bennett, portfolio manager at Russell Investments. “RDV provides an income return and selects stocks which offer other desirable qualities such as capital growth, so investors can have their cake and eat it too,” said Mr Bennett.

The ETF is based on a specially constructed index, the Russell Australia High Dividend Index, which comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield but also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings.

Diversification and tax considerations key

Russell says investors should not only diversify out of cash but also make sure their equity holdings are diversified to reduce stock specific risk.
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“Investors are increasingly using ETFs as an anchor to a direct equity portfolio as it helps them diversify across stocks, sectors and industries. They then complement this with their own favourite stock picks or managed funds,” said Mr Bennett.
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Investors should also consider how they can take advantage of tax benefits such as franking credits as part of their investment strategy. For example, in the case of ETFs like RDV, franking credits are passed onto the investor. Equity ETFs, like RDV, have naturally lower turnover and can qualify for tax breaks under the CGT discount rules, meaning any realised gains made after a year may be one-third or one-half tax-free to investors. This is further enhanced by the fact the money investors would have used to pay tax each year may stay invested, adding to the growth potential of the investment.

Australian dividends catch eye of overseas investors

High dividend paying Australian equities are becoming popular with international investors who are relying on dividends to fund their income needs as yields from cash instruments in other developed economies remain low.
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“The fact international investors are scouring the Australian market for dividends shows how competitive the yields are in our market,” said Mr Bennett.
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“As we head into the new financial year we want investors to be aware of alternatives to cash investments which provide solid income but don’t require you to forgo other benefits such as capital growth,” Mr Bennett concluded.

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The value of ASX-listed stocks, as measured by the All Ordinaries Index, fell 2.7% during June 2011. Many other major markets also fell during the month including Hong Kong down 5.4%, the US down 1.8%, the UK down 0.7%, and Singapore down 1.2%. In contrast Japan was up 1.3%. Over the course of financial year 2011 (FY11), the All Ordinaries rose 7.7% following a rise of 9.5% in the previous financial year. Market volatility was slightly lower in FY11 (0.6% average daily movements compared to 0.8% in FY10). The rise in Australian equity valuation lagged behind many other major markets with the US up 28.1%, the UK up 20.9%, Hong Kong up 11.3%, and Singapore up 10.0%. This relative performance, in large part, reflected the strong rise in the Australian dollar over the financial year: 26.0% higher against the US dollar, 14.4% higher against the yen and 6.1% higher against the euro. Market conditions helped underpin continued strong secondary equity market trading and a further increase in initial public offering (IPO) activity during FY11. Secondary capital raising activity remained healthy in FY11, although lower than FY10 and well down on the record levels seen during FY09.

Measures of volatility in the Australian equity market were generally restrained during June:

• Current volatility (as measured by the average daily movement in the All Ordinaries Index) was 0.7% in June (May 0.8%).
• Expected future volatility (as measured by the S&P/ASX 200 VIX) rose on average in June to 19.6(compared to 18.4 in May).

Volatility in US markets (S&P 500 Index) rose sharply in June with average daily movements of 0.9% (0.6% inMay). Expectations of future volatility in the US also rose during June.

The value of daily cash market trading in June was steady compared to the previous month’s performance, with an average traded value of $5.3 billion a day. Activity in interest rate futures contracts continued its upward trend, with trading during the June expiry month in the four main contracts (3 and 10 year bonds, 90 day bank bills, and the 30 day cash rate) creating a daily average record of 525,536 interest rate futures contracts traded.

Listings and capital raisings

• In June 2011 there were 13 new listings, 63% higher than the 8 in the previous corresponding period (pcp). There were 160 new listings in FY11, up 72% on 93 in FY10.
• Total listed entities at the end of June 2011 were 2,247, up 3% on the 2,192 a year ago.
• There was $3.3 billion of initial capital raised in June 2011, compared to $226 million in the pcp.
• Secondary capital raisings in June 2011 increased slightly, with $1.6 billion raised, compared to $1.5 billion in the pcp. There was also $1.1 billion of other capital raised, including scrip-for-scrip, in June 2011.
• Total capital raised in June 2011 amounted to $4.9 billion, up 186% on the $1.7 billion raised in the pcp.
• For FY11, total capital raised is down 18% on FY10, with capital raised from IPOs $29.4 billion and from secondary raisings $33.7 billion.

Trading – Cash markets (including equities, interest rates and warrants trades)

The All Ordinaries Index closed at the end of June at 4659.8 points, a fall of 2.7% over the course of the month. Theindex has fallen 3.9% in the calendar year-to-date but was 7.7% higher than a year ago.

• Total cash market trades for June 2011 were 12.8 million, up 8% on the pcp. Total trades for FY11 were 144.3million, up 9% on the pcp.
• Average daily trades for June 2011 of 610,193 were 8% higher than the pcp. Average daily trades for FY11 were570,440, up 9% on the pcp.
• Total cash market traded value was $111.2 billion in June 2011, up 2% on the pcp. The average daily value traded was $5.3 billion in June 2011, also up 2% on the pcp. Total value traded for FY11 was $1.3 trillion, down 1% on the pcp, corresponding to an average daily value of $5.3 billion, down 1% on the pcp.
• In June 2011 the average value per trade was $8,681, down 6% on the pcp of $9,266. The percentage of traded value crossed was 24% (28% pcp).

Trading – Financial derivatives markets

• There was a continuation of very strong trading activity in the benchmark interest rate contracts in June (an expiry month), including record monthly volume in:
  • 30 day cash rate futures (885,640 contracts), 8% higher than the previous record set in May 2011.
  • 90 day bank bill futures (2,879,948 contracts), 7% higher than the previous record set in August 2007.
  • 3 year treasury bond futures (5,365,381 contracts), 15% higher than the previous record set in March 2011.
• Volatility in the short end of the yield curve drove activity in the 30 day interbank futures and 90 day bank bill futures as the market’s view on future changes in the official cash rate by the RBA changed. At the beginning of the month, market expectations were for another 25 basis points increase in the official cash rate by mid next year. However,with economic data signalling a weaker domestic economy and concerns over the euro debt crisis deepening,market expectations turned to the probability of a rate cut in the second half of 2011.
• Equity derivatives volume (excluding the ASX SPI 200) for June 2011 was 16.2 million contracts. Measuring volumes on the prior contract size in order to allow for a meaningful comparison, results in equity derivatives volume (excluding the ASX SPI 200) for June 2011 of 2.5 million contracts. This represents a 26% increase in total volumes compared to the pcp, with a daily average of 118,559 contracts, up 26% on pcp. Total volumes for FY11(based on the prior contract size) were 23.1 million contracts corresponding to an average daily volume of 91,495contracts, both up 7% on the pcp.
• Total futures and options on futures contracts volume (excluding equity derivatives and CFDs) for June 2011 was a record 13.6 million, up 71% on the pcp, with a notional value of $6.6 trillion. Average daily contracts volume during June 2011 of 616,781 was also up 71% on the pcp. Total volumes for FY11 were a record 98.0 million contracts,corresponding to an average daily volume of 382,687 contracts, both up 29% on the pcp.
• A total of 5,937 ASX CFD trades were transacted in June 2011, comprising a volume of 15.3 million contracts. The total notional value of all CFD trades for June was $204.2 million, a decrease of 26% on the pcp, while the value of CFD open interest at the end of June was $87.1 million, a decrease of 27% on the pcp. Total ASX CFD trades in FY11 were 92,905, down 25% on FY10, comprising 176.5 million contracts, up 15%, and with a notional value of $3.5 billion, down 4%.

Trading – Energy and agricultural derivatives markets

• A total of 10,776 Australian electricity futures and options contracts were traded in June 2011, a decrease of 28% on the pcp. Total open interest was 46,360 contracts at the end of June 2011.
• The ASX grain futures and options market traded 33,518 contracts (670,360 tonnes) during the month, up 42% on the pcp. Open interest at the end of June 2011 of 108,774 futures contracts represents 2.17 million tonnes of Australian grain and oilseed. The total volume traded for FY11 was 483,273 contracts (9,665,460 tonnes), a record year representing 24% growth on FY10.

ASX CLEARING CORPORATION

Clearing

All on-market trades (equities and derivatives markets) are novated by ASX’s two central counterparty clearing subsidiaries, ASX Clear and ASX Clear (Futures), which act as counterparties to those trades and replace bilateral counterparty exposures.

• Total margins (including additional margins held against stress testing exposures and concentrated large positions)averaged $3.0 billion during June 2011 (including excess cash collateral but excluding equity securities lodged in excess of the margin requirement), with cash margins lodged averaging $2.5 billion.
• There were intra-day margin calls made on four separate days in June 2011 totalling $4.6 million compared to $2.9million of intra-day margin calls in May 2011.

ASX SETTLEMENT CORPORATION

ASX Settlement

There were no disruptions to the completion of batch settlement in the equities market during June 2011.

• Total equity settlement delivery fail rate averaged 0.65% per day during June 2011, a small increase on the 0.5% rate for May 2011.

Austraclear Settlement

There were no disruptions to the Austraclear settlement sessions during June 2011.

• The levels of total debt holdings in Austraclear decreased over the course of June by $14.7 billion to $1.2 trillion. During June electronic certificates of deposit decreased by $6.9 billion, treasury bonds decreased by $5.1 billion,semi-government bonds decreased by $3.6 billion and corporate bonds decreased by $3.5 billion. Treasury notes increased by $4.3 billion and all other holdings increased by $0.1 billion in total in June.

A separate ASX Compliance activity report for June 2011 has also been released today.

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One of Australia’s most successful diversified fund managers, Centuria Capital Limited (formerly Over Fifty Group Limited) announced today that Peter McDonagh has joined as Head of Reverse Mortgages.

With almost 30 years experience within the financial services industry, Mr McDonagh has extensive expertise in managing mortgage services teams and high-volume mortgage administration operations with up to 90 staff.

Prior to joining Centuria Capital, Mr McDonagh worked as the Performance Improvement & Quality Advisor in National Australia Bank’s (NAB) Group Business Services. Previous to this, he was the Funding Coordinator HomeSide Service Experience at NAB.

Mr McDonagh has also held senior roles within CBA’s Mortgage Services Business in Melbourne over many years and more recently held a contact role as Team Leader of Exceptions Processing at Australia Post.
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Matthew Coy, CFO of Centuria Capital said of the appointment: “As a business we pride ourselves on the strength of our team and also on our diversified offering. Peter’s appointment further demonstrates our commitment to this area of the business and we are pleased to have someone of Peter’s calibre join the team.”
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The Reverse Mortgages Business at Centuria currently manages 2,300 loans and has an aggregate size of mortgage book of $195 million. The average loan value is $85,000 with gearing equating to less than 20 per cent on current valuations.
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New mortgage origination has been suspended, however the group is managing all existing loans and honouring previously approved limits within them.
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Mr McDonagh will be based in the Melbourne office.

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Last year, the government announced a new tax system for managed investment trusts (MITs) that will reduce complexity, increase certainty and minimise compliance costs for MITs and their investors.  In April, a further announcement was made to defer the start date of the new laws from 1 July 2011 to 1 July 2012.  The government also announced two minor changes to the previously announced measure to facilitate the entry of MITs into the new tax system.

The new tax system will be largely based on recommendations arising from the Board of Taxation review of the taxation arrangements applying to MITs.

Key aspects of the new tax system will be:

• an elective ‘attribution’ system of taxation that will replace the present entitlement system and provide that investors are taxed only on the income that the trustee allocates to them on a fair and reasonable basis, consistent with their entitlements under the trust deed or the trust’s constituent documents
• implementation of rules dealing with ‘under’ and ‘over’ distributions that are within a 5% cap, so that trustees are not required to reissue statements and investors are not required to revisit tax returns removal of double taxation that arises in certain circumstances
• abolition of Division 6B of the Income Tax Assessment Act 1936 which relates to corporate unit trusts.

Click for more information about the taxation of MITs.

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The TOFA reforms were first announced in the 1992 budget and were later taken up by the Review of Business Taxation. The review’s final report – A Tax System Redesigned (the Ralph report) – made various recommendations about the taxation of financial arrangements.

While some of the recommendations made in the Ralph report were rejected, several of the concepts proposed have been implemented progressively over the years. Stages one and two of these reforms were introduced in 2001 and 2003 respectively.

The recently introduced Division 230 implements stages three and four of the TOFA reforms.

TOFA is intended to reduce the influence of tax considerations on how financial arrangements are structured, emphasising other factors, such as risk, when making financing decisions.

Although TOFA provides a comprehensive and overarching framework to address the economic substance of arrangements, it is not an exclusive code for the taxation of gains and losses from financial arrangements.

Unless otherwise specified, other provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997) still deal with gains or losses from financial arrangements where TOFA does not.

(All legislative references in this guide are to provisions of the ITAA 1997 unless otherwise specified.)

Problems with how tax law applied to financial arrangements before TOFA

Before the TOFA reforms, the income tax law placed too much emphasis on legal form rather than the economic substance in the context of financial arrangements. This resulted in inconsistencies between the tax treatments of different types of transactions that have similar economic substance.
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Also, the inflexible, form-based rules did not keep pace with financial innovation, creating opportunities for tax deferral and tax arbitrage.
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Income and deductions from financial arrangements were often dealt with on a realisation basis, although some income and deductions from financial arrangements were dealt with on an accruals basis. This meant that the income tax law did not adequately take into account the time value of money or provide for an appropriate allocation of income over time.
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Previously, the way tax law applied to financial arrangements resulted in tax-timing and tax-status mismatches between revenue and capital items. Also, the law did not address the tax-timing treatment of emerging hybrid instruments or new structured products, including those with fixed and contingent returns.
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The piecemeal approach to amending the law to address a new product or fix a problem resulted in complex law that was a combination of both general and specific provisions.

Click to view more details about the tax treatment of gains and losses, hedging and general information about the TOFA reforms visit the ATO website

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The growing demand for transparency, increased liquidity, fee structure changes, and lower stock-market beta products have increased competition in the sector. The classic fund of hedge fund (FOHF) model—offering investors “access” to a diversifying set of alpha managers, albeit at a higher cost and with reduced liquidity—is being challenged, especially where performance has been poor.

“During the GFC, many multi-manager/FOHF products failed to deliver absolute returns or diversifying protection from equity market sell-offs, raising significant doubts in investors’ minds as to the core value premise of the format. High profile due diligence failures compounded its unattractiveness, along with relatively high fee structures. In addition, some products using single-manager multi-strategy and active multi-manager models that incorporate tactical exchange-traded fund (ETF) and index-like allocations have outperformed the “alpha manager” FOHF model,” said S&P Fund Services analyst Michael Armitage.

He added: “We view the “allocate and pray” feeder FOHF model as dead. In future, we expect offerings that fail to compete in terms of active oversight, transparent risk management, product-level liquidity, and competitive fees to lose out to the growing competition from newer funds designed from the ground-up to deliver on these features. There were several upgrades in this year’s sector review as we recognised funds with some of these product advantages and gained conviction in other offerings that had shown extended track records since our previous reviews.”

The Alternative Strategies – Multi Asset – Diversified Multi-Manager And Multi Asset – Multi-Strategy Sector Report published today, together with reports for all funds rated as part of the review, are available on S&P’s subscriber website www.fundsinsights.com

We also withdrew our ratings on the following four headline funds:

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• Improve existing products before creating new
• Focus on solutions which deliver targeted outcomes
• Human judgement a key enabler
• Third party administrators a partner for innovation

An annual, independent study released today by CREATE-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors, finds that while innovation is deemed to have produced mixed results over the last decade, asset owners have retained an appetite for innovation, but only where specific principles are met.

The report, entitled Investment Innovations, raising the bar, surveyed over 500 respondents from pension plans, asset managers, consultants, administrators and distributors from 30 countries with a combined AUM of over US$29 trillion. It asked respondents which financial innovations they believe have worked, which haven’t, what should be the main thrust of innovations over the next three years and what specific improvements and actions they want to see related to these innovations.

The headline findings cite 2008 as a watershed for financial innovation with many of the new products, asset classes, return enhancing tools and asset allocation techniques developed in preceding decades viewed as becoming increasingly fallible, as the financial crisis developed. This prompted a dangerous mismatch in expectations between asset managers, advisors and their clients. Now, client engagement is rising again and the report presents a call to action for asset managers and owners to work more closely together to add value in the innovation process, better aligning their interests and expectations for mutual benefit.

Prof. Amin Rajan, CEO of CREATE-Research and the study’s author, said:

“The global economy is still in a state of uncertainty and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry. Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions which deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain traction.”
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Key findings of the report include:
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• Some 35 innovations saw significant adoption in the last decade. 57% of respondents said that emerging markets equities delivered most value while leverage recorded the worst performance, according to 40% of respondents
• 50% of pension plans believe a switch from products to solutions will be a key driver of innovation over the next 3 years
• A mismatch exists between asset managers’ and clients’ expectations – 39% of the clients think further product innovation will deliver genuine value over the next three years versus 64% of the asset managers
• Lack of client engagement is viewed as a major cause of failed innovation: 73% of pension funds surveyed are only rarely/occasionally engaged when asset managers innovate their financial products
• 88% of asset managers foresee further product innovations over the next three years, although of these, 52% believe they will be incremental, improving existing innovations, rather than creating new ones

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Grant Forster, CEO of Principal Global Investors Australia, said: “The findings show that lack of client engagement is viewed by the industry as a major factor behind failed innovation. First and foremost, there should be a direct link between innovation and client need. That means building tailored investment solutions that are relevant and additive to clients’ business objectives, rather than creating copy cat products or those which rely on financial engineering. We believe that our multi-boutique model provides a strong platform to execute this strategy, enabling a deep knowledge of products combined with an ideas-centric, client driven approach.”
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The report finds that pension plans increasingly want to see an overlay of human insight, foresight and empathy in the investment process, as quant models can only deal with historical data. This is highlighted by the failure of existing risk models during the last two vicious bear markets.
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The report also highlights that product quality, better alignment and operational excellence will dictate the thrust of innovation in the near term. Asset managers intend to adopt more robust processes for promoting new ideas and stress-testing the resulting products. They also expect to rely more on their administrators in order to focus on their own core capabilities and continue an upward advance in the investment value chain.
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Neeraj Sahai, Global Head of Citi Securities and Fund Services, said: “Underpinning the drive for innovation is the need for ongoing operational excellence. The findings show that looking ahead over the next several years, market participants are focusing on becoming more efficient, reducing risk and modernising the back and middle office, in partnership with administrators. This drive will be a key differentiator for distinguishing the leaders and the laggards of the new era of innovation.”
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Click to download the full report –  Investment Innovations 2011

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Commonwealth Bank Vantage+ provides enhanced or leveraged exposure to the price returns performance of the S&P/ASX 200 index over a five-year period. Investors have 5.3 times leveraged exposure to the index capped at an 80% index gain (equating to a maximum return of 323% over the five-year term).

S&P Fund Services analyst Rodney Lay said: “Based on our back-tested and Monte Carlo analysis, we believe the expected return profile adequately compensates investors. Historical back-testing generated average returns of 15.5% p.a. A loss was recorded on 24% of occasions. The Monte Carlo analysis we undertook generated similar results, albeit with a very slightly higher probability of loss.”

“In terms of suitability, we believe investors should have a solid outlook for domestic equities as well as be prepared to incur a significant loss on invested capital. Due to the product’s very high risk-return profile, an investor’s investment amount is totally at risk, so it is suitable for only a small percentage of an overall portfolio. This is a product where a very small part of an overall portfolio can provide five times the exposure to the equities market,” added Mr. Lay.

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