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Investec S&P500 Growth ESP |
19 June 2012. Somebody asked me about the Investec S&P500 Growth ESP - I don't have a complete understanding of the derivative instruments being used to generate it, but based on what I've seen I'm not going to take part in the initial listing of the Investec S&P500 Growth ESP (note the careful way I worded that - I'm leaving the door open to investing post-listing, if the value falls sufficiently - although that may introduce additional tax issues, if my holding period is less than 3 years):
You lose out on all the dividends which over a 4 year term (Investec retain the right to extend the 3.5 year term by 6 months) would amount to some 8% of your investment (at a 2% p.a. dividend yield).
You don't receive the full benefit of Rand depreciation. It sounds like only the upside growth is exposed to USD/ZAR depreciation (of course the opposite applies to ZAR strength). As nominal expected returns are lower in North America, this significantly reduces expected returns.
I sleep better at night when I'm not gearing up investments (borrowing money in order to invest).
It does offer a capital guarantee in 4 years time, but it comes at too high a price for me (loss of dividends & reduced exposure to the Rand/Dollar exchange rate). My investment horizon is 30 to 50 years, so short-term capital guarantees don't hold much value for me. Anyway, at a 5% inflation rate the majority of decent investments should (although are NOT guaranteed to) retain their capital value over a 4 year term, in fact you need to achieve a 22% return just to break even in real terms.
It sounds like you lose out on some interest at the end of the term (basically they're selling off over the last 4 months to pay out at the average index level over the last 4 months, but then what happens to the interest on the capital realised and able to be placed into a money market account?)
I'm not saying it wont outperform - even investments which face structural headwinds can outperform when the dice rolls in their favour - but it's the kind of investment I avoid.
From their website, the Investec S&P500 Growth ESP offers (this is a summary of what I perceive to be important, navigate to the Investec site for details):
"100% capital guarantee in Rand at maturity". Who is guaranteeing this - it sounds like Investec Bank Limited?
"At least 110% of the growth (in US dollars) of the S&P500 index with no cap". If the S&P500 is negative then do you get 110% of the negative growth?
"The final index level will be calculated as the average of the closing level of the index on the last business day of each of the last 4 months prior"
But you get no dividends (dividend yield on the 18th May 2012 was 2.0%).
"The instrument represents the investor's rights to a parcel of MSCI USA index ETFs as well as a put operation over these ETFs where the put option is designed to secure the investor's capital at expiry with performance linked to the S&P500 index. As compensation for the capital protection, the investor foregoes any right to receive distributions on the ETFs during the term of the S&P500 Growth ESP". (From readers' comments it sounds like there's more to it than just this - I don't have a complete understanding of the derivative instruments being used to generate the return).
It seems that there is a degree of "gearing", or borrowing money in order to multiply the capital growth (positive or negative, I assume).
The S&P500 Growth ESP is going to be an inward listed investment on the JSE. It has a term of 3.5 years, with Investec reserving the right to extend the term by a maximum of 6 months, should market conditions necessitate.
Offer closing date is the 6th July 2012 & the trade date is 11th July 2012.
As it is listed on the JSE, one can sell the instrument at market prices, although one has no idea what that market-related price will be.
The advisor receives a 0.5% upfront fee and 0.75% is paid annually in advance for the first 3 years (including VAT).
These can change over time. "The definition of a "Qualifying Share" in section 9C of the Income Tax Act means an equity share which has been disposed of. An "equity share" is defined in section 9C to include a participatory interest in a portfolio of a collective investment schemes in securities. Section 9C of the Income Tax Act number 58 of 1962 ("Act") deems receipts and accruals arising from the disposal of a Qualifying Share to be of a capital nature if the taxpayer was the owner of the Qualifying Share for a continuous period of at least 3 years immediately prior to the sale."
While I am not be a believer, I love the fact that Investec did a video of the reasons they like the product (10/10 to their marketing department). I do believe in presenting the other side of the story, so here it is:
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