New fund targets beaten up banks via structured products
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Sunday, 27 April 08 - 07:25 PM (GMT) By david clive stevenson in General |
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At long last the rocket scientists in the peculiar world of structured products are actually beginning to think outside of the box and come up with some funds that are a little different and potentially interesting. Blue Sky in particular lives up to its name by releasing a fund that potentially gives you 12.5 times (yes that is twelve and a half ) times the growth in an equally weighted basket of five leading UK high street banks. Ah but there's a rub - that upside is capped at a maximum rate of 125% AND you don't get the chunky dividend yield from holding the underlying.
I haven't done the full sums but over the six year term I reckon you could be losing out on a cumulative return approaching 45p in the £. Also the upside cap is a real downer - Barclays for example may seem like a bargain at its current 455p but one year ago it was valued at just under 900p - that's a close to 50% fall in one year. Look at it another way and suddenly a 100% or even 125% cap doesn't look very generous. I could see that cap breached within 3 years at which point you'd lose out on any gains above that cap IN ADDITION to that dividend yield. And you don't even get rock solid capital protection - there's 50% soft protection which to be fair won't probably be breached.
If I seem a little unfair on Blue Sky its because in investment no matter how clever the product - and this is well timed - what really matters are the details and these aren't generous enough. I think I actually might prefer the Global Financial Services Investment Note from rival Barclays (launched last year) which sports 160% upside participation with no cap over 5 years and rock solid 100% capital protection. I also like the fact that the Barclays product has a wider spread of global banks.
FULL DETAILS BELOW
Innovative investment boutique Blue Sky Asset Management (BSAM) is launching a unique structured product offering investors 12.5 times the growth in the top five UK banks, to a maximum return of 125 per cent, over six years, targeting a long-term recovery in the banking sector.
The Accelerated Recovery Plan is based on a bespoke portfolio of the UK’s five leading banking groups - HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS - and will provide the accelerated growth potential with 100% contingent capital protection at maturity, subject to a 50% Downside Portfolio Barrier Level. In addition, BSAM has facilitated a form of ‘phased entry’ for investors, and will use the average prices of the five banks between June and September as the starting level for the Portfolio.
The ARP Plan will accelerate any growth in the banks that form the Portfolio by 1250%, meaning that only a 10% recovery in their share prices is required over 6 years – little more than 1.5% per year - in order to deliver the maximum return of 125% to investors.
The three-month phased entry at the beginning of the plan is designed to account for the prevailing short-term volatility in the sector, whilst providing investors with immediate access to the long-term recovery potential of the stocks.
The Accelerated Recovery Plan is open to new business immediately – the closing date is 16th June for new business and 23rd May for ISA transfers, including cash ISAs. The strike date – the start date of the Plan – is 20th June, with the three-month averaging applied to the opening prices until 20th September.
Chief Executive at BSAM, Chris Taylor said: “Having focused on the banking sector over several months, we believe we are now at a point where it is reasonable to anticipate the beginning of the end to the turmoil seen in the stocks. Substantive and effective action by central banks around the world, including the Bank of England, is increasing liquidity and volatility is beginning to dampen down. There is light emerging at the end of the tunnel.’’
“The rights issue from Royal Bank of Scotland – a U-turn since March - is further evidence of the “kitchen sinking” in the sector. There may be more bad news to come in the short term, but ultimately the ‘come clean and repair’ chapter of the crisis that we are now seeing will expedite the longer term recovery that is on the horizon. This creates an opportunity for investors to think ahead and to position themselves to take maximum benefit out of the recovery.’’
”Structured products are increasingly providing a new breed of high value investment solutions for professional intermediaries. The Accelerated Recovery Plan is a tactical offering for investors who wish to target relatively aggressive growth strategies. The scope for high and absolute returns from even a minimal medium term recovery in the banks within the Accelerated Recovery Plan is exceptional – the highest gearing and cap that we are aware of ever in the UK. And the innovative use of three-month phased entry averaging mitigates the short term risk and provides a clever long term access solution for investors.”
BSAM’s products – which include a series of 10 per cent annual income plans utilising the same portfolio of banks plus mainstream growth plans - are available to retail investors and institutions through professional intermediaries. BSAM is unusual in its positioning as a structured investment firm, aligning a proprietary and independent research capability with a specialist structured asset management approach. The emphasis placed upon research-backed investment thinking and the innovative use of structured asset management, offers unique investment solutions to investors - and the firm is due to unveil further propositions over the next four weeks.
BSAM believes that retail investors need to be offered more intelligent structured investments designed to maximise returns, within an optimised and balanced risk and return approach. This contrasts with many other structured products which BSAM suggest are shaped by what providers think will sell the most, as opposed to what may deliver the best performance to investors.
In the financial sector BSAM argues that as the market starts to re-assess and re-price the banks the optimal window for investors to access the performance from any recovery will pass. Indeed, the most recent bad news emanating from the banks has actually been received positively by many in the market, with sanguine reactions and mooted sector and share price movement, reflecting the fact that whilst banks clearly remain under pressure in the short term much of the outlook is in prices already. The constructive and coordinated actions of Governments, central banks and the banks themselves are increasing confidence that an end to the write downs and the associated liquidity and confidence crisis is in sight.
BSAM highlights that the share prices of the five banking groups within the ARP Portfolio have all fallen by an average of 35% over the last 12 months – ranging from 13% for HSBC to 53% for HBOS. The downside portfolio barrier level is only breached by any of the stocks falling a further 50%, from the averaged strike point of 20 th June to 20th September.
The barrier level is triggered by closing prices only and ARP also includes six months averaging at the close of the Plan, which spreads the measurement of the final value of the stocks over this period to reduce any final volatility and protect any gains. Any potential capital loss within the Plan, at maturity, is 1% for 1%, in line with the value of the lowest stock in the Portfolio, if the barrier is breached.
ARP has a minimum investment of £10,000 for Direct Investment - which is available to individual investors, pension schemes (such as SIPP or SSAS), corporate, trustee and charity investors; or £7,200 if investment is made through an ISA or ISA transfer. Commission for intermediaries is 3%, which can be rebated to enhance investments. BSAM highlights that the Plan is established based upon a set volume of pre-hedged assets, and will potentially close early if oversubscribed. In the event of early closure, three days notice will be provided to intermediaries.
Shareholder Activists
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Saturday, 26 April 08 - 01:58 PM (GMT) By david clive stevenson in General |
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As the highly satisfied owner of a gaggle of bombed out real estate funds – Capital &Regional, Primary Health Property and TR Property IT – I can’t say I’m terrifically surprised by the emergence of the shareholder activists (Terra Catalyst and London & Stamford) in the sector. I’m not always convinced by the altruistic arguments offered by these (predominantly) hedge funds but I do think they’re absolutely essential in imperfect markets like small caps and investment trusts where investors frequently misprice risk, under-estimate value and generally ignore the nonsense that company managers come up with. But all this talk of efficacy and ‘re-aligning’ management’s interests with the shareholders is for me irrelevant – the more interesting question is whether these activist funds are actually a good investment. I’m prompted to ask this question because we recently reported that more and more wealthy high net worths have been quietly buying back into the listed private equity space. I’m a big fan of contrarian investing strategies and I absolutely like the alternative qualities of listed private equity houses like SVG and 3i (all companies I’ve owned in the past) but for the life of me I can’t quite work out why anyone’s daft enough to opt for these guys over the activists ? These hedge and active fund managers are ideally suited to make money in any market and should clean up as mainstream investors abandon risky shares and small caps....
The real pioneers in this space like the US fund manager Lens have been a great long term investment as has its UK sibling Hermes through their UK Focus Fund which has pretty much consistently outperformed the FTSE All Share Total Return Index since its inception in 1998. There are numerous hedge funds that now operate in this space - most are closed to private investors - although there are a number of pure plays listed on the market.
· The lightly traded Value Catalyst run by Laxey – this is a closed end investment fund recently relisted on AIM. This sits alongside the Laxey Investment Trust which emerged out of the shell of the Tea Plantations Trust in 2007. This is effectively close to being a clone of Value Catalyst. Both are run by Laxey, an aggressive hedge fund, that mixes and matches traditional value investing along with extensive use of hedging strategies that make the funds much less market sensitive – VCF in particular aims to be net long with a target exposure of approximately 50 per cent to the market. According to Donald Robertson at SVM (a fund manager that invests in the VCF) “in our opinion, the beauty of this fund is that it is a ‘true’ hedge fund, not one of the disguised leveraged long only funds”.
· Brian Myerson and Brian Padgett and their Principle Capital’s Investment Trust which aggressively invests in good value small caps but is still mainly a long fund – according to the managers their strategy “is to bring private equity style skills to investing in the public market arena”.
· Chris Mill’s Oryx International Growth Fund run by Christopher Mills of JO Hambro. This activist long only value fund is a good deal less vocal than the first three but no less active !
· Strategic Equity Capital isn’t strictly an activist fund but more a cross between a private equity house and activist - the fund invests primarily in publicly quoted companies that the managers believe are undervalued and could benefit from strategic, operational or management initiatives. According to Robertson at SVM “the advantage of this fund is the deal flow that is likely to come their way through their connection with SVG Capital. The fund takes a relatively small number of holdings and creates value through a combination of capital raising / restructuring / financial engineering and corporate transactions.”
Beyond these pure plays are a slightly longer list of what I’d call very active value investors who may not shout loud in the newspapers and the courts about their activities but who are extremely motivated investors who will force an investee company think long and hard about how to realise intrinsic value. In this list you’d probably see Cayenne, British & Empire, Iimia Investment Trust and Advance UK – with the exception of Cayenne which does some hedge fund investments, these are all long only, classic value investor funds.
So, within these two broad camps – activists and active value – who’s performed best in the last six months? The bottom line on my cursory analysis is that the active value boys have done rather better than most of the activists with the exception of the Laxey funds which have excelled. Crucially the Active Value fund in particular seemed to cope remarkably well with market volatility – here’s the managers own rather idiosyncratic commentary on how a supposedly active hedge fund had a rather boring time in the late summer of 2007....” So let’s cut to the chase: how did we fare in August and September? VCF returned -2.04% in August and +2% in September....Yes we do use leverage but we also build in margins of safety and permanently run well below our ability to borrow. ... We have not had to sell anything, we have had no margin calls or changes in our ability to finance and have in fact probably had our most inactive month for as long as I can remember (and that’s not because it was a holiday month!).”
Principle Capital and Oryx by contrast have both been badly hit, partly because they’re so heavily small cap biased – no matter how clever their managers have been in the past, it’s difficult to make money when all the markets wants to do is cut risks.
The active value funds have generally been very successful over the last few months – they’ve nearly all performed better than the FTSE 100 index with less volatility and relatively low correlation. Returns have been anaemic for sure but to have survived as well as they have done when markets have been actively selling off traditional value stocks and small caps is a minor miracle in my book.
... More items are available in my News Archive
