Financial Planning Chapter SIG Presentation: Portfolio Strategies using ASX Listed Securities 28 May 2010 Disclaimer This material contains information only ASX does not represent or warrant that it is complete or accurate The information is for education purposes only and any advice should be sought from a professional adviser If you are seeking advice (including a recommendation or opinion) about a financial product you should consult an Australian financial services licensee To the extent permitted by law, no responsibility for any loss arising in any way (including by way of negligence) suffered by anyone acting or refraining from acting as a result of this material is accepted by ASX This disclaimer extends to any private discussions or correspondence with the presenter of this information © copyright ASX Operations Pty Limited ABN 42 004 523 782 (‘ASXO’) All rights reserved This publication should not be reproduced, stored in a retrieval system or transmitted in any form, whether in whole or in part, without the prior written consent of ASXO Find an Adviser Visit www.asx.com.au Select ‘Education & Resources’ from left hand menu Select either ‘Find a Broker’ or ‘Find a Planner’ or enter either www.asx.com.au/findabroker or www.asx.com.au/findaplanner into your browser Agenda • ASX Market Developments • AQUA Market • ASX Trade • Exchange Traded Funds/Commodities • Features, benefits & risks • Portfolio Construction using ETFs • Generating Alpha with sector ETFs • ASX Instalment Warrants • Features, benefits & risks • Instalment Strategies • Off-setting income and expenses ASX Trade • Introduction of new market services - Trade Match – current ITS - Pure Match – low latency execution facility - Volume Match – order crossing mechanism • A number of new order types will also be introduced as part of the initiatives • ASX Best will provide a smart order routing system to ensure that clients obtain the best execution • Changes will begin to be implemented 3rd quarter 2010 ASX AQUA Market • Flexible market service and rule framework to facilitate the quotation of a wider range of products • Tailored to fund managers, investment banks and product structures • Three broad categories of product that can be quoted: - Managed Funds - Exchange Traded Funds - Structured Products • Increased transparency, product distribution and price discovery ASX AQUA Market Companies BHP A-REITs Westfield LICs AFIC/ARGO ETFs Spiders iShares Equity Listing Rules Derivative Equity and Derivative Equity Hedge Funds Wallace ARF Long-Dated Equity-linked products Equinox New AQUA Listing Rules for funds ASX Trading system (ITS) & ASX Settlement system (CHESS) Capital protected or Structured Investment Products Instalments ALPS Warrant Listing Rules Call/put Warrants BHP call Features of ETF / ETCs • • • ETFs - invest in a basket of securities that make up an index or sector ETCs - track the physical price of a commodity and provide direct exposure to the underlying asset Characteristics in common: • • • • • • • Have transparent portfolio holdings Have an open-ended structure Can have on exchange market makers Trade at or close to Net Tangible Asset (NTA) backing Trade intra-day on an exchange like any other share Covered by National Guarantee Fund (NGF) Low MERs typically much less that 1% How ETFs work Secondary Market Primary Market ASX Market Maker Trades Like Stock Creation or Redemption of Units Fund ETF and LIC price movements Instalments Overview • Instalment Warrants are a tool used to enhance share ownership by allowing the investor to purchase shares in two part payments • There is no obligation to make the Final Instalment Payment - time to decide whether to take ownership of the share • Investors continue to receive the benefits of share ownership - full capital appreciation of the shares - receipt of full share dividends - franking credits Instalments & Margin Lending Instalments operate in a similar way to margin lending however… • Investors are not obligated to make the final Instalment payment (ie the “Loan”) • Hence, the final instalment payment is not regarded as debt • Instalments can be thought of as a low-risk margin loan that: - is ASX listed, - can be traded just like shares, - does not involve indebtedness Can be used by SMSFs - does not require repayment Warrants Classification for Advisers • Under the Corporations Act, warrants may be defined as a ‘Security’, a ‘Derivative’ or a ‘Managed Investment Warrant’ Securities Derivatives Managed Investment Warrant • All types of warrants issued over shares • Trading warrants • Instalments issued over ETFs, A-REITs and some Infrastructure funds • Some capital protected and structured investment warrants • Some Structured investment warrants such as capital plus Types of Instalments There are three main types of Instalments: • Regular – Provides short-term exposure (1 -3 years) - Dividends received as cash • Rolling – Long term exposure (1 – 15 years) - Dividends received as cash • Self-funding – Long term exposure (1 – 10 years) - Dividends used to pay down loan Pricing of Instalments Traditional Structure: Regular, Rolling and Traditional Self funding Instalment Funding Cost ($0.50) Instalment Price $5.50 Capital ($5.00 •Funding cost  Prepaid Interest on loan provided  Loan protection (put option)  Borrowing Fee •Capital contribution $10 Loan Amount $5.00 XYZ Share XYZ instalment Loan (limited recourse) ($5.00) Capital component: loan to the investor Pricing SFI Variations Stop Loss – SFI Capital Component $10.00 XYZ Share Price Investor Pays:  $5.00 Loan Amount Stop Loss Level $5.50 XYZ Share Price Issuer Funds:  $5.00  XYZ Share XYZ instalment Capital up-front (First Payment) Instalment Payment – non-recourse loan to the investor Interest is capitalised daily to the Loan Risks of Instalments • Underlying fails to perform • Increased leverage increases risk of loss • Limited Life of warrants • Extraordinary event • Expected move in underlying does not occur during the life of the warrant • Instalment terminates • Liquidity risk Instalment process Instalments can be purchased either: on market via SEATS, or off-market via the Offering Circular Issuer sells Instalment (Investor buys Instalment) Issuer buys the share Benefits of shares flow from the Security Trust to the investor Issuer places share in Security Trust on behalf of investor Why use Instalments? Benefits Strategies • • • • • • • • • • • Part pay for shares Diversify existing portfolio Enhanced dividend yield Greater franking credits Eligible within a SMSF Pre-paid interest deductibility Leverage Cash extraction Dividend yield play Maximising SMSF caps Enhanced earnings shelter Building a portfolio using Instalments  The scenario:  In March 2009 an SMSF investor wishes to invest $25,000 into a portfolio of shares with broad diversification  The investor wants long term exposure and market return  The investor has also has set aside $20,000 to trade the market in the short term  A possible solution:  Using the STW ETF the investor can obtain a diversified portfolio in one transaction  They could also use the Dividend yield play strategy to potentially earn income in the short term Building a portfolio using Instalments Core Investment Portfolio $25,000 Core holding of Australian Equities ETF v Instalment over ETF Mar-Jan10 Satellite $????? Trading $20,000 Feb 09 BHP,CBA RIO & QAN Satellite Satellite Satellite May 09 WBC,ANZ NAB & IPL Nov 09 CSR,NAB WBC & ANZ Sep 09 BHP,CBA TLS & WES Core Portfolio Beta + Benefits NB – Figures have been rounded for ease of illustration Investment amount Price/unit 02/03/2009 Units Purchased Expense Interest* STW ETF STW Instalments $24,996 $24,990 $30.52 $13.53 819 1847 nil -$2,365 Income dividends $0.74 & $0.66 franking credits1 @76% Gross income $1,147 $339 $1,486 -$1892 $2,586 $764 $3,350 After deductible expense* $1,486 $1,458 Tax on net income @ 15% Excess franking credits 1-2 $223 $116 $219 $545 Earnings & contribution Off-set $773 $3,633 $17.07 x 7.50%pa Interest at 6.00% is deductible.-$473 added to cost base Next Steps – ASX Tools and Resources • Online Education - Fact sheets - Online courses - Podcasts of events • Model portfolio studies – www.asx.com.au/portfoliostudies - Using instalments - Using ETFs - Interest rate securities • Find a planner program Upcoming events - National Options – June Webinar Interest Rate Securities – 16 June Webinar SMSFs – Adviser session 20 July Register at:www.asx.com.au/events www.asx.com.au/keepmeposted for specific dates and locations or to log-on for the webinar Thank you for attending Please complete the CPD Quiz