Capital guaranteed with new Investec rand-hedge product

Japie Lubbe of Investec Structured Products says that an investment in China Seas Basket Limited – a company incorporated in Guernsey and listed on the Bermuda Stock Exchange – offers South African investors the ability to earn pound-based returns while protecting their capital in full.

A tracking product created by Investec, China Seas gives an equal weighting to a basket of five indices: the MSCI Taiwan Index, MSCI Singapore Index, Nikkei225, Hang Seng Index and Eurostoxx 50.

Addressing stockbrokers and independent financial advisors on Tuesday, Lubbe said the product is targeting growing consumer goods markets, where manufacturers are benefitting from low commodity prices and stock markets are trading at price:earnings valuations below their long-term averages.

The product is a 4.3-year growth investment that is linked to the performance of this basket of Asian and European indices. It has a two times geared exposure to growth in the basket (which means investors earn two times the growth of the indices), subject to a maximum return of 40% in pounds sterling.

With forward rate agreements pricing in a 48% depreciation in the ZAR:GBP exchange rate over the next four years – effectively projecting that by December 2020, £1 will cost you R34 – Lubbe notes that this investment provides South Africans the added benefit of a rand hedge.

Should the investment reach the maximum internal rate of return (40%), it will equate to an 8.14% per annum return in pounds, he says.

“The China Seas product offers investors the opportunity to invest in one product, allowing access to international markets that are ordinarily risky to participate in with the comfort that their capital is protected in GBP in case those markets go down. Should markets rise, investors will enjoy accelerated gains,” Lubbe explains.

If investors hold the investment to maturity they are guaranteed to get at least 100% of their principal investment amount back, secured by a bond issued by Investec Bank plc.

For investors who wish to sell their shares before the maturity date, an early exit fee of 1.25% less any administration and applicable banking fees will be charged.

An annual fee of 0.60% will be charged to cover financial advisor costs, with an additional 0.60% levied by Investec Corporate and Institutional Banking annually. A 0.15% upfront administration fee – and ongoing fee of 0.135% per annum – brings the total expense ratio to around 1.34%.

Financial advisors may also charge a once off fee of up to 2% plus VAT on new shares issued, at their own discretion, which will be deducted from the gross investment amount paid by each investor.

South African investors who have R160 000 to invest offshore would qualify to purchase shares in the China Seas Basket Limited, the closing date for which is March 3. The investment matures on July 10 2020.

Shares can be purchased using offshore allowances, disclosed foreign assets, international assets held by non-South African investors or an asset swap.

The company has a Guernsey tax exemption certificate, allowing South African tax authorities to receive more revenue when local investors elect to sell their shares, since none of the profits are paid away to foreign tax authorities, Lubbe maintains.

Favourable tax treatment of offshore investments locally means that South African investors also benefit.

Profits on the product are locked in at each phase, meaning that when new shares are issued in the company, whatever investors have earned up to that point is guaranteed should they elect to hold the shares for a second phase and not sell them.

Since Investec has guaranteed investor capital through its bond issuance, the only risk for investors would be Investec going insolvent, adds Lubbe.

Despite this, he advises against placing all your eggs in one basket. “Make sure that you don’t invest more than what is an appropriate allocation to one bank,” he says.

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