The hunt for yield is moving into exotic territory, with the launch of a fund that uses equity derivatives to deliver an 8 per cent return.
Clime Investment Management’s Clime Income Enhancer Fund has been developed in partnership with US-based Sequoia Specialist Investments. It offers fixed income returns linked to a “reference basket” of four Australian equities.
Clime is offering the product to sophisticated investors with a minimum of $25,000 to invest. It is hosting a briefing to educate investors before they invest.
The reference basket is made up of “a notional basket of one share in Macquarie Group, BHP, Rio Tinto and Treasury Wine Estates.”
The fund offers fixed coupons of 2 per cent payable at the end of each quarter – 8 per cent a year – for a term of six quarters. The maturity date is 21 June 2021.
A second round offer is planned at maturity. The fund is liquid and buy-backs are available on any business day during the investment term.
The fund has no capital protection or guarantee of financial return.
Investors will get a full return of capital at maturity if none of the component shares in the reference basket have fallen by 40 per cent or more relative to their starting price at any time during the period from the commencement date until the maturity date
If the closing price of any of the component shares is 40 per cent or more below the starting price at any time, then a “kick-in event” will occur. The final value of the units will reflect the performance of the lowest performing component share.
In other words, some of the stocks in the reference basket might rise during the investment term but if one stocks falls by 40 per cent or more, the return of capital will reflect the fall in value of that stock.
Investors might also be subject to an early maturity if the closing price of all the component shares in the reference basket are above their “auto call” levels on an auto call date. The auto call dates are 20 June 2020, 21 December 2020, 22 March 2021 and 21 September 2021.
The auto call level is 100 per cent of the starting price of the component shares comprising the reference basket.
In other words, if all the stocks in the reference basket go up, the investor will have their investment amount returned, with no additional amount to reflect the increase in the value of the stocks.
This is the transformation of equities into fixed income by way of sophisticated financial engineering.