I found this:PORTFOLIO POINT: JB Globalfs new product is a...

I found this:



PORTFOLIO POINT: JB Globalfs new product is a valuable advance in risk-management technology, includes complex and perhaps unnecessary features.


The very rapid reopening of the equity derivatives market has been one of the most interesting post-GFC developments, with technological advances offering the potential for better risk management and investment product design.

For example, Standard & Poorfs has recently launched a new set of index benchmarks known as the gcontrolled riskh indices. These are available for a range of indices, including the ASX 200, and allow investors to set their actual level of exposure to the underlying index with reference to prevailing volatility levels in that index.

Because indices typically rise when volatility falls, but fall (often sharply) when volatility rises, this can be a powerful risk-management tool, setting benchmarks for investors to wind their equity exposure up or down as risk levels fluctuate. And because changing volatility is often a leading indicator of market movements, the so-called gvolatility targeth method provides the potential for outperformance compared to typical investment practices.

Product providers have rushed to create investments utilising the volatility target method, including the recently released ASX 200 Income and Capital Accelerator product arranged by JB Global Investment Services, a privately owned Sydney investment services company run by brothers Justin and Scott Beeton.

The JB Global ASX 200 product embeds a three-year volatility target option into a deferred purchase agreement, which is 100% capital protected and provides the potential for coupons capped at 8% per annum payable in years two and three as well as a final payment if the underlying option has value at maturity. Investors can only buy the product by borrowing 100% of the investment cost from Bank of America-Merrill Lynch, by pre-paying annual ginteresth at the rate of 3.9%.

Before investors get too excited at what appears to be a generously low interest rate, as we have noted with regards to other capital-protected investments where gearing is mandatory, this is typically a sign that financial engineering has simply used the proceeds of the gloanh to fund the making of a deposit into an underlying zero coupon bond, (which at maturity provides the capital guarantee) and the purchase of an option giving the actual investment exposure.

The gloanh and the gbondh are essentially mirrors of the same cash flows. There is nothing problematic with this technology (bond + option products are de rigeur forms of capital protection); but when the product can only be purchased with a loan, it smacks of artificiality and is undoubtedly tax-aggressive.

The ginteresth in this investment is linked to the cost of buying the underlying option, with the gcapital protectionh simply being the return of the value of the underlying bond, which pays back the 100% loan at maturity. The key difference between buying just the option on its own, versus buying the protected product with mandatory gearing, is the apparent generation of a tax deduction for ginteresth costs.

The underlying volatility target option in this case has been cheapened by the use of averaging methodology, whereby the annual and final payments are referenced to opening and closing index balances, averaged over a relatively lengthy period at the start and end of the product term.

Averaging is a common technique used to cheapen option costs and is typically to the detriment of the product from the investorfs perspective. There is a hefty performance fee payable to JB Global (10% of annual coupons and any final payments), and the two initial coupons are capped at 8% pa. Itfs hard to agree with the tax opinion in the PDS, which suggests that the two initial coupons are taxable as ordinary income and the final payment is taxed on capital account. The financial character of each of the three possible payments under the product is identical and thus, so should be their tax treatment.

While the underlying volatility target method is a valuable advance in risk-management technology, itfs unfortunate in this case that the overall product has complex and perhaps unnecessary features that detract from that benefit.

The score: 1.5 stars
0 Ease of understanding/transparency
0 Fees
1 Performance/durability/volatility/relevance of underlying asset
0 Regulatory profile/risks
0.5 Innovation



Tony Rumble is the founder of the ASX-listed products course LPAC Online, a provider of investment training to financial services professionals.


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