BERKSHIRE HATHAWAY CLASS B

Transcription

1 Vested Equities Structured Investments STRUCTURED INVESTMENT BERKSHIRE HATHAWAY CLASS B CONTACT Address Vested Equities Level 11, 50 Cavill Ave Surfers Paradise QLD 4217 Phone & Fax Toll Free: Phone: Fax: Online contact@vested.com.au Website:

2 1 Contents Introduction... 1 Warren Buffet - The Man... 1 Berkshire Hathaway - The Company... 2 Investment Performance... 4 The Investment Opportunity... 5 Why Are We Accessing This Product? Who Is This Investment Potentially Suited To? The Benefits of Utilising Leverage Limited Recourse Borrowing Frequently Asked Questions Introduction This guide aims to provide a summary of the upcoming investment opportunity offering investors exposure to Berkshire Hathaway Inc Class B Shares. The aim is to introduce investors to Structured Investment Products, as well as providing details of historical performance for similar products. This is not a Product Disclosure Statement. Investors should read and understand the relevant PDS before making any investment decision. For further information on Berkshire Hathaway Inc Class B shares, Vested has prepared separate analyst research. For a copy of the PDS (Product Disclosure Statement) or Berkshire Hathaway Class B shares research, please contact your Vested Adviser. Warren Buffet - The Man One of the most successful and influential businessmen in today s world, Warren Buffett s ideologies have greatly shaped the way people make investments. In the 1960 s Buffett purchased equity in a little-known textile company Berkshire Hathaway and grew it into one of the largest conglomerates in

3 2 the world. Today, Warren Buffet controls a personal net worth of US$75 billion and actively contributes to many philanthropic causes. Berkshire Hathaway - The Company Berkshire Hathaway is a multinational conglomerate holding company with a range of wholly owned subsidiaries and large stakes in many successful listed corporations. Under Warren Buffett s guidance Berkshire Hathaway has grown to one of the most iconic investment companies in the world, with total assets over US$620bn and gross revenues over US$220bn. Although Berkshire has a long history of investing in listed US equities, they have recently moved toward acquiring whole companies as investments. Some famous 100% owned holdings include; Dairy Queen, Net Jets, Duracell, GEICO, while substantial listed equity investments include; Apple, Kraft Heinz, American Express, Coca-Cola, and General Motors. Berkshire Hathaway Holdings Berkshire Hathaway owns a diversified basket of American and international corporations. Some are wholly-owned subsidiaries while others are minority shareholdings in listed companies. The table below gives a few examples of Berkshire Hathaway s holdings. Financials GEICO Goldman Sachs Industrials, Energy & Utilities Suncor Energy SE Homes Retail & Manufacturing Cost Co Wal-Mart AMEX Phillips 66 John Deere Wells Fargo Delta Airlines General Motors Misc General Electric Heuzberg Diamonds Buffalo News Liberty Media Discretionary & Staples Duracell Coca-Cola Kraft Johnson & Johnson

4 3 Historical Track Record THE TABLE BELOW HIGHLIGHTS BRK- B OUT PERFORMANCE OF THE ASX-200 OVER A 5-YEAR PERIOD SOURCE: BLOOMBERG * PAST PERFORMANCE IS NO INDICATION OF FUTURE PERFORMANCE SOURCE: NASDAQ, ZACKS Analyst Consensus As at the time of writing 21 st July 2017, consensus targets amongst leading investment banks have Berkshire Hathaway Class B Shares rated as a Strong Buy. Our view on the US market remains bullish as we see several factors driving growth over the medium term. These include: The lowest rate of unemployment in the US in 14 years; Strong earnings growth in US equity markets, and;

5 4 Pro-business policy development in the White House highlighted by potential tax cuts and infrastructure spending. Investment Performance Eight Berkshire Hathaway linked Structured Investments have matured over the last 5 years, each delivering a positive return for investors. Due to the structure of the investments, investor received some strong returns over time. The highest 3-year return on outlaid capital was %, the lowest was 6.70%, and the average across all issues was 64.59%. Maturity Date March 2013 July 2013 October 2013 January 2014 April 2014 June 2014 May 2016 June 2016 Underlying Investment Berkshire Hathaway Class B Berkshire Hathaway Class B Berkshire Hathaway Class B Berkshire Hathaway Class B Berkshire Hathaway Class B Berkshire Hathaway Class B Berkshire Hathaway Class B Berkshire Hathaway Class B 3-Year Return On Cash Outlay* 42.86% 73.39% 73.81% 35.41% 88.82% % 23.29% 6.70% Average 64.59% * Past Performance is no indication of future performance. Net of fees, in AUD.

6 5 The Investment Opportunity Structured Products Structured Products are designed to facilitate highly customized risk-return objectives and are used by investors extensively, particularly in Europe and Asia. Structured Products typically take a traditional security, index, commodity or other tradable asset and customise the return payoff and/or other features to suit the investor. Many Structured Investments can also incorporate limited-recourse leverage (borrowing) to gain additional exposure to the underlying asset and may offer partial or full principal protection for the investor, subject to the design of the product. Please note that a structured product is not a basic deposit product and therefore does not qualify for protection under the Australian Government's Financial Claims Scheme. Investment Structure The upcoming Berkshire Hathaway offer will provide investors with a way to borrow to invest with exposure to Berkshire Hathaway Inc Class B shares (NYSE:BRKB). By prepaying the interest and fees in advance on the 3-year loan, investors will participate in any positive performance from the investment. The investment limited recourse loan, lending 100% of the investment amount. The limited-recourse nature of the loan provides investors with certainty that there will never be any possibility of margin calls or a shortfall on the loan if the investment experiences negative performance. The maximum potential loss is limited to the investors initial outlay (comprising the prepaid interest and any fees). Additionally, the investment employs a volatility cap mechanism in an attempt to smooth returns, which increases and decreases the exposure to Berkshire shares between 0% and 150% on a daily basis depending on the volatility of the share price. Investors may receive returns during the investment term in the form of Performance Coupons. The Performance Coupons are designed to pay out any positive performance during the term

7 6 and at maturity. There are three potential Performance Coupons during the 3-year term; Two Performance Coupons capped at 10.8% at the end of year 1 and year 2; and a Final uncapped at Maturity (representing any of the remaining accumulated unrealised gains) Key Features Performance coupons are payable to the investor on an annual basis, subject to the overall performance of BRK- B shares and the investment An approximate $11,000 cash outlay would give an investor $50,000 of exposure to the performance of the Berkshire Hathaway Class -B investment Potential for enhanced returns on actual investment using 100% leverage Competitive interest rate of 5.95% p.a. and Risk Management Fee of 0.7% p.a. SMSF s are eligible to apply (Investors must decide their own suitability around borrowing within an SMSF) Exposure to a strong US equity market Potential favourable exchange rate exposure Benefits of portfolio diversification Limited-recourse borrowing (no liability if there is a fall in investment value risk is limited to pre-paid interest and fees) Medium term investment horizon 3 years Monthly performance tracking Key Risks Your return is affected by the performance of the Reference Basket. There is no guarantee that the Reference Asset or Reference Basket will perform well. If the Reference Asset or Reference Basket performs

8 7 negatively during the Investment Term you could lose some or all of your invested capital. The Units have varying levels of exposure to the Reference Basket depending on volatility due to the variable Participation Rate. It operates by varying the exposure that the Units will have to the Reference Basket depending on the Realised Volatility of the Reference Basket and the Target Volatility. There is the risk that the Participation Rate could drop to significantly below 100% during the Investment Term in which case Investors will not gain the full benefits of an increase of the value of the Reference Asset. Investors should note that there is a lag in measuring the Realised Volatility of the Reference Asset. This means that where there has been a period of high Realised Volatility, the Investor's exposure to the Reference Asset will be low, regardless of whether the Reference Asset is performing positively or negatively. There is no guarantee that the Units will generate returns in excess of any Fees during the Investment Term. Additionally, in the event of an Investor requested Issuer Buy-Back or Early Maturity Event you will not receive a refund of any Fees. Investors are subject to counterparty credit risk with respect to the Issuer and the Hedge Counterparty; The Units may mature early following an Early Maturity Event, including an Adjustment Event, Market Disruption Event or if the Issuer accepts your request for an Issuer Buy-Back. Please refer to Section 4 Key Risks of the Term Sheet PDS and Section 2 "Risks" of each Master PDS for more information.

9 8 Performance Coupon Hypothetical Returns The Table below indicates hypothetical coupon performance over a 3-year period.

10 9 Historical Underlying Investment Performance SOURCE: MORNINGSTAR * PAST PERFORMANCE IS NO INDICATION OF FUTURE PERFORMANCE Volatility The graph below shows the historical Volatility of BRK-B. Note that since 2012 volatility has been relatively more stable than previous corresponding periods as the share price has appreciated.

11 10 Why Are We Accessing This Product? Exposure to the US Market vs historically subdued domestic market Research by the ASX and Russel Investments highlighted that in 2016 Australian shares lagged overseas markets for the third successive year. Analysis of regional share market growth over a 10-year period showed the US share market achieving an average annual growth rate of 7.0% p.a. compared to 4.5% p.a. achieved by the ASX. Since the end of the GFC in 2009, Australian shares are up just +65% compared to +145% in global shares, and +210% in US shares. With these comparatively lower returns, Australian investors may be interested in diversifying into global asset classes and strategies within their portfolios. Investors should note that we do not attempt to forecast future conditions, however we do draw attention to the importance of diversification not only globally but also through asset classes. Exposure to the US Currency The RBA has been able to maintain higher interest rates than other developed economies post-gfc, but as the US economic recovery evolves we are seeing narrowing interest rate differentials between Australia and the US. This implies downside risk for the Australian dollar as investors rotate to from AUD to USD denominated assets. A falling Australian dollar boosts returns for unhedged international investments when those assets are converted back to local currency. For example, if the Australian dollar falls 5%, any US assets value will increase 5% in AUD dollar terms when converted to domestic currency. Note that only the coupons in the product are exposed to the USD, not the investment.

12 11 With lagging demand for our commodities, stagnating earnings growth in the domestic share market and a weak property market, interest rates in Australia are expected to remain low. The US however is strengthening and interest rates are expected to rise. These factors are bullish for the US$ and should benefit investors who have money offshore. We see the recent strength to $0.80 as an opportunity to set short positions. It s up to investors to decide if alternative investment opportunities will support portfolio growth in a more substantial way than keeping funds onshore. AUD VS USD SOURCE: BLOOMBERG * PAST PERFORMANCE IS NO INDICATION OF FUTURE PERFORMANCE The Next Generation of Investment Mangers Although Warren Buffett has historically been the public figurehead of Berkshire, the future looks promising for shareholders post his departure as CEO. There are three current Executive Managers, Mather Rose, Gregory Abel and Ajit Jain, all excellent candidates for the top job of CEO. Two new investment managers have been appointed recently: Todd Combs - of Castle Point Hedge Fund, during his time at the fund he oversaw funds under management grow from US$35M to $USD400M over a 5-year period. Ted Weschler - founded private hedge fund Peninsula Capital in 1999 funds under management were

13 12 US$150M, in 2011 Peninsula Capital was managing over US$2bn. In a recent interview, the Berkshire CEO was quoted discussing the performance of his two proteges, revealing they are managing over USD$10bn in capital versus roughly USD$2bn when they started. This confidence indicates that a succession plan is potentially underway and should be expected to be seamless when the time comes. Who Is This Investment Potentially Suited To? Investors seeking exposure to the US Market to diversify their portfolio Investors that are currently earning income Individuals comfortable with a 3-year investment horizon SMSF Trustees Investors wanting to access leveraged investments Investors with a positive outlook on the US Economy Investors seeking limited liability borrowing Individuals who are wanting access to Berkshire Hathaway class B Share Performance The Benefits & Risks of Utilising Leverage Leverage has the potential to amplify gains and losses an investor would otherwise receive from an asset. The Berkshire Hathaway product was designed with consideration given factors including, but not limited to, US macroeconomic drivers, AUD/USD exchange rate factors, leverage ratios, and historical underlying asset performance.

14 13 Using leverage allows an investor to keep their capital free for other investments increasing overall potential portfolio diversification. The chart below demonstrates the performance of the S&P500 and a leveraged S&P500 ETF. It demonstrates the significant effects leverage can have in positive market conditions. Adding leverage to a portfolio will usually amplify losses, however in this case due to a protection function, investors are not exposed to a fall in loan principal past the initial balance. They are however, exposed to negative performance in that the initial cash outlay (prepaid interest + fees) are at risk if the investment does not perform positively. LEVERAGED S&P ETF (BLUE) VS S&P 500 TOTAL RETURN (ORANGE) SOURCE: BLOOMBERG Limited Recourse Borrowing Limited recourse borrowing (LRB) is the process of utilising a loan from a third-party lender for the acquisition of an asset. This type of loan allows the borrower to participate in the upside of the underlying asset performance while having no liability for any call on the loan in the event the underlying asset falls in value. An example of this protective function would be if an investor borrowed $50,000 to buy shares that halved in value. In this scenario, the investor s only loss would be the cost of the prepaid interest (i.e. approx. $10,000 + fees) with the lender bearing the loss.

15 14 Frequently Asked Questions What are the risks? Risks are covered in depth in the PDS and summarised in the Key Risks section of this document. What are the fees and costs? The fees and costs are limited to i) the prepaid interest (5.95%) and risk management fees (0.7%), ii) a 10% performance fee, iii) a fixed initial advice fee. No other fees are charged over the term. How long is my capital invested? The Berkshire Hathaway Class B Structured Investment is a 3- year term. Investors have the potential to receive performance coupons annually which provides a potential cash extraction opportunity during the investment term. Who is Vested Equities? Vested Equities is a diversified financial services firm with capabilities in portfolio management, research and analysis, derivatives strategies and Sophisticated Investor (s708) opportunities. How do I invest? To invest in this series, contact your Vested adviser on to receive a copy of the PDS. The process after reading and understanding the PDS is as follows:

16 15 Complete Application Form Prepay Interest & Any Fees Units alloted to Investors Each Year Investor Is Paid Out Any Positive Performance as a "Performance Coupon" (Subject to 10.8% Cap at end Y1 and Y2) Investment Concludes and any remaining positive returns paid as a Final Coupon Vested Equities Pty Ltd holds an Australian Financial Services License All advice (if any) is general advice only. Your personal circumstances and financial objectives have not been taken into consideration. Accordingly you should consider if the advice is right for you. Past performance is not a reliable indicator of future performance. Please be aware that all investment and trading activity is subject to both profit & loss and may not be suitable for you. All advice and education content is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or personal advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Vested Equities Pty Ltd, it's directors and it's advisers may have material investments in this company Units in Sequoia Launch Units Series 30 are issued by Sequoia Specialist Investments Pty Ltd (ACN ) (the Issuer ) and arranged by Sequoia Asset Management Pty Ltd (ACN , AFSL )(the Arranger ). Investments in the Sequoia Launch Units Series 30 can only be made by completing an Application Form attached to the Term Sheet Product Disclosure Statement ( TSPDS ), after reading the Term Sheet PDS dated 18 July 2017 and the Master PDS dated 10 June 2015 and submitting it to Sequoia. A copy of the PDS can be obtained by contacting Sequoia Asset Management on or contacting your financial adviser. You should consider the Term Sheet & Master PDS before deciding whether to invest in Units in Sequoia Launch Units

17 16 Series 30. Capitalised terms on the webpage have the meaning given to them in Section 10 Definitions of the Master PDS.

18 Vested Equities Pty Ltd holds an Australian Financial Services License All advice (if any) is general advice only. Your personal circumstances and financial objectives have not been taken into consideration. Accordingly you should consider if the advice is right for you. Past performance is not a reliable indicator of future performance. Please be aware that all investment and trading activity is subject to both profit & loss and may not be suitable for you. All advice and education content is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or personal advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Contact Us: Office: Level 11, 50 Cavill Avenue, Surfers Paradise, QLD contact@vested.com.au Phone: