Module Four: Instalment warrants & Self Managed Super Funds (SMSFs)

Transcription

1 Module Four: Instalment warrants & Self Managed Super Funds (SMSFs)

2 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 ( 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.

3 Find an Adviser Visit search by find a broker 1. Find a broker or a planner using the ASX compiled directories ASX does not recommend individual advisers and provides this service to assist individuals make their own decision on the best source of advice to meet their specific needs. For tax rulings visit This presentation is not to be taken as taxation advice. Instead it should be used as a precursor to further discussions with a qualified taxation consultant.

4 Agenda Recap of previous modules ASX Quoted Instalments structure How to identify an Instalment Types of Instalments available & gearing A Strategy for SMSFs to maximise income and offset non-franked income & expense Benefits and Risks

5 Types of ASX Warrants W A R R A N T S Trading Equity Index Currency Commodity Knock-out (Barrier) Investment Instalments Endowments Capital Protected Structured Investments

6 3100+ Instalment Series Quoted May 2008 Instalments 3,500 $800 3,000 Total Series on Issue 2,500 2,000 1,500 1, $700 $600 $500 $400 $300 $200 $100 $0 Turnover Value $ millions Jan-08 Jul-07 Jan-07 Jul-06 Jan-06 Jul-05 Jan-05 Jul-04 Jan-04 Jul-03 Jan-03 Jul-02 Jan-02 Jul-01 Jan-01 Turnover Value Series on Issue

7 Risk The ASX Product Suite Return Instalments ASX CFDs Futures Options (short positions) Options (long positions) Trading Warrants Inflation Listed Managed Investments Shares Absolute Return Funds Exchange Traded Funds Infrastructure Funds Listed Investment Companies Listed Property Trusts Pooled Development Funds Interest Rate Securities Convertible Notes Corporate Bonds Floating Rate Notes Hybrid Debt Securities

8 Lecture Series Upcoming presentations key dates Topic SEP OCT NOV DEC Introduction to Instalments Introduction to Structured Products Long-Term Investment Strategies using Instalments Leverage/Protection Strategies using Trading Warrants Sydney Dates September October November 4 th 15 th 25 th

9 What is a Quoted Instalment? Similar to Telstra Instalment receipts Instalments allow you to gain full exposure to a share with part payment now and an optional final payment later The holder of an instalment is entitled to all dividends, distributions and franking credits following first payment. Generally issued between 1 to 15 years by a financial institution Tradable on-market (ASX) through a broker Offered over blue chip/top100 ASX listed securities including individual shares, LICs, ETFs etc Eligible form of gearing for Self Managed Super Funds (SMSF)

10 Pricing an Instalment Loan Amount $5.00 Loan (limited recourse) ($5.00) Capital component: loan to the investor $10 Instalment Price $5.50 Capital ($5.00 Capital contribution XYZ Share XYZ instalment Funding Cost ($0.50) Funding cost - Prepaid Interest on loan provided Loan protection (put option)

11 What happens at Maturity? Pay Completion Amount Receive underlying shares Rollover Application Roll from expiring series to a new series. Sell On-market Immediately before maturity sell on ASX Do Nothing If Completion Payment greater than underlying share price then nothing happens If Completion Payment less than underlying share price then receive Assessed Value Payment (VWAP less Completion Payment).

12 Why invest in Quoted Instalments? Generate wealth with a limited capital base Receive a regular and reliable income stream Safer gearing solution Known and limited downside risk First Instalment No margin calls* Tax effective Eligible form of gearing for SMSFs * NB Rolling Instalments may be subject to adjustment at reset date

13 Choosing an Instalment Visit asx.com.au & select Prices, research & announcements from left hand menu

14 Choosing an Instalment Select Prices and enter a code and Go

15 Choosing an Instalment Select Warrants

16 Choosing an Instalment

17 Types of Quoted Instalments Vanilla Receive dividends/distributions as cash in hand Self Funding (SFI) Dividends used to reduce loan Rolling Gearing level is reset* Income After 1 st year interest added to loan Dividend Advance Up to 75% of the estimated dividend paid upfront * There may be an adjustment at the reset date ie more or less instalments issued/redeemed or cash contributed to maintain gearing

18 Gearing of an Instalment Gearing or LVR (Loan-to-Value Ratio) Loan / Share Price Eg XYZ $5 loan/$10 share = 50% LVR Instalments can have different gearing levels Regular geared 40-65% Gearing of an Instalment is not constant If share price rises, gearing will decrease If share price falls, gearing will increase

19 Using Instalments Instalments have similar applications as do shares Growth capital appreciation Yield income Balanced blend of income and growth Instalment strategies can assist to enhance..

20 Quoted Instalments in a SMSF

21 Deductible Components $$ added to cost base Protection Protection Protection XX% deductible Loan Interest RBA unsecured PL rate Loan Interest & protection up to RBA unsecured PL rate RBA home Loan rate Extra Interest Loan Interest protection up to RBA home loan rate Funding Cost pre post pre budget 08 post budget 2008 Deduct loan Deduct loan interest & Any amount over RBA interest only protection up to RBA rate rate add to cost base

22 Application within SMSF Bill has his own SMSF and is considering investing $50,000 in XYZ shares He wishes to consider the benefits of choosing the share or Instalment over XYZ He is planning on holding XYZ for the long term XZY Shares are currently $45.00 An XZY Instalment is currently trading at $22.50 with a final payment of $26.00

23 Application within SMSF Bill s options are: Invest $50,000 in XYZ Shares 1,111 shares Invest $25,000 (approx) in XYZ Instalment and achieve (approx) the same exposure by number of units to XYZ shares leaving $25,000 to invest elsewhere 1,111 instalments Invest $50,000 in XYZ instalments and achieve double (approx) the exposure by number of units to XYZ share 2,222 instalments

24 Application within SMSF NB Data has been approximated and rounded for ease of illustration Investment Price/unit Units Purchased Expense amount Interest* $26.00 x 10%pa Income dividends $2.00 after franking credits1. Grossed up After deductible expense* Tax on net 15% 2. Excess franking credits 1-2 Earnings & contribution Off-set XYZ SHARES $50,000 $ ,111 $2,222 $952 $3,174 $3,174 $476 $476 XYZ Instalments $25,000 $ ,111 nil -$2889 $2,222 $952 $3,174 $444 $67 $885 $3,173 $5,900 Interest at 9.45% is deductible.-$159 added to cost base

25 Application within SMSF - geared NB Data has been approximated and rounded for ease of illustration Investment Price/unit Units Purchased Expense amount Interest* $26.00 x 10%pa Income dividends $2.00 after franking credits1. Grossed up After deductible expense* Tax on net 15% 2. Excess franking credits 1-2 Earnings & contribution Off-set XYZ SHARES $50,000 $ ,111 $2,222 $952 $3,174 $3,174 $476 $476 XYZ Instalments $50,000 $ ,222 nil -$5459 $4,444 $1,905 $6,349 $890 $134 $1,771 $3,173 $11,807 Interest at 9.45% is deductible.-$318 added to cost base

26 What type of Instalment? For SMSFs in the accumulation stage Self Funding Income Dividend Advance For SMSFs in retirement/pension stage Vanilla Rolling

27 Risks of Instalments Instalments offer a greater level of leverage compared to the underlying securities. Risk management is essential The higher the level of gearing the higher the risk The possibility that the interest costs (on the loan) may be higher than the investment returns Understanding the product is the key to success gearing, relationship to underlying, dividends. The liquidity of instalments is governed by the liquidity of its underlying not the number of instalments traded.

28 Find an Adviser Visit search by find a broker 1. Find a broker or a planner using the ASX compiled directories ASX does not recommend individual advisers and provides this service to assist individuals make their own decision on the best source of advice to meet their specific needs. For tax rulings visit This presentation is not to be taken as taxation advice. Instead it should be used as a precursor to further discussions with a qualified taxation consultant.

29 ASX Free events and lectures Visit search by events 1. ASX Investor events calendar - seminars, lectures, training, sharemarket information

30 ASX information Fact Sheets Issuer Contact List Getting Started Cash Extraction Dividend Yield Play (DYP) Brochure Understanding Trading & Investment Warrants Enquiries: ASX customer service on

31