Introducing Smart Beta Smart beta is a phrase that has been coined to cover a variety of products, techniques and approaches which can be used by investors to gain asset class exposure in a way that beats their benchmark. Smart beta products typically offer index exposure with a twist that aims to exploit a persistent market anomaly, or which improves the risk/return balance for the investor. Examples of the smart beta products that are being developed include alternative indices, trend following funds and covered call strategies. Enhance your potential returns with Meteor s Smart FTSE Meteor s new Smart FTSE is a five and a half year investment structured to offer enhanced exposure to any positive performance of the FTSE 100 ( the Index ) and reduced exposure to any negative movement, making the risk similar to that of a balanced fund. Smart Benefits: Available through all of the main SIPPs, wraps and platforms, and via Meteor s Omnium account Continuous availability Strikes on 1 st business day of each month Daily liquidity is available both pre and post strike Smart FTSE vs FTSE 100 The investment return at maturity will be 2x any positive growth in the FTSE 100 between its Opening Level and Final Level, subject to a Cap which will be determined on the Start Date of the product. Indicative Cap levels will be displayed on our website throughout each month prior to the Start Date and are expected to range between 4 and 8. An indicative cap of 5 has been used in the graph below to illustrate the broad range of index values over which Smart FTSE can provide a higher return than simple exposure to the FTSE 100 alone. In the event that there is no index growth, investors will only be exposed to 5 of any loss. Five day averaging is applicable to both the Opening and Final levels. 25 20 Maturity Value 15 10 5 Index Smart Participation Who is Smart FTSE for? Final Index Level Investors seeking specific asset class exposure Investors with a positive view on equities who are seeking to capitalise on their exposure Investors seeking to mitigate downside exposure in a market correction
How is the FTSE likely to perform in 5.5 years time? Using a number of assumptions including projected UK equity returns and dividend futures, referenced at the end of this document, we have calculated a probability distribution for the FTSE 100 to assess the likelihood of the index ending at a particular level in five and a half years. The analysis reveals: Index Level 11-13 (Median Range) 19% <10 (Capital Loss) 37% >15 (indicative 5 cap exceeded) 19% The central range of the probability distribution for the Index, using the assumptions we have made, is between 11 and 13. The upside cap has the potential to range anywhere from 4 to 8, and the probability distribution means that Smart FTSE will enable investors to make the most of even the smallest rise in the index. It can also be used to calculate the value of the product for an investor, and to compare this with the value of an alternative investment Smart FTSE value at maturity and probability distribution 25 6% Final Product Value 20 15 10 5 5% 4% 3% 2% 1% Index 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Smart FTSE Final Index Value Positioning the Smart range within a portfolio: Although the focus here is specifically on Smart FTSE, as the range expands Meteor s Smart products will provide investors with a different way to access exposure to a number of asset classes and indices and will be positioned in the market place as alternatives to: tracker funds, balanced funds, ETFs actively managed funds
Smart FTSE ` versus a FTSE Tracker Fund The illustration below highlights the advantages of gaining UK equity exposure using Smart FTSE, in comparison with a FTSE Tracker Fund. In the event that the Index achieves 12 growth, the median of the probability distribution, the returns from the product would be similar to that displayed. The Smart FTSE cap in this example is set at 5. Smart FTSE offers enhanced returns if the total return from the FTSE 100 is in line with market expectations or if the FTSE 100 falls. Investors would experience a much smaller capital loss compared with the loss they might experience with a tracker fund if the FTSE falls. Smart FTSE offers higher returns than a tracker fund if the index performs in line with the probability profile. If the index is unchanged, the index tracker fund will offer a slightly higher return as investors would benefit from dividends by investing in the index tracker fund If the index increases significantly, the index tracker fund will generate a higher total return which exceeds the product cap Smart FTSE versus Tracker Fund with dividend distributions taxed at 32.5%
Smart FTSE versus a Balanced Fund Smart FTSE provides a useful alternative to a Balanced Fund. Despite both having similar potential for capital loss, Smart FTSE provides significantly improved returns where there is Index growth. Again, the median probability has been assumed for this illustration. For the sake of this example it has been assumed that a Balanced Fund offers exposure to a mix of equities and bonds on the following basis 5 Equity 5 Bonds Bond risk premium of 1.963% Fund has total costs (Reported and Unreported) of 1.5% There is an effective tax rate on all income as a higher rate tax payer (including dividends and coupons from bonds) Both products have similar downside profiles Smart FTSE offers increased exposure to any gain in the FTSE The FTSE 100 must increase by more than 18 of the initial index level for a balanced fund to offer a higher return than Smart FTSE. Smart FTSE versus a Balanced Fund
Assumptions for Smart Beta comparisons: Example used is comparative index tracker fund: ishares FTSE 100 Dividends are assumed to have a yield of 3.4%pa and are taxed at the highest rate UK 5 Year Swap rate: 1.2% Median equity risk premium: 5% (current projection rates in FCA Handbook COBS 13 Annex 2.3) UK equity returns in combination with the risk free rate are expected to be 6.2% pa Fund has Total Costs (reported and unreported) of 1.5%pa Index volatility: 17.8% Important Information: This information has been prepared solely for information purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any investment offered by Meteor Asset Management. Meteor Asset Management has used historical information in order to provide an illustration of how certain parameters may have performed over a defined period. This presentation may also contain certain performance data based on back-testing, i.e., calculations of the hypothetical performance of a strategy, index or asset as if it had actually existed during a defined period of time. The scenarios, simulations, development expectations and forecasts contained in this presentation are for illustrative purposes only. The information is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. We do not undertake to update this information. Meteor Asset Management Limited and its affiliates disclaim any and all liability relating to this information, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, this information. Additional information is available on request. Meteor Asset Management Limited does not give investment, tax, accounting and legal or regulatory advice and investors should consult with their professional advisors. Meteor Asset Management Limited 55 King William Street London EC4R 9AD Tel +44 (0)20 7904 1010 Fax +44 (0)20 7283 1355 Email info@meteoram.com Web www.meteoram.com Approved and issued by Meteor Asset Management Limited. Meteor Asset Management is authorised and regulated by the Financial Conduct Authority, FCA Number 459325. Financial Conduct Authority: 25 The North Colonnade, Canary Wharf, London E14 5HS.