Absa Capital, the corporate and investment banking division of Absa Bank Limited which is owned by Barclays, is touting a new structure aimed at outperforming inflation for retail investors worried that the domestic equity market is due a correction.
"Many investors are of the view that the Top 40 is currently over-valued. Therefore, with a potential correction looming it is important to create an investment vehicle and payoff that will counteract any negative market movements an investor may feel elsewhere in their portfolios, and still provide potential for above inflation returns," said Absa Capital's head of retail distribution, Ryan Sydow (pictured).
The Target Return features a lock-in mechanism that could capture a fixed return of 8.5% pa with a capital-at-risk buffer alongside the initial investment at maturity, if the FTSE/JSE Top 40 Index does not fall by 40% or more over the term and is still down on the maturity date.
The concept is ideal for investors who would like to continue to access potential growth in South Africa (via the FTSE/JSE Top 40 Index) but want to de-risk their current portfolios with a product that performs well in flat and falling markets. Markets have to fall by more than 40% for the lock-in not to occur and for capital to be potentially at risk. Any returns via the Target Return have the potential for capital gains tax treatment at maturity.
Sydow said that the product offers a safer alternative to long-only equity positions but without sacrificing much of the upside, even if markets have fallen.
"This means that any gains locked-in cannot be lost even if the market subsequently falls. But obviously if the index is below the pre-determined barrier on the anniversary date, no fixed return will accrue for that year," he said.