South Africa’s Discovery aims at autocall funds

Discovery Invest has launched the Enhanced Yield Fund, a new derivatives-based structured fund aimed at South African investors seeking to capitalise on the need for above-inflation returns and capital protection.

This 60% soft-protected five-year knockout fund will pay a yield of 15% if the FTSE 100 index's performance is flat or positive at the end of year one, excluding dividends. In this case the initial capital plus the full return is paid at the end of the year and the fund closes. If the FTSE 100's return is negative at the end of the first year, no amount will be paid and the fund will continue until the next observation date. The product will pay 15% per period elapsed until maturity if the knockout condition is not met.

“With interest rates at all-time lows locally and globally, investors are searching for opportunities to enhance their investment returns with some capital protection,” said Discovery Invest’s head of research and product development, Craig Sher. “The Discovery Enhanced Yield Fund is structured to provide investors with the potential to do exactly this”.

While conservative funds such as money market, diversified income or cautious funds typically offer capital protection they often don’t beat inflation, said Sher.

The returns of the product will be classified as revenue for tax purposes and will be taxed as income and not as capital gains. “The returns are interest-like, and should be taxed in the same way,” said Sher.

Currently, only a small portion of Discovery Invest’s assets under management are linked to structured products, said Sher, with the bulk of money coming from unit trust investments which remain the vehicle of choice for South African investors.

Discovery Invest entered the domestic structured products market in the last year and has between R1.5bn (US$122m) and R2bn (US$163m) of tranche-based structured products. The fund will open on March 30 and close on May 8.

In addition, the South African provider will close tomorrow its Discovery Capital 200+, a five-year 50% soft-protected endowment plan linked to the performance of the Eurostoxx 50 and the S&P 500 hedged by BNP Paribas. This product will pay investors double the initial investment if the two indices go up by 1% over the five year term, and any upside above that level.

This product, said Sher, was also designed to be tax-efficient so returns are taxed as capital gains within the Discovery Endowment Plan.

Discovery Invest has grown its assets under management by 27% to R45.6bn in the interim period through December. The growth was largely driven by increased take-up of integrated products, market momentum and adviser support.

Click the link to see the Capital 200+ product brochure.