The corporate and investment banking division of Absa Bank Limited, member of Barclays, has today launched the Target Return Lock-In Investment(the Target Return), for investors who want to continue to try and outperform inflation by accessing riskier investments such as equities, but who are also worried that the local equity market is due a correction.
The Target Return offers investors an in-built lock-in mechanism that could capture a fixed return of 8.5% per annum with a capital-at-risk buffer at maturity if certain conditions are met. As such, in the event of a correction in over-valued markets the Target Return could still achieve attractive returns.
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.
According to Ryan Sydow, Head of Retail Distribution at Absa’s corporate and investment banking division, the objective of the Target Return investment is to offer investors a safer alternative to long only equity positions, but without sacrificing much of the upside.
“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 counter-act any negative market movements an investor may feel elsewhere in their portfolios, and still provide potential for above inflation returns,” said Sydow.
As such, the Target Return’s attractiveness lies in its ability to potentially deliver a decent annual fixed return, even if markets have fallen, since investors benefit from a capital-at-risk buffer on maturity, while any annually achieved fixed return is locked-in and payable on maturity.
“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,” adds Sydow.
Moreover, at the end of the five-year investment period, investors will receive 100% of their capital back - on condition that the closing level of the index over the term did not fall by 40% or more and still be down on the maturity date.
Since the investment spans five years, investors have the potential to accrue a fixed return at the end of each year linked to FTSE/JSE Top 40 Index, subject to the index ending the year above a pre-determined barrier level.
Provided the risk reward ratio continues to be attractive, Absa will continue to issue these innovative securities.
“They offer investors the ability to remain in equity and earn modest returns in falling markets instead of moving into lower yield less risky alternatives like cash. We believe this offering is a truly exciting route for the investor in today’s uncertain markets,” concludes Sydow.
Note to the editor:
About Corporate and Investment Banking at Absa:
Corporate and Investment Banking, a division of Absa Bank Limited (Absa) and a member of Barclays, is a leading South African corporate and investment bank with global reach, offering clients financing, risk management and advisory solutions in a wide range of currencies and structures across the globe.
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