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Your questions about Endowment Warrants answered

What is an Endowment Warrant, Who should use them and How much do they cost? Click here and find out the answer to these questions.

Tuesday, December 15th 1998, 12:00AM

by Philip Macalister

What is an Endowment Warrant?
An Endowment Warrant is an investment product which gives you the right to purchase a share in around 10 years time based on its price today.
You acquire this right by making an initial payment now, which is just a fraction of the current share price and then pay a final payment in around 10 years time to acquire the share.
Even though you initially only pay part of the value of the share, you receive the full benefit of any dividends and growth on that share for the entire term of your investment.
Endowment Warrants are issued by Macquarie Bank Limited and can be sold at any time.

 

How do Endowment Warrants work?
Each series of Endowment Warrant has an issue price that is your initial payment. The issue price varies with movements in the price of the underlying shares. You can easily find out the current price for each series by visiting the Endowment Warrants page on Good Returns click here, or calling Challenger Asset Management on 0800-446259, or (09) 3090474.
An outstanding amount is set for each series of Endowment Warrants at the opening of each series. This is the difference between the issue price and the current value of the share plus costs and risk premium.
Your final payment - due in approximately 10 years - will be the outstanding amount after the accrual of interest and deduction of the dividends earned by those shares over the term. Interest accrues at the Australian 90-day bank bill rate plus a margin of three per cent. It is reset to market rates regularly.
If you hold your Endowment Warrants for the full term, you pay the issue price and make no further payment until expiry of the warrants.
At the end of the term, you choose to pay the residual outstanding amount and receive the relevant shares, OR receive a cash payment equal to the then share price less the residual outstanding amount.
You can sell your investment in each series or Endowment Warrants on the Australian Stock Exchange at any time prior to the end of the term.
Endowment Warrants are available over individual Australian stocks or as a portfolio covering the top 20 stocks by capitalisation in Australia.
The top 20 stocks are:

AMP

ANZ Banking Group

Brambles

BHP

Coca Cola Amatil

Coles Myer

Colonial

Commonwealth Bank

Fosters

Lend Lease

National Aust Bank

National Mutual

News Corp

Rio Tinto

St George Bank

Telstra

Westpac

WMC

Woodside Petroleum

Woolworths

Who should use them?
People wanting to get ahead in life
Short-term goals can often be met through the effort and income growth. Real wealth creation, however, must be focussed on capital growth and the necessary time to achieve it, without taking undue risk being taken.
Endowment Warrants can accelerate the creation of real wealth. While many other leveraged investments are short-term, Endowment Warrants offer long-term leverage (up to 10.5 years) either over individual stocks or over a portfolio of 20 leading Australian shares.

Investors who are looking for tax effective investment
With the year 2009 Endowment Warrants there is no income tax to pay on the dividends paid on the underlying share portfolio during the term, as the cash value of the dividend reduces the outstanding amount and is not directly paid to the investor.

First-time share investors
A dividend portfolio allows first-time share investors to reduce the risk of their investment. However, minimum transaction fees normally associated with a direct share investment of a few thousand dollars, makes such an investment very expensive. Year 2009 Portfolio Endowment Warrants provide you with diversification across 20 leading Australian companies, without incurring the significant transaction costs normally involved in purchasing a separate parcel of shares in each company.
The minimum investment is only $2000. This represents a simple investment tool for first time investors who want to invest initially only a small amount in the share market.

Experienced share investors
Experienced share investors understand the 'risk/reward' trade-off with leveraged investments. With Year 2009 Portfolio Endowment Warrants you benefit from capital growth and dividend earnings of a diversified share portfolio throughout the 10.5 year term.

People who have investments in managed funds

  • Year 2009 Portfolio Endowment Warrants are an alternative to managed Australian share funds. Both provide exposure to diversified portfolios of Australian shares, however, unlike managed funds, with Portfolio Endowment Warrants:
    There are no annual management fees
  • Your investment performance is directly related to the initial portfolio of shares - there is no manager discretion to change the portfolio of shares
  • You can sell Year 2009 Portfolio Endowment Warrants on the Australian Stock Exchange at any time.

Investing for your children's future
Year 2009 Portfolio Endowment Warrants provide the opportunity for long-term capital growth. So they may be a useful way to provide for future education expenses, university fees or generally to help your children get a head start.

THE VALUE OF YOUR INVESTMENT AT THE END OF END OF THE TERM
The graph below illustrates:

  • the compound effect at the end of the 10.5 year term of various share price growth rates on the value of the portfolio of shares
  • the final payment at various dividend growth rates, at the end of the term, and
  • all other things being equal, that the higher dividend growth rates will result in a reduced final payment and a higher Portfolio Endowment Warrant value.

The shaded are in the graph illustrates the hypothetical value of the Portfolio Endowment Warrants, being the difference between the value of the underlying portfolio of shares (at any given share price growth rate) and the final payment (at any given dividend growth rate). Investors should note that the share price growth rate of the portfolio of shares is likely to be different to the dividend growth rate of the portfolio of shares.
The fact that the outstanding amount is not fully paid off does not in itself indicate the success or otherwise of the investment. As the graph below shows, because the Year 2009 Portfolio Endowment Warrants give leveraged exposure to the portfolio of shares there can be considerable value in the investment even though the outstanding amount is not fully paid off and a final payment may be due at the end of the term.
Please note that the graph does not take into account possible changes in interest rates and other factors that may affect the performance of the Year 2009 Portfolio Endowment Warrants.

Graph 1: The value of the Year 2009 Portfolio Endowment Warrant at the end of the 10.5 year term based on an initial warrant price of $1.17.

Investors should note that the share price growth rate of the shares is likely to be different to the dividend growth rate of the shares.
Click here to see general assumptions and Important Notice.

 

ESTIMATED OUTSTANDING AMOUNT AND FINAL VALUE ACCORDING TO SHARE PRICE/DIVIDEND GROWTH RATES
By way of further explanation, the table below illustrates the value of one Year 2009 Portfolio Endowment Warrant and the final payment, at the end of a 10.5 year term, at various annual share price/dividend growth rates.

Table 1: Illustration of final price

YEAR 2009 PORTFOLIO ENDOWMENT WARRANTS

Current

Price

Value on expiry at various

annual share price/dividend growth rates*

0.0%

2.5%

5.0%

7.5%

10%

12.5%

15%

Portfolio Value

$2.01

$2.01

$2.61

$3.37

$4.32

$5.51

$6.69

$8.82

Final Payment

 

$1.66

$1.52

$1.35

$1.16

$0.94

$0.68

$0.38

Warrant value**

$1.17

$0.35

$1.10

$2.02

$3.16

$4.57

$6.31

$8.44

Current Outstanding Amount: $1.18

The above calculations are as at October 2, 1998. Click here to see general assumptions used and an Important Notice.
* Investors should note that the share price growth rate of the shares is likely to be different to the dividend growth rate of the shares.

** Pre-capital gains tax.

 

HISTORICAL SHARE PRICE GROWTH RATES ON THE PORTFOLIO OF SHARES
The graph below shows the average per annum growth in the value of the portfolio of shares (excluding AMP, CBA, CGH, NMH, SGB, TLS and WOW, which have only recently been listed) for 10 year rolling periods over the past 20 years (excluding reinvestment of dividends). The portfolio of shares analysed was reweighted at the commencement of each 10-year period to be equally invested in each of the 13 shares.

 

Graph one shows that, as year 2009 Portfolio Endowment Warrants provide leverage, the major factor which affects the performance of the Portfolio Endowment Warrants at the end of the 10.5 year term is the share price growth rate of the portfolio of shares.
The graph above shows that in every 10 year period the portfolio of the 13 shares included in the analysis achieved annual returns of at least 7.5 per cent annually and of the 121 samples, approximately half of the periods had average per annum growth greater than 17.5 per cent and over three-quarters had average per annum growth greater than 12.5 per cent.

Investors should note that past performance is not a guide to future performance and the graph should not be relied upon when making a decision to invest in the Year 2009 Portfolio Endowment Warrants. All investors should seek independent advice prior to making an investment decision.

« Making warrants for capital gainsHealthcare made sensible »

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