by Jenny Ruth
AMP Henderson is making use of a partnership structure new to group investment schemes in an effort to make a managed fixed income product competitive with the do-it-yourself (DIY) approach.
Not that the structure itself is new: the Partnership Act was passed in 1908.
A major advantage is that each investor will be taxed at their marginal tax rate, as opposed to the 33% rate that managed funds pay.
While the partnership will be more competitive with a DIY investment, there is a potential drawback because the partnership doesn’t enjoy the limited liability status of other group investment schemes.
AMP Henderson chief investment officer Chris Wozniak says the Strategic Income Partnership, which charges a 0.95% ongoing management fee, will invest in investment grade corporate fixed interest.
"This product is designed to compete more effectively with the DIY approach. When you buy a bond from a broker or financial adviser, there’s a fee – ie brokerage. The partnership buys and sells bonds at the wholesale rate," Wozniak says.
In the partnership the bonds are actively managed on an ongoing basis and the interest rate risk is also actively managed as opposed to the DIY approach which is generally to buy and hold to maturity.
While in theory, investors could be exposed to unlimited liability, AMP has structured its partnership to minimise such risk, Wozniak says.
While investors can be liable if any partner fails to pay its contributions, AMP won’t allot partnership interests until the subscription amounts have been paid.
Investors are also jointly and severally liable for all the partnership’s liabilities and it will be investing in the notoriously risky area of derivatives.
Wozniak says the derivatives won’t be geared. "The fund is using derivatives as a hedge, to remove risk from the portfolio, not to add to it," he says.
Securities Commission general counsel Liam Mason won’t comment on any individual product, but observes that he hasn’t seen the partnership structure used this way before.
"It’s novel. I can see the tax efficiencies over a unit trust. It’s important that the risks are very clearly disclosed for investors," Mason says.
"We will be keeping an eye on it, but I don’t see that there’s a need for action. We’re not out to stop innovative products at all. All we want is for people to understand what they’re getting into."
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