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KNOCKOUT: Creating coupons from equities

KNOCKOUT Series 1 is a new fund brought to you by Liontamer Investments. It's the first launch of a knockout fund in the New Zealand market – a concept that has proven hugely popular with investors all across Europe. As with Liontamer's other funds, it is based on market performance, but this time the objective is to provide a high potential coupon, which will be paid even if a particular sharemarket has low or zero growth.

Friday, August 8th 2008, 4:18PM
Plus there is an opportunity for the fund to mature early, in each year of the five year term. Liontamer designed KNOCKOUT Series 1 specifically for New Zealand investors as a new and exciting way to potentially enhance portfolio returns in an otherwise low return environment.

How does it work?
Investors have the potential to earn a 12% coupon rate per annum which builds up over the five year term of the investment (not compounded). Payment of the coupon is dependent on the performance of a basket of Europe's 50 leading blue chip companies, as measured by the Dow Jones EURO STOXX 50 Index. If the level of the index is the same or higher than its starting level in a year's time, investors will earn the 12% coupon. Even better, the fund will close early (that's the 'knockout') with a full return of capital.

If the index doesn't maintain its value, investors simply stay invested for another year and the same test applies. Each year Liontamer compares the index to its starting level on the anniversary of the fund. Investors get five opportunities (one each year) to earn the high coupon and achieve a knockout (maturity of the fund). If this happens at the end of Year 2 the coupon jumps to 24%, if it happens at the end of Year 3, it's a 36% coupon, Year 4 is 48% and Year 5 is 60%. For each year they stay invested, the coupon jumps up in value to compensate for the longer term.

Jumper units
KNOCKOUT Series 1 has a great new feature called 'jumper units'. As described above, if the fund doesn't close early, investors simply stay in for another year. The coupon investors could earn at the end of each year jumps up in value by 12%, reaching the maximum of 60% in Year 5. Investors need to be prepared to stay invested for the full five years; however, the fund will actually mature as soon as they are eligible for a coupon payment.

Jumper example
For simplicity, let's say the sharemarket index starts at a level of 100 when the fund starts:

In this example, the index is below its starting level at the end of Years 1 and 2, so there is no early maturity or coupon paid. In Year 3 it rises to a higher level triggering a coupon payment of 36% and a full return of capital to investors.

What level of capital protection is there?
The jumper units also have an excellent level of capital protection in place*. Investors stay fully protected, so long as the sharemarket index remains at, or above, half of its initial starting level (measured at monthly observation points). This provides substantial protection from falls of up to 50% in the index from the starting level.

As an example, if the index continuously falls in value, to a low point of –40% at the end of Year 5, investors still receive a full return of capital (but no coupon payment). If the index breaks the 50% safety-net during the term, the return of capital tracks the performance of the index, just like any ordinary sharemarket tracker fund. Any loss mirrors the loss in the index.

Who provides the capital protection?
This fund will own investments that are capital protected by KBC Bank, who is the 'Fund Asset Provider'. Capital protection is conditional on the index remaining at, or above, half its initial starting level at each monthly observation point during the term.

With any form of capital protection, the financial strength of the bank providing it is important. This is because the bank is legally liable to repay the investment amount to the fund if the conditions of the protection are met. It is very important for investors to ensure the bank has a strong credit rating. In this case, KBC Bank has an AA- credit rating from Standard & Poor's (similar to most well-known NZ banks).

  • KBC Group is a Global Fortune 500 company (ranked 246 in 2007)
  • 12 million customers and over 50,000 employees
  • Market capitalisation of around $48 billion
  • KBC Bank is the 10th largest bank in the European Economic and Monetary Union (EMU) and operates across Europe and Asia.

As at 31 March 2008

How will the fund be taxed?
Liontamer believes that the determination which it has obtained from the IRD allows investors in its trusts (which meet certain criteria) to apply the Fair Dividend Rate (FDR) method to calculate their taxable income from their investment. Generally, the FDR method applies to investors with more than $50,000 invested in offshore equity investments. If you choose to use this method, tax is payable each year on a maximum amount of 5% of the total market value of your offshore share portfolio.

Those who qualify as de minimis investors (i.e. have $50,000 or less invested in overseas shares) may derive a tax-free capital gain on the sale of their units to Liontamer on the maturity (including early maturity) of the fund, depending on their individual circumstances. As an example, if the 12% coupon is paid at the end of the first year, we have calculated the gross return required on a one year deposit (on an investment which is not equity-linked) to match this coupon (assuming the FDR method is applied by non-de minimis investors in the year the coupon is paid):

Important note: For taxation advice relevant to your personal circumstances, we strongly recommend that you talk to a tax adviser.

About the sharemarket index
The coupon return is linked to a European sharemarket index; the Dow Jones EURO STOXX 50 Index. This is the leading blue chip index for Western Europe, and provides a good representation of the leading companies in that area. The index covers 50 stocks from 12 European countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. It currently includes such well-known giants as Nokia, AXA, L'Oreal, Suez, Total, and Unilever. Liontamer's parent company KBC Asset Management (KBCAM)# has a lot of experience in European markets and the company's main offices are based in Belgium, in the heart of Europe. Based on KBC's experience in Europe and extensive regional research, we believe that the medium-term outlook of the European sharemarkets is positive.

Full details are contained in the Investment Statement and registered Prospectus, provided by Liontamer Investment Management Pty Ltd (ABN 23 104 174 325). Copies can be obtained from Liontamer Adviser Relations on 0800 210 450. *100% capital protected where an Early Maturity Event occurs, and at final maturity unless the Final Index Level is less than the Starting Index Level and the Index Level has fallen below the Capital Protection Threshold (50% of the Starting Index Level) on any Observation Date. There is a more detailed description of the conditional capital protection in the Investment Statement (including an explanation of the terms used above) and the limited circumstances when capital protection may not be available. # None of KBC Bank NV, KBC Asset Management NV or KBC Group NV guarantees repayment of the investment amount or any returns on the investment nor do any of them accept any liability to investors. However, as the Fund Asset Provider, KBC Bank NV is legally liable to pay to Liontamer as trustee of the fund certain amounts. Neither KBC Group NV nor any other member of the KBC Group guarantees the obligations of KBC Bank NV.

Order Investment Statements and fact sheets on 0800 210 450 or email

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