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AUSTRALIA Series 1 - Accessing an Australian equity recovery

Liontamer’s latest fund, AUSTRALIA Series 1, provides two innovative ways for investors to access the Australian share market.  

Friday, June 12th 2009, 10:44AM

For those advisers familiar with Liontamer's range of capital protected funds*, AUSTRALIA Series 1 represents a slight departure. Typically, Liontamer focuses on the capital protection component, and this latest fund certainly has that aspect covered, but after spending some time talking to advisers it became apparent that there was significant pent up demand from clients for a recovery fund that offered a boosted exposure to the Australia market, hence the introduction of a new feature - Unprotected units.

First, why Australia?

In our experience, Kiwi investors tend to have a local bias to Australasian equities, either directly, or via a managed or exchange traded fund. Throughout the global credit contagion this has left many investors exposed to declining Aussie share prices; for example the benchmark S&P/ASX 200 Index has fallen around 40% since its high in November 20071.

AUSTRALIA Series 1 has been designed for advisers seeking to a) put a floor under any further Australian equity losses but who want to participate in any future gains, or b) have a positive outlook for the Australian sharemarket and who want a boosted exposure to any market recovery over the medium term.

Any pick-up in the Australian equity market is clearly dependent on the prospects for the Australian economy in
general. So how is Australia placed in the global scheme of things? Well, on the surface it looks to be doing it tough. The 2009 budget, titled "Nation building for the recovery", noted that the annual tax take is down, unemployment is rising, the economy is expected to stay flat in 2008/2009 and shrink 0.5% in 2009/2010 and debt levels are poised to escalate dramatically.

While that sums up the bad news, the good news is that all the numbers were roughly in line with expectations, which meant markets generally took the budget news in their stride and Australia maintained its AAA credit rating with Standard and Poor’s. This was a big relief for the Australian Government given the impact a sovereign credit rating downgrade could have had on local interest rates and the Australian dollar.

On the positive side, buoying the economy is the fact that early on in the financial crisis the Australian Government introduced measures intended to stimulate the financial system. So far, more than A$50 billion has been targeted to build new infrastructure, create jobs and encourage consumer spending. The package will take time to take effect but is specifically designed to stimulate growth over the medium term. In addition the Reserve Bank of Australia has lowered the cash lending rate to an all time low in a concerted effort to kick-start credit markets. This means that businesses are now able to borrow to invest in new technologies, finance expansion and rollover debt cheaper than ever before. Australian consumers also have lower mortgage payments, tax incentives and more money in their pockets to spend.


Natural ability

In the 1990s Australia was one of the fastest growing economies in the OECD as economic reforms embarked on in the eighties boosted the country's global competitiveness. In the last decade Australia has effectively leveraged its vast natural resources while tapping into the pockets of its own citizens in the form of compulsory super, to drive growth and ride a wave of demand for Australian-sourced commodities from Asia. While Asian manufacturing has recently taken a hit and that wave has subsided, at Liontamer, we believe that Australia's resilient resource-based economy is well positioned to benefit from any future lift in Asian demand. After the dust has settled, Australia still has massive natural reserves of essential energy inputs like coal and uranium. It is also a major producer of iron ore,copper, nickel, zinc, gold as well as agricultural goods, giving it an enviable ability to both fuel Asia's appetite for commodities and feed the workers of the world's factory floor. Meanwhile the news from Asia is mixed, but generally encouraging. While exports are down, the latest data from China shows that retail sales rose 14.8% in the year to April, industrial production was up 7.3% and investment in infrastructure, such as roads and power plants, rose at an annual rate of 30.5%, indicating that domestic demand still underpins China's growth2.

How to access a market recovery

AUSTRALIA Series 1 provides an exposure to the Australian market via the Liontamer Australia Index. This Index is made up of the largest 200 companies in the Australian sharemarket and covers approximately 78% of the market capitalisation. As a mirror of the benchmark S&P/ASX 200 Index it includes a diverse range of Australian companies and provides a broad coverage of different industries and sectors including health care, media, banking, utilities, energy and resources.

There is a general perception that the Australian market delivers a high annual dividend yield. In recent years that may be true, however it is clear that many Australian companies are quickly moving to cut dividends and retain earnings to better weather the current climate. Liontamer's modelling shows that provided the market grows at an annualised rate of 6% or higher over the term of the investment (using some fee assumptions and taking into account historical dividend yields), the key features of the fund (either capital protection or an enhanced return) compensate for the fact that investors forgo dividends under this structure.

Capital protection or boosted returns?

AUSTRALIA Series 1 provides two quite different methods to access a potential sharemarket recovery in Australia. The first unit type, Protected Units, offer 100% capital protection at maturity and exposure to all the market gains*. The second option, Unprotected Units, has no capital protection (so investors are exposed one-for-one to any decrease in the Liontamer Australia Index) but rewards investors with significantly boosted returns of 160% of any rise in the Index at maturity.

This means that investors have two simple choices of how to access a recovery story; capital protection for those that place a high value on wealth preservation, or boosted exposure for those who have a positive medium term outlook and are comfortable with the potential for capital loss.

Another new feature, driven by market feedback and added  to the Unprotected Units, is the ability to allow unitholders to request an early exit based on the value of the fund at the time of repayment3. While AUSTRALIA Series 1 is intended to be a hold-to-maturity investment, this means that clients holding the Unprotected Units can exit the fund on a quarterly basis without the usual restrictions that will continue to apply to the Protected Units ^.







Full details are contained in the Investment Statement and registered Prospectus, provided by Liontamer Investment Management Pty Ltd (ABN 23 104 174 325). Copies are available upon request from Liontamer by calling 0800 210 450. 1. Source: Thompson Reuters, as at 29 May 2009. 2. Sydney Morning Herald, 20 May 2009. 3. Less the exit fee. *Capital protection at maturity only applies to the Protected Units and means you will receive back 100% of the combined amount invested and early bird interest (earned during the offer period) less any entry fee charged (up to 3%) and any exit fee. Capital protection only applies at maturity. ^Early withdrawals may result in investors receiving back significantly less than they put in, due to market movements, the exit fee and the fund’s establishment costs. There is a more detailed description of capital protection in the Investment Statement and the limited circumstances when capital protection may not be available. †Liontamer Australia Index: Initial Index levels are averaged monthly over the first six months for the Protected Units and over the first three months for the Unprotected Units. Final Index levels are averaged monthly in the last year for both unit types. Averaging will protect you from any sharp falls in the Index; however in a rising market averaging lessens returns.



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