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USD Equity Plus

equity structured product

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Pierre Rodrigues

Head of Product Development

2016 was a challenging year for equity investors, with pedestrian returns on both local and international markets. There’s not much indication that this trend will reverse over the next 12 months – in fact, the expectation is that equity returns will be below the long-term average. One way in which investors can find performance is through structured products that provide a guaranteed pay-off profile while limiting downside risk. We particularly like a new offering launched by Investec – the USD Digital Plus equity structured product.

During periods of market uncertainty and volatility – when downside risk is high – it’s vital for investors to have some level of capital protection. Structured products, which multiply market gains up to a certain point but also offer protection against loss, are therefore an appealing option in turbulent times. One such product is the new USD Digital Plus equity structured product recently launched by Investec and listed on the JSE – it allows investors to access the growth potential in the S&P500 index while limiting downside risk.

SPW clients have increasingly obtained exposure to the S&P500 index, often by way of index-tracking unit trusts and exchange-traded funds (ETFs). Our clients have benefited from the strong rise in the S&P500 index, which has of late seen regular record all-time highs:

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Given that the S&P500 market is at or near record highs, which has increased the chances of more muted returns over the next few years, our Director of Investments, Alwyn van der Merwe, has advised SPW portfolio managers overseeing discretionary mandates for clients to consider switching from tracker funds to Investec’s new USD Digital Plus equity structured product. It offers investors the chance to earn heightened returns on the S&P500 index – the world’s largest stock market – with built-in capital protection.

We like the USD Digital Plus equity structured product for these reasons:

  •  Unlike traditional investments such as unit trusts and ETFs, the USD Digital Plus structure provides a level of principal protection should the index have a negative return of up to 30% during the term.
  • Provided the S&P500 index is positive versus its starting point, investors will earn at least a 30% return on their investment. So, for example, if the index starts at 2000 on the starting date and at the end of the term it’s up by even only 1 index point, investors will receive a return of 30%.
  • Should the index continue to surge and increase by more than 30% over the period of the investment, investors will be paid the full upside return of the index – in other words, the returns will not be capped.

This product may be of particular interest for SPW clients holding tracker funds on the S&P500 but it’s open to all clients for consideration. While currency movements are notoriously difficult to call, the rand has appreciated considerably against the US dollar over the past few months. Although still slightly oversold, the rand does represent a better entry point into the dollar than has been the case for the past 15 months. The market-implied US dollar/rand forward depreciation rate is approximately 25% to July 2020, according to Bloomberg.

The USD Digital Plus equity structured product is an investment with a 3.5-year term and is available until 20 April 2017. Investors can invest from a minimum of R60 000 and should speak to their financial adviser or portfolio manager for more details. The USD Digital Plus is listed on the JSE and can be easily traded before its scheduled maturity date in normal market conditions.

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