Subscribe

The award-winning Investec Structured Products team brings you the latest iteration of International Titans Basket Ltd. This product offers 100% capital protection and geared upside (with a cap), referencing a basket of underlying global equity indices.

Bringing decades of experience and passion to this discussion, Japie Lubbe walks us through exactly how the structure works.

In this podcast:

00:00 Intro
01:32 60-40 portfolios vs. structured products
04:04 Track record of Investec Structured Products
05:00 Overview of latest product: International Titans Basket Limited
09:30 Index exposure and valuations
11:21 Stats around trying to “time” the market
13:41 100% capital protection
19:00 Backtesting the upside cap and gearing
21:02 The underlying mechanics of the structure
23:50 Credit risk
27:41 Fees and access to product

Watch on YouTube for the full experience

If you choose YouTube for this podcast, you benefit from the accompanying slides in the Investec presentation alongside Japie’s explanations:

You can find all the information you need on the Investec website at this link.

Disclaimer

This podcast is for informational purposes only and does not constitute advice. You must speak to your independent financial advisor before investing in any product, and especially this one. Investec Corporate and Institutional Banking is a division of Investec Bank Ltd, an authorised financial services provider, a registered credit provider, an authorised over the counter derivatives provider and a member of the JSE. Ts and Cs apply to this product and you should refer to the Investec website for full details.

Transcript:

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. We come to you in August after a crazy month, actually, in the markets. We’ve seen all kinds of stuff going on out there.  

I’m grateful to be able to lean on the experience today (and so much experience it is) of Japie Lubbe. He is the stalwart, really, of the multiple-award-winning Investec Structured Products team.  

Japie, it’s always such a pleasure to do these with you. I really enjoy them. We are, of course, here to talk about one of your new products (as always), which is International Titans Basket Limited. 

I think what’s going to be particularly interesting in this one (and for our listeners on Apple Podcasts and Spotify, don’t worry – it’s okay if you can’t see the slides), but if you’re watching this on my new YouTube channel, then we’ll be able to put up some of the slides from the presentation and that will just help with your understanding of this.  

 So, if you have access to YouTube, you may want to switch to that. But don’t worry, you can also carry on because Japie will take us through everything without you needing to have the slides.  

 Japie, welcome. Lovely to do another one of these with you and thank you for your time. 

Japie Lubbe: Thank you! 

The Finance Ghost: Let’s jump into a conversation about conventional wisdom. You’ve been around in the markets for long enough to know that conventional wisdom can change over time, and there’s been plenty of debate around that 60/40 split equities and bonds.  

And it’s quite interesting because in the presentation for this particular product, you actually put a bit of effort into talking about this, to just set the scene in terms of how markets have actually behaved, whether this really still holds.  

So, particularly with you on the podcast and with how many years you’ve been doing this for, Japie, I’d love to get some insight from you, first and foremost, on whether that conventional wisdom still holds and why that’s relevant to the structured products that you release into the market. 

Japie Lubbe: Thank you. What we’ve done is we’ve had a look at market returns for different asset classes for the last 26 years. And in that period – this is now comparing the MSCI World (in dollars) in total return to bonds and cash and inflation. Very importantly, the 26-year average for equities, total return, was 7.1% per annum (p.a.). And the total return for bonds was 2.9% p.a., money market was 2.2% p.a. and inflation was 2.6% p.a. 

What this means is that any portfolio that has 60% equities and 40% money market or bonds is going to have quite a difficulty outperforming inflation, because inflation has been higher – for a 26-year average – than money market, and has only been 0.3% below what bonds returned.  

Now, I think that conventional wisdom probably worked very well in the years where interest rates were coming down, down, down all over the world. But of late, especially the period of 2021 to now, in the US, rates have kicked up a lot. 

What that means is that the investors have taken a big haircut in their bond valuations and the equities have done well, but together, balanced funds have had very mediocre returns, if anywhere reasonable. 

So our philosophy is that it’s probably better for the investor to allocate to equities, because they tend to have the stellar performance and ability to pass inflation through to the investor. 

But some of the equities have it in a hedged way, like we’re going to be talking about today. Because then, if the equities have a very bad period, you just avoid the very bad period.  

But in essence, over time, you’ve got more allocation to equities being the best asset class by some margin. 

The Finance Ghost: Yeah, it’s certainly very interesting. I’m going to just touch on the track record here of the team: 23 years, 136 public products, 104 of which have matured. 100 have delivered positive returns, and the other four have returned capital to investors. Losses: none!  

Japie, what a career. Well done. That is really, really impressive. Obviously that’s no losses on matured products, just to be clear, but still, a really good track record there.  

And obviously all the caveats apply here about past performance and future performance and all the normal stuff, but I think it’s worth just mentioning that track record because that talks to what you’re saying at the moment, which is, well, consider equities in a structured way, as an alternative to the very traditional thinking around equities and bonds and everything else.  

So, with that kind of track record behind you and people certainly paying attention to this, maybe give us just a broad overview of this new product, which is International Titans Basket Limited. I’ll give the floor to you to just walk us through what this thing is and what it does. 

Japie Lubbe: Yeah, sure. So, this is now the fourth roll of this company. There’s a Guernsey company that’s listed in Bermuda, and the company’s term is five years. After five years, the investors decide whether they’re going to keep or sell their shares.  

They do also have liquidity, which is because Investec makes a market in the shares during the five-year period. But this is now the fourth of these five-year periods. 

For this one, the assets are going to be denominated in US dollars. It’s a five-year-and-one-month period, and the exposure – which is the engine to the vehicle – is an allocation of 35% S&P, 25% to the Euro Stoxx 50, 20% to the Nikkei 225, and 10% each to the FTSE 100 in the UK and emerging markets. That combination is 93% the same thing as the MSCI All-Country World Index. That’s the underlying market exposure.  

The share comes with 100% capital protection if kept to maturity and on the basis that the banks pay, as you said have done in the last hundred that matured, there’s never been a bank or counterparty that’s not met their obligation.  

And then the return will be whatever that portfolio of indices in those percentages do – with a gearing of 125%, or we refer to as a participation of 125% up to a cap of 40%.  

So, keeping it simple, if the market does 20%, you get 20x 1.25. If the market does 40%, you get 40x 1.25, which would be 50%. And 50%, to put into perspective, equates to 8.3% p.a., as far as an internal rate of return – and that’s after all fees, costs and expenses.  

And because that is achievable with no capital at risk, the first thing an investor should consider is how much is it worth to have equity exposure but with no capital at risk?  

Well, that is simply like you take out insurance on your car or your medical aid. It’s called a put option. It’s the premium you pay to protect an asset. And in this context, for five years, world exposure to equities would cost you 12%. 

These investors don’t need to incur that 12%, because you would appreciate if you had $100 and you had to pay away $12 to protect the $100, this means you’d only get 88% of the total return (like on an ETF, say). And dividend yields, with the markets being so hard down, they’re probably at 1.7%, 1.8%. So, five years of dividends couldn’t buy a protection on $100. It’s not sufficient. 

So, the minimums here are $14,000. And this offering then is open until the 16th of October, then it closes. 

The Finance Ghost: Very, very interesting. I know for sure that 100% capital protection is music to the ears of any investment audience, that’s for sure. And I just want to confirm there – that up to 8.3% p.a., that’s in US dollars.  

Japie Lubbe: Yes. 

The Finance Ghost: So, that needs to be thought of as a hard currency return, right? When you hear a percentage like that, you shouldn’t immediately think, “Oh, rand, what can I get at the bank?” You need to think, “US dollars.” Right? I just want to confirm that. 

Japie Lubbe: Absolutely. And I think, to your point, what we’re seeing in the performance of the markets is that the MSCI World Total Return has done that 7.1% average for the 26 years. But the last period from September ’22 to now, it’s done 22.5% per year. 

So, you’ve got to say to yourself, “If something performed for 26 years at 7.1% p.a. total return, but just the last three-and-a-half years, it’s done 22.5% p.a., that should be ample proof that it’s time to be cautious.”  

And the caution should come from the fact that, firstly, the portfolios that have done very well – that’s fantastic. We’re very pleased about that.  

But if I’m allocating money to the market now, or if I’m thinking, “How do I capitalise on where the market is?” – it might not be a bad idea to cash in some of the very highly valued shares, but keep the shares if they carry on doing well.  

But in this case, you’re choosing the indices. Because, as we know, the indices from a passive perspective still pick up the shares that are doing very well. They dominate the index, and the ones that aren’t doing well fall out of the index.  

But if the entire market corrects massively, like in 2008/2009, then you just get your 100 back in dollars. So, that’s very valuable in the context of a portfolio. 

The Finance Ghost: Yeah, absolutely. It all comes down to risk/reward, right? I mean, that’s what investing is, and that’s certainly the way that these structured products are designed. So, let’s dig a little bit deeper into that equity exposure.  

You’ve mentioned five indices there, and you’ve also mentioned the correlation to the MSCI All Country World Index (or the ACWI as I’ve heard it referred to). 

Japie Lubbe: Yes. 

The Finance Ghost: Now, those who might be worried about equities at the moment, and I think you’ve given us a good reason, there, to be worried, which is the incredible run they’ve had for the past few years versus long-term average. They do seem expensive, relative to historical averages.  

I know that your presentation does go into some detail around average P/E ratio versus historical levels – again, if you’re on YouTube, you’re going to see some cool charts now. If you’re listening, just concentrate, because Japie will take you through it in a way where it’ll still make sense.  

So, Japie, maybe just walk us through your view on, firstly, the concept of timing the market (biggest debate ever) and why that can be dangerous, because you can miss some key trading days, and also just some thoughts around the valuation levels at the moment and how you think about this world when you’re putting these products together and how you think investors should consider it. 

Japie Lubbe: Yeah. So, firstly, coming to the valuations, at the moment, the MSCI World Total Return is trading at 23.5x. 

So, 23-and-a-half years of earnings are required to qualify for the current value of that share. The long-term average is 18.9x. In statistical terms, this means it’s trading at around one to two standard deviations above the long-term average. 

Obviously, an average is something that has been determined after mean reversion. After markets are over-expensive, they come back to the average. And if they’re too cheap one day, then they appreciate and they come back to the average. So, it is important to recognise that equity, as an asset class, has given 4.5% to 5.5% real return over the long term.  

If your entry date is now and this thing is at the high end of the valuation, you just have to be mindful about the downside risk of that, or the risk that it actually just goes sideways. 

Now, people may feel that, if it’s expensive, why don’t I just wait and then buy when it’s cheap? This is your point about trying to time the market.  

We’ve done some research on that and, interestingly, if an investor was invested for the last 20 years every day and got the total return, like an ETF, and they didn’t have costs (in other words, they weren’t managing the money in any way, they were just buying the passive), a 20-year exposure invested every day would have given them an 8% p.a. dollar return. 

But if they missed the best 10 days because they were trying to time it, and they so happened to not be in on the best 10 of the 20 years, that comes down to 4.7% from 8%. And if you miss the best 20 days, it comes to 2.5% from 8%. And if you miss the best 30 days, it comes to 0.8%.  

So effectively, it’s extremely hard to time the market. That’s why that old saying goes, “It’s time in the market, it’s not trying to time the market,” because it’s very difficult for professional investors – anybody – to actually get that consistently right.  

Another way to look at it is if you were to have put $100 into the market for the last 21 years once p.a. (if you put it into the money market, just kept it at the bank in the dollar money market), the $2,100 capital would have grown to $2,566.  

But if you put it into the MSCI World All-Country like we’re talking about here, total return, and you picked the worst day every time for 21 years, you still would have gone to $5,723. If you were lucky enough to pick the best day, you would have gone to $7,714.  

The point here is not to know when to pick the best or the worst, because you wouldn’t have known. But rather the gap between the $2,560 that the money-market-type yields would have given you, versus more than double and even treble that in equity exposure. 

The Finance Ghost: Yeah, it’s fascinating, right? There’s a real message of hope there for all investors. Obviously the very important point here is that this is money put in every single year into the market.  

So, dollar cost averaging is doing some wonders for you in this particular case, as opposed to taking your life savings and YOLOing them into memory stocks a couple of months ago. Probably not the kind of thing you want to be doing, but hopefully listeners to this podcast are not behaving like that – and if they are, they should be speaking to a financial advisor urgently for reasons beyond just this product. 

Japie, the good news here, though, is that even if things go really badly (and I’ll just refer back to the track record here where that’s only happened, what was it – I think four times out of 104?), you’ve merely returned capital. But it can happen, and there’s absolutely a chance. That’s where the 100% capital protection makes a lot of sense. 

I know that this is something that investors really do like, so perhaps you can just walk us through the example that you give in the slide pack around the impact it actually has when you’ve got that capital protection at maturity, and just how much better off you are than someone who doesn’t necessarily benefit from that. 

Japie Lubbe: Absolutely. Because most people are saving, let’s say for when they’re old one day or for their children or their grandchildren, for a legacy. So, you’ve got to think long-term when you’re investing your money – especially in equities, because equities you’ve got to give time, firstly, that’s why we like five years (unless you’re a day trader, but that’s not what this discussion is about).  

Now we’ve got this example where this is actually one of those four where we returned the capital. The specific company was called the Euro Asian. It was done, you know, 17 years ago, and effectively, it had two underlying indices: 50/50, half the Euro Stoxx 50 and half the Nikkei 225, okay? Half each.  

If you calibrated those two indices to the year 2000 and you started at 100, by the time 2002 came and you’d been through the dot-com bust, it would have been down to 50 (the 100). It then went back up to 100 when we started our company, which was a five-and-a-half year tenure and our investors went in at 100. Five-and-a-half years later those two indices were at 56. From 100 they’d gone back down to 56.  

Our investors, because they had 100% capital protection, got out their 100, so they didn’t lose the 44.  

And you see what happens in maths is we think of it as a 44 loss. What you should think of is the 44 on 56, where it is now, means it’s got to go up 85 to get back to where you were. Okay? You must look at the maths from where you are to where you needed to get back to where you’d originally been.  

Now if the investors stayed with those two indices, which were then worth 56, they would have potentially been quite happy, because it has grown back to 252. We know how the Nikkei and the Euro Stoxx have gone up. Your traditional investor would have been quite happy thinking, “My 56 has grown back to 252, like in a unit trust or an ETF.”  

Now what we demonstrate here to our actual investors (this is not a theory) is that by staying 50/50, they’re now at 468 versus 252 – same underlying indices, no change in the underlying indices, but just starting the date at 100 and not at 56. 

So, this is actually really important because what it means in a portfolio when you’ve got different assets – we would never recommend what we’re talking about today for all the money, maybe 20%, 25% of clients’ money – but that portion has a huge advantage if there is ever a big correction.  

And if you look at the 200-year track record of equities, you’ll see it’s just, “When does it come?” Assets tend to overextend themselves and get to too high a valuation and then, you know, there’s a mark of time why they come down or stay sideways.  

So, this is the value of the 100% protection. It’s the fact that downstream, the investor at the maturity, if it was bad, is getting into the market at the spot level of the market in future, but with 100 in their hand and the market’s price at 56.  

Ordinarily, your problem is your statement tells you you’re worth 56. And you can’t say, “I wish I wasn’t invested.” You are. And, unfortunately, you now have to wait until, one day, you get back to where you’d been or make money – and you can never catch up.  

It’s the same concept as why people on this podcast, I’m sure, all take out medical aid, life insurance, car insurance, household insurance. If you do not take out medical aid, and you might be young and fit and strong, but if you get very badly ill and you don’t have medical aid, you can never recover in life.  

Same as your car. You drive your car, you don’t have insurance, you drive into a Ferrari and you’re going to pay. You’ve to sell your assets, you’ve got to sell your house, to pay. The guy’s got insurance, he just phones Santam or OUTsurance, whoever, and says, “You guys pay for this car.”  

And now in investments, it’s also important to have a portion of your investments protected, in case (Heaven forbid), bad times come. 

The Finance Ghost: Yeah, I love that. It’s a bit like you’re getting ready to run a 100-meter race, you know? And if you’ve got the capital protection, you’re on the starting blocks, you’re ready to go again. And if you didn’t have the capital protection, you’re still tying your shoelaces when the gun goes off and you can work out for yourself who’s going to finish that race a lot better.  

So, it is a very powerful concept. And again, it’s managing the downside risk. You’ve got to give up some of the upside potentially. There’s no way of knowing for sure what the markets will do over the next few years. You might not be giving up anything – in fact, you might be better off because of the gearing – but there is a cap on the upside, and that’s the important thing that you might be giving away in order to get the 100% downside protection, right? 

Like everything in life, it’s a bit of yin and yang. You’ve got to give away and get some stuff on the other side. So, let’s talk about that, because that’s the participation of 125% with the index basket growth capped at 40%. In other words, you can get up to 50% total. 

And, as you gave us earlier over the period that works out to a compound annual growth rate of just over 8%. And you’ve obviously backtested this. So, I think (again, a really interesting chart for those listening on YouTube – there’s the payoff simulation in the presentation by Investec, and maybe we’ll put that up for this discussion), Japie, perhaps you can just walk us through the way you think about these payoffs and how you actually backtest this? 

Japie Lubbe: So, firstly we did a backtest on if you had had such a share that paid off between 0 and 50 in the past compared to having had these indices at those weightings on a five-year rolling return. Because in the case of this simulated share, you didn’t take losses – and losses happened (this is from 1988 to now) 22% of the time – because you had the geared upside up to 50% and no losses, you would have actually outperformed the physical exposure 54% of the time.  

That means that at world-level (so we’re not talking single shares here, we’re talking at world equity as an asset class), the cap we put at 40% is because we look at the history, even the most recent 26 years, 7.1% p.a. total return for five years compounds to 40%.  

That’s why we’re comfortable to say put a cap at 40% because if you’ve just had three-and-a-half years at 22.5%, the likelihood of it outperforming the average is probably quite limited. There’s more likelihood that you actually have a correction, or that it goes sideways.  

But I think another important thing just to add here for the listeners is, in this structure (which you don’t get in normal shares, ETFs and unit trusts), after five years, if it’s been positive, like we’ve got an example of one of our other shares in the pack where after five years you lock in the performance. In other words, if it’s been positive, your $100 now goes to $150 and that becomes the capital protection for the next five years.  

But simply because the investor owns a share in a company, they haven’t sold their shares and you only pay tax one day when you sell the shares in the company. And at that time you only pay tax on the profit in the foreign currency. These are all foreign shares. They’re not rand-denominated shares. That’s important.  

So, if we go to the actual makeup of, “How does such a share work?” – in other words, so that the listeners can understand, “How is it that Investec is going to offer them this thing?” – we have an example whereby on day one of the new phase, we’ll have $100. So, $100 will be the total capital, and we take $74 of that and we’re going to give that to Investec on a dollar-denominated credit link note. We’ll talk about that a bit more in due course. 

That $74 will grow to $75, $76 and mature in five years’ time at $100. This is inside this Guernsey company. And that’s just a formula according to a contract we signed with Investec, that’s what protects the capital. So, that’s got nothing to do with shares. It’s a bond, okay? It’s a fixed income instrument inside the company.  

Then we put aside, for five years of fees costs, expenses, auditors, lawyers – all the costs for the five years – that’s $7 and that amortises down to $6, $5, $4, $3, $2, $1, $0. 

So, at the end of five years, that money has been paid out, but as part of the $100; included in the $100. That means, on day one, you’ve got $19 left over. 

What we do is we go to the banks and we say, “What would a call option cost?” A call option is an asset that gives you, one-for-one, whatever the market’s doing, unlimited, okay? One-for-one. So, if the market does $10, they pay you out $10. And the premium you’ve got to pay on that now is $20. 

Because we’ve only got $19, what we do is we say to the bank, the counterparty bank (and we’ve got eight of them competing for the trade), “What would you pay us? What would you rebate us, if we sold your call option at $140, at a level of $140?”  

They say, “Okay, well then we’ll rebate you $4.8 for that because you stop participating if it goes above 40%.” Hence the $20 less the $4.8 is $15.2. And you simply take the $19 you have available and you divide it by $15.2. That’s how you get the 1.25 or the 125% gearing. 

So, in five years’ time, if the stock exchange has gone down $40, the options are worthless. They’re call options. They only pay if they go up and the fees and costs have been amortised. But the $74 still grew to $100. So, that’s how you then have the $100 to reimburse the investor.  

And as I said, then the stock exchange is now priced at $60. Very good time to come into it. 

If the market’s gone up, whatever it’s gone up by, you take that percentage and you times it by 1.25 until you hit 40%. And at 40% you then made the $50. 

So, it’s very simple, you know – obviously from where we’re sitting. But for a normal investor, if you said to me, “Can I do this myself?” It’s very, very difficult, because you can’t buy the same assets at the same pricing because this transaction is probably going to go out at $150 or $200 million. They’re a very big company. 

So, that’s how we actually construct the company to give the payoff we’re saying to the investor. 

Maybe the most important thing to consider here is: whose obligation is it to pay? In other words, “Who am I reliant on here, as an investor?” We refer to that as the credit risk, the risk on the options.  

In other words, the guys who sell us the call option structure can only be a bank with an S&P A or better rating. So, you’re talking JP Morgan, UBS, the biggest banks – and we get eight to ten of them to compete for the transaction, because our Guernsey company can place the assets with any one of them; we haven’t pre-selected. 

On the debt, that’s $74, which grows to $100. What we do is we’re going to buy that from Investec. So, senior debt of Investec, and we agree with Investec that they can take one fifth each. So, five names of international banks that are investment grade i.e. much higher rated than SA government debt), and one fifth each to the tier 2 debt, the debt that’s subordinate to the depositor. 

Now, the question arises, “How do I, as a man in the street or a lay person, how do I know? What must I look at before I put my money with any bank in the world? What are the things that I must rely on to make sure that I’m going to be fine?”  

Obviously, Investec is doing this for the investors. We’ve got the track record, as you’ve said, but essentially, the banks we can use (because we haven’t pre-selected, again – we want to use the best on the day) are Commerzbank, Deutsche Bank, Barclays, UBS, ING, Royal Bank of Canada, Lloyds, NatWest. These are massive, systemic banks of those countries.  

And the three things you look at are, firstly, the dividend yield, the ordinary share dividend yield. And if you look at the material, you’ll see that these banks have all been paying ordinary dividends for the last 10 years. 

Now, under the strict regulation that exists in the world, banks can’t pay dividends if they’ve got any question about their capital or their solvency or their liquidity or stress testing, you know – anything that the reserve bank checks, they check it quarterly.  

So, banks are highly regulated. They’ve got to provide all the numbers. And if there are any questions about any aspect, firstly the regulator says, “Get your shareholders, put more capital in.” And also, they don’t enable them to pay ordinary dividends. So, that’s the first thing.  

The second thing where an investor can see how solid a bank is, is what we refer to as the ‘credit spreads’. The credit spread is the amount of interest rate that you pay above the curve to get money from the market.  

And as we speak, credit spreads in the world (these banks, inclusive) are at, like, 26-year lows. So, banks have viewed the best that they’ve been in the market by capital markets, hedge funds, etcetera, because of this very strict set of rules, and regulation, and control, which happened after the GFC (Global Financial Crisis).  

There were problems (you remember Lehman Brothers). Consequently, they’ve tightened the noose and they’re really, really strict on them.  

And the last thing is the share prices – what has happened to the prices of the actual ordinary shares. We’ve just done an input which shows that if you started at 100 five years ago, all the banks we could potentially take exposure to here are at 200-plus starting at 100. So, they all doubled in price.  

Really, all that’s saying to us is that, with quite big moves in interest rates, up, down, as you know, the banks are sitting very solid, because banks are recognising that they’re highly regulated. The reserve banks push them to make sure that they look after their affairs very well.  

But, as you said, we don’t know what the future holds. But what we do know is, as Investec, doing this job, we’ve done this for 25 years. We obviously want to maintain our record – and we invest our own monies in these – so we’ll do our best to ensure that this is as solid as possible. 

And also, the investors have liquidity. So, let’s say I buy the shares and, one day, I don’t like one of the banks that was included. I sell my shares; I’m not compelled to hold the shares for the full five years. 

The Finance Ghost: Japie, thanks. Always good to understand the way you actually think through all of this; how you think about these banks, who the counterparties are, and everything else. We learn so much from doing these podcasts with you.  

And obviously, from an investor and potential investor perspective, people want to know about fees. That’s always a big talking point. So, let’s deal with that quickly and then I’m going to ask you to, straight after that, just deal with how people actually go about investing – what are the minimums; who do they contact? 

So, fees and access, and then we can bring this one to a close. Thank you. 

Japie Lubbe: Yeah, thanks. So, as we showed, we put aside (upfront on day one), roughly 7% for five years of fees and costs and expenses. Now, what the investors appreciate is they’re getting 100% capital protection from the Investec bond, but they don’t have to buy – like you have to buy yourself car insurance, medical aid – and pay a premium.  

If you had to do that yourself, it would cost you 12%. If you, today, phoned a bank and said, “I want to protect my $100 on the MSCI World for five years,” – this is not a problem, send me a cheque of $12. We only need $7. 

So, firstly, it’s a whole lot less than the vanilla alternative in the market, which is to buy your own insurance. 

Secondly, how that $7 works is we have distributors – people who sell this and give advice to the investors as to how much to put in; all the normal advice – they earn 0.6% p.a. We, as Investec Capital Markets (who structure it), and/or the promoters, we earn 0.6%.  

And then, we have the administrators. They offer the directors for the company and do all the share administration (because the company is highly regulated – it’s regulated under the Guernsey Financial Services Commission; it’s regulated in Bermuda as a listed share with Grant Thornton as the auditors; it’s regulated in South Africa under the Companies Act and registered prospectuses – all of that’s highly regulated). The important thing is they earn 0.11% p.a. 

And then there’s a once-off charge for the auditors and the lawyers, and that’s about 0.5%. But all told, together, it’s roughly $7.  

As I said, investors aren’t baulking at that because the alternative is to pay $12, and here you’re only paying $7. It’s built into the $100 that you gave. 

So, importantly, if markets are bad (let’s say they go down 40%), you don’t have a 40% market loss plus five years of fees. You get your $100 back, which means that the $7 was already provided for. That’s very beneficial, from a cost perspective. 

Also, if you think about it, you could buy unit trusts. Most international share unit trusts, equity unit trusts, probably cost you 1.7% to 2%, depending which one you take, but there’s no protection.  

In other words, if it goes down 40%, you’re going to be down 40%, roughly – maybe 38% or maybe 42%, but roughly 40%. So, there’s a big distinction. That’s the protective aspect.  

One other thing I’d just like to mention is that we started the conversation by saying we’ve done this for a long time. We gave the long-term track record of our team. This particular type of company, we’ve done. This is the 30th one.  

We’ve had 24 of these that have matured. Of the 24, we gave a profit. We beat the underlying index. 23 of the 24 – that’s 96%. 

We had a look on Morningstar (which is the information base that you can check all the unit trusts in the world) and the unit trusts trying to beat MSCI World – which is the biggest universe – over five years, 30% could beat it. Over 10 years, 33%. 

Then we had a look. Why is it that we beat these indices over that period by so much? And 30% of our outperformance came from not losing money. Not losing money is actually very, very valuable if you look at the composite impact of that on your total. 

Lastly, we outperformed those indices by an average of 2.49% p.a. in hard currency for five years across 24 companies, and the dividend yields on those markets was 2.38%. 

In summary, this way of managing money… you’re taking the risk on the banks, because of the credit risk, as we discussed, but the consequence has been that we’ve beaten the total return (now, the total return is the market plus the dividends), and we’ve applied no fees to the total return. We said, “Let’s say you get it for free – you can’t get it cheaper.” 

At this point, beating those markets, compared to the unit trust industry (again, it’s not unit trust A or B, it’s just the market), we found that 9.2% of unit trust managers could beat the total return, over 10 years. And this product range, over 23 years, has beaten it. 

And as I said, a big part of that is the construct. It’s the way it’s put together, and it’s the fact that the investors are happy to take on Investec risk or JP Morgan or the banks that promise to pay. Because those banks – being so highly regulated – it’s very hard for them not to pay, but it could happen that they don’t. Then you’d need a recovery rate on your debt. 

Your applications here have to be for at least $14,000. What we would recommend, if anybody’s interested, is that you just contact us.  

We’ll discuss with the investor or potential investor, whether they have an advisor (because we have many, many advisors that have got licences with us to market and sell the product), or whether they use an online platform, (like DMA), or they’re clients of Investec. Depending on the circumstance, we’ll put them onto the easiest route. 

Also, if they need advice, the important thing is: we’re not giving advice here. This is just a product which says what the product does.  

But the customer may feel, “I’m not sure how much would be appropriate for me or whether this would in any way be appropriate.” Then we could put them onto an advisor. That would be the easiest way to assist. 

It closes on the 16th of October, so there’s plenty of time. But what we’ve seen with all these things is there’s administration – you sometimes have to apply to get your money offshore. It’s a foreign share; it’s not a local rand share – and, consequently, following that up in good time is good advice. 

The Finance Ghost: Japie, thank you. Always such an absolute pleasure. I think this gives everyone a huge amount of information to work through. And if you’re interested, please do follow the advice there – contact the team or speak to your financial advisor. There are multiple ways to get into this. 

Japie, good luck with this raise. I’m sure it’ll be a success, as it always is. Your track record speaks for itself. Thank you for coming back to the Ghost Mail audience.  

I’m particularly stoked to be able to put one on YouTube for the first time with these supporting slides, so that listeners can actually go and check out the presentation as you would be delivering it to any of your big clients. I love the fact that we have this kind of access now in Ghost Mail.  

Thank you, Japie, for your time today, and all the best with this. 

Japie Lubbe: Thank you. 

This podcast is for informational purposes only and does not constitute advice. You must speak to your independent financial advisor before investing in any product, and especially this one. Investec Corporate and Institutional Banking is a division of Investec Bank Ltd, an authorised financial services provider, a registered credit provider, an authorised over the counter derivatives provider and a member of the JSE. Ts and Cs apply to this product and you should refer to the Investec website for full details.