ALPHA Structured Investments
Smart Defensive Strategy Two: Blend Growth with term deposit

Smart Defensive Strategy Two: Blend Growth with term deposit: how to create your own protected portfolio using Alpha RECHARGE

For clients that are looking to retain an existing defensive bias to their portfolio but to increase their exposure to the upside in the market – at the same time as protecting their downside:

CASE STUDY 2: Alex and Mia are aged 48 and 53 and are, like most accumulators, not feeling happy with the level of their retirement savings. They had $350,000 invested in their SMSF prior to the GFC and saw their account balance fall to $225,000 by the end of last year. They predominantly use direct equities in their portfolio and of the $225,000, $125,000 was held in Australian blue chip shares. The value of their portfolio has now risen back to $310,000 (of which $210,000 is held in their direct equity portfolio) with the remaining $100,000 invested in a term deposit, paying 5% pa. They are cautious and do not wish significantly to reduce the amount of their portfolio allocated to their term deposit, at the same time they need to continue to generate strong returns in their portfolio, so they have asked for your advice as to how they can maintain as much of their existing term deposit at the same time as generating additional equity exposure.

You advise Alex and Mia to sell down $14,680 of their term deposit and to invest that amount in Alpha ReCharge Series 2 ($14,680):

  • Alpha ReCharge Series 2 is a 2.25 year term investment which provides exposure to either the ASX 200 or the HSCEI Index, with the potential for coupons of up to 7% pa payable at the end of year one and year two, with a final payment representing capital growth over the term. The initial cost of $14,680 provides exposure to $100,000 face value in the ASX 200 Index.1

Over the next 12 months the Australian share market remains volatile including further falls to 4300 points, and at the end of next year the ASX 200 is trading at 5000 points (ie a 500 point or 11% increase from current levels of around 4500 points). That would mean that the direct share portfolio (worth $210,000 today) held by Alex and Mia would have been worth $233,100, and their term deposit would have been worth $104,250 (ie interest at 5% less 15% SMSF tax). Their total portfolio would have been worth $337,350 had they done nothing and simply retained their existing portfolio.

Instead, by investing in Alpha ReCharge Series 2 Alex and Mia’s portfolio will be worth:

  • Of the $210,000 that remained invested in direct equities, that component will now be worth $233,100
  • The Alpha ReCharge Series 2 investment will pay a coupon of $7000, after tax at 15% this will equate to $5950
  • the original amount of $14,680 invested in Alpha ReCharge is $16,294.80 (ie a gain of 11%)
  • The term deposit of $85,320 is worth $88,946.10 (ie interest at 5% = $4266 less SMSF tax at 15% of $639.90 = $3626.10)
  • Alex and Mia’s portfolio is now worth $344,290.90, ie a net gain of $6940.90 compared to doing nothing.

IN THIS EXAMPLE, ALEX AND MIA HAVE RETAINED THE DEFENSIVE TILT OF THEIR PORTFOLIO BY RETAINING A LARGE COMPONENT OF THEIR TERM DEPOSIT, BUT HAVE INCREASED THEIR PARTICIPATION IN GROWTH OF THE EQUITY MARKET (WITH DOWNSIDE RISK LIMITED TO THE COST OF $14,680 FOR THE ALPHA RECHARGE INVESTMENT) – EVEN WITH THIS MAINTENANCE OF THEIR DEFENSIVE BIAS, THEIR OVERALL PORTFOLIO OUTPERFORMS THE “DO NOTHING” SCENARIO.

© Alpha Structured Investments P/L AFSL 290054 - Like all investments, there is no return without risk. If there are losses in relation to the share portfolio, the value of the shares delivered to investors may fall or be nil. Investors should read the Product Disclosure Statement for Alpha RECHARGE, dated 12 October 2009 and issued by Citigroup Global Markets Australia Limited in full and carefully consider the detailed description of the arrangements and risks in the PDS before deciding whether to apply for Alpha RECHARGE. Prior to the maturity of the Alpha RECHARGE investment the value of Alpha RECHARGE will be affected by various market factors such as interest rates, shares and option prices and volatility, the creditworthiness of Citigroup Global Markets Australia Limited and the time remaining to Maturity Date. As a result and as indicated above there is no assurance that an Alpha RECHARGE investor that sells their Alpha RECHARGE investment prior to maturity will receive a price equal to or in excess of the Alpha RECHARGE investors original investment amount. A copy of the Product Disclosure Statement can be obtained by contacting your financial adviser or Alpha Structured Investments. Like all investments, investments in the Alpha RECHARGE involve some risks. The risks include general market risks and risks which are specific to Alpha RECHARGE. Please ensure you have read and understood the Risk Factors, which are set out in that PDS. No action should be taken on the basis of or in reliance on the information, opinions or conclusions contained in this document. In preparing the information in this document, Alpha Structured Investments did not take into account the investment objectives, financial situation or particular needs of any particular investor. Before making a decision to invest, investors should consider the appropriateness of the product having regard to their relevant personal circumstances. Investors should read the PDS in full and carefully consider the detailed description of the arrangements and risks in the PDS before deciding whether to apply for Alpha RECHARGE. This document is not, and is not intended to be, an offer or invitation for subscription or sale, or a recommendation, with respect to any proposed offering of Alpha RECHARGE or any other securities, nor is it to form the basis of any contract or commitment. You should consult your investment adviser before you invest in Alpha RECHARGE.