I thought this case study would be of interest as it illustrates how to use a particular investment product to gain exposure to the growing Asian markets. We still believe in the Asia story and think to see the growth continue, but probably a little slower than it has in the past, over the coming years…
Situation for John:
John has become disillusioned with his unhedged international equity exposure. Not only has its value been affected by the Global Financial Crisis but it has also lost value due to the increase in the Australian dollar. It seems to have done little for a number of years. John still has $100,000 invested in international equity funds and has contacted his advisor to discuss liquidating his position entirely.
Strategy Proposed for John:
John’s advisor realizes that to meet his financial goals, John needs growth asset exposure so he recommends a strategy that addresses John’s concerns:
a. Sell John’s entire exposure invested in international equity funds.
b. Invest $79,000 in a term deposit earning 6.75% p.a.
c. Invest $21,000 in Instreet Link Asia 50 gaining $100,000 exposure to developed Asian equity markets (ex Japan). For a fraction of the cost of the underlying exposure this investment gives exposure to developed Asian equity markets for 3 years and is not affected by moves in the Foreign Exchange (FX) rates between Asia and Australia.
Possible Results for John:
- In 3 years time the $79,000 term deposit is worth $96,100
- If the market rallies 50% by maturity, Instreet Link will be worth $50,000 and the value of the above strategy will be worth $146,100
- If the market falls by 30% Instreet Link will have no value. However, there will still be $96,100 in a term deposit.
Conculsion
John now has exposure to developed Asia (excluding Japan) of $100,000 which is similar to the unhedged international equity fund exposure he had before. If the Asian markets continue to rally, John will benefit from this and not be affected by changes in the Australian FX rates.
John also has $79,000 invested in a term deposit at a bank of his choosing which will be worth $96,100 in 3 years. The advisor can take comfort that the worst case scenario for this strategy is a loss of $3,900 over 3 years.
This is a case study only and general in nature – not taking into account your individual circumstances or needs. For more information, a full Product Disclosure Statemnt (PDS), Statement of Advice tailored to your needs and research documents; please contact Amanda on 07 5593 6895 or email amanda@wealthplanningpartners.com.au