SMSF trustees have a growing appetite for a wider range of investments in their portfolios, according to researcher Investment Trends.
One asset class that interests them is international shares, which is no surprise given the strong performance of the international equity market in recent years.
However, many trustees are slow to change their asset allocations because they do not want to do not want to sell existing assets in their portfolios. They are particularly reluctant to sell Australian shares because they would lose franked dividend income and could have a capital gains tax liability.
Another way of approaching a new investment is to use a structured product, which provides entry into a market at a fraction of the cost.
Investment manager Instreet has a range of products that provide exposure to global equity markets using a derivative instrument called a deferred purchase agreement.
Instreet’s Masti range of funds includes an S&P 500 deferred purchase agreement, Euro Stoxx 50 DPA and a Select Indices Basket, which covers several markets..
Instreet launched its latest Masti offer earlier this month. Investors pay a finance charge of 6.55 per cent a year on the notional value of the units.
The term is for three years. Investors can choose to continue or discontinue their investment each year. If they walk away they have no more to pay.
The funds pay a fixed coupon of four per cent at the end of the first two years and then a final coupon based on the return of the underlying index.
An investor’s potential financial loss is limited to their prepaid finance cost, less any coupons received.
Instreet managing director George Lucas says that because investors only pay the finance charge to gain exposure to the underlying markets they do not have to sell out of other assets to diversify their exposure.
Lucas says it also changes the investor’s risk profile. If the underlying market suffers a big fall a Masti investor will only lose the finance charges already paid and can walk away from any remaining years of the term.
However, there is no guarantee that the units will generate returns in excess of the fees paid.