Protection blunts the market's fangs

By MARK FRYER

Trust us, we're big". They may not say it quite that way, but size has traditionally been part of the sales pitch when institutions go looking for investors' money.

It's not an approach that one of the newcomers on the investment scene can use. No billions of dollars under management, no office tower with their name on the top, no long history.

Instead, Liontamer Protected Investments is hoping to win investors by offering an unusual combination, at least for this part of the world: sharemarket returns without sharemarket suffering.

Liontamer specialises in what are known as "capital-protected" or "structured" investments.

The promise is "equity market upside without the downside", says the company's head of investment solutions, Janine Starks.

In the seven months since it was set up, Liontamer has launched three funds offering the chance to profit from a rise in world sharemarkets, while protecting the original investment.

That combination may seem too good to be true to anyone schooled in the idea that risk and return go hand in hand.

However the strategy employed by protected investments is not as mysterious as it can seem (see "Ask the right questions", right).

Nor are capital-protected investments new to this country. Among others, the BNZ has offered them, as has Westpac, which has an offer open at the moment, and the OM-IP series of funds - a hedge fund coupled with a guaranteed return - has proven popular.

But Liontamer is hoping to persuade New Zealanders to put much more of their money into capital-protected investments, popular in Britain, Europe and Asia.

"In the UK there's around 70 Liontamers and so far this year they've launched over 400 products. The market last year was worth £6.2 billion," says Starks.

Even by local standards Liontamer is still tiny, though Starks is coy about precisely how much it has raised. The firm's first issue attracted more than the $5 million minimum but less than the $20 million maximum, she says, and the second, which is still open, also took in more than its $5 million minimum, without yet reaching the $15 million maximum.

Longer term, "we were aiming for a hundred million within the next couple of years, but we'll just see how that goes".

The company was set up by former BNZ employee Laetitia Peterson, who began working with capital-protected investments in the early 1990s, and Michael Lodge, who runs Auckland company Fund Distributors. They were joined by Starks and Neville Giles, both of whom have worked for various financial services companies, and the company also has two Australian directors.

They chose the Liontamer name largely to emphasise their difference. "We didn't want the blue logo with the 'something invest company' written on it", says Starks.

Their relative youth has been a worry for some people, she says.

"They're looking at four people in their 30s and saying, 'What sort of balance sheet do you four have?' and in all honesty we've got no different balance sheet than you and three of your friends."

To counter that concern, she points out that Liontamer simply sets up its investments and doesn't handle investors' money, which is passed on via a custodian to US investment bank Morgan Stanley.

So far, the company has concentrated on selling itself and its products to investment advisers, rather than individual investors.

Setting up these capital-protected investments is very different from a standard unit trust.

For one thing, each offer is open only for a certain time, runs for a set number of years, and each new offer comes with different terms.

Liontamer's first deal, for example, promised 100 per cent of any rise in world share prices over seven years, and all your money back regardless of what happens to the markets. Subsequent deals offer either 150 per cent of the rise in world share prices, with a degree of protection, or a more conservative 85 per cent, but with full protection.

The terms change with each offer because these investments are based on buying options - effectively a way of betting on sharemarkets. And, like any form of betting, the odds change.

The big issues are interest rates and how volatile the markets have been, which decide how much of the sharemarket return Liontamer can offer its investors, how much protection and how long the investment will run.

Somewhere between five and eight years is a reasonable time-span, says Starks. The longer the time, the better the deal that investors can be offered, but going beyond eight years is just too long for most people.

Liontamer hasn't been helped by Finance Minister Michael Cullen's announcement in August that the Government plans to change the tax laws to prevent investors from avoiding tax by using Australian unit trusts - which is what Liontamer's funds are.

What that means has yet to be revealed, but Starks hopes the Government is aiming at funds which use the Australian structure to put money into New Zealand investments, avoiding tax which would otherwise be payable if they used a locally based fund.

"We're quite comfortable that we're not the target of what he's trying to do," she says.

"But at the same time I always warn people that when it comes to governments and tax it's the old 'will they use a sledgehammer to crack a nut?'

"The only thing you can say to people is be aware of it, we are comfortable but we can't make you any guarantees.

"At the end of the day, across the board, if all Australian unit trusts were affected ... then it will just be a level playing field."

As well as offering deals to investors, Liontamer also hopes to create investments for other institutions to offer their customers, and is looking beyond New Zealand.

"Australia is the next target on our list but it will be a number of months away yet ... maybe six months to a year before we look at it," says Starks.

"We have to prove that the formula works in one market and that takes longer than a few months - we'd be a bit arrogant if we thought give it a few months here and then we'll whip off to Australia."

Liontamer Protected Investments

* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email: Mark Fryer. Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.