Episode Transcript
[00:00:00] Speaker A: Structured products have come a long way from a specialized exotic investment tool. They are now mainstream and financial advisors are more comfortable about investing in them on behalf of clients. In this episode, Yapi Libbe from the investech Structured Products team is back and he's here to talk about a product that tracks the Chinese equity market. A land that is fraught with risk and brimming with opportunity, with enhanced upside and downside protection. This product is certainly interesting.
Welcome to this episode of the Ghost Stories podcast. It's a new year and that means lots of new opportunities. In fact, today's opportunity is called International Opportunities Limited. So no messing around. There's clearly something to pay attention to here. And of course there is, because it's another podcast with the team from InvesTech structured products and they always bring us super interesting stuff to learn about and think about for your portfolio this time around. Yapi Libbe, you are back on the show. Thank you for joining. You've been on it before and we've met quite a few people from the team actually. It's always lovely to have you on here. So a happy new year to you. It is starting to head towards late January at time of recording, so maybe it's too late to even wish you a happy new year. I'd rather say that I hope your year has got off to a good start. And thank you for joining me. This is going to be a pretty interesting show, I think.
[00:01:15] Speaker B: Thank you.
[00:01:15] Speaker A: So, Yapi, let's get into the meat of this thing, really. And what's quite interesting is that this latest product that we are talking about comes hot on the heels of a product towards the end of last year that was focused on the Indian market, which was a very good excuse to go and just check out what was going on on that side of the world from an emerging market perspective. Now we're back to the other big emerging market, if I can call them that, which is China, certainly on that side of the world. And I mean, let's face it, China has been a bit of a tough story recently. The news of stimulus at the end of last year first caused some excitement and some crazy share price moves in single stocks and then it sort of fizzled out a little bit, maybe due to lack of details, maybe due to some geopolitical uncertainty. So it's a tricky, but it's an exciting market. It definitely comes with some risk and that's why the structured products can be so interesting, actually. So what attracted you to doing a structured product on this Chinese market? As we now head into A new year.
[00:02:10] Speaker B: Yeah. So I think the first thing that we look at as investment people is what are the alternatives that I can buy and when I buy one of those alternatives, how does it add up to what I already have?
So in investments it's important to identify potential assets that have a low correlation to what you already typically have as an investor. And we recognize that mostly our client base would have developed market exposures through the US and Europe and the UK and maybe some Japan and some MSCI World type exposures. And. And they are invested obviously, because, Olivia, mostly into South African shares. So we start off by looking at the index correlation between the Chinese market and the other major markets of the world. And in our presentation there's a matrix which shows how low the correlation is of the Chinese market to the S&P 500, to the euro stocks, even to commodities, you know, to the jse. So this is a great addition into a portfolio for a South African because this market is, you know, roughly, I'm going to take a stab here, roughly 30% correlated. Whereas for instance, the S&P 500 is 82% correlated to the FTSE and 90% to the Euro stocks. Okay, so those go up and down together. So what you want is you want markets or assets to be added. They call it the cheapest free lunch is diversification. Okay, so that's a key thing for us, why we're looking at China. The second thing is, if you look as far back as five years ago, we've done an evaluation of the performance of the Chinese equity market on a total return basis compared to the S and P and the Nikkei and the euro stocks, MSCI World, India, which you mentioned, the JSE's top 40. And it's very interesting to note that the Chinese market was the best performing market for the first two years of that time. Then as we know, Covid hit and the Chinese market with all markets came down, but the others all recovered and this one didn't. Why? Because the Chinese government, they applied a lot more tough love. They didn't give a lot of money to their people, to corporates, to businesses, as the US did, and even South Africa and Europe and other countries. So these other countries that allocated a lot of government money to stimulate the economies ended up with on the flip side of the balance sheet, a whole pile of debt. Okay, so they got a lot of debt, but the people got a lot of money from these stimulus. And this chased up interest rates, chased up inflation in those countries and also resulted in quite good growth in Asset pricing. So shares went up a lot, properties would have gone up a lot. We've seen what's happened to gold, we've seen what's happened to Bitcoin. Okay, so these assets, a lot of them got this cash that came from government printing money or issuing money to the, to the populace. China, exact opposite. Okay, so what you have in Chinese equities the last five years, the total return is 9%, including of dividends. And the US is 94. The Nikkei, which is Japan, is 96. The MSCI world is 71. Huge numbers. Okay, where's China? Stayed back a lot. So from a pure valuation perspective, you know, that gives us a good entry level for people that want to consider it. Now. Now when we look at the actual valuations of the market, which is on that same screen, when we look at the price earnings ratio, the price to book, the return on equity, and we compare the Chinese market to all these other major markets, it stacks up very well. In other words, it's cheap. The market is cheap because one, it hasn't gone up a lot of late, but the GDP is still reasonably strong. I mean, you know, China's growing at over 4% and that compares favorable to most markets in the world. Okay, so we think that a good reason to target is that the valuations are good as we speak. And then if you look at other important metrics for investment, we look at an index comparison where we have a look at how much did the GDP of each of these major markets grow over the last 10 years and how did that compare to the total return of the equity market? This is at major index level for the 10 years. I just quote you too. The Chinese market equities, total return went up 52%. That includes the 10 years of dividends, but the economy grew 86%.
In the U.S. the shares went up 191%, total return and the economy grew 52. Okay. And you can look at the comparative countries there. So what you have where the stimulus was given to the economies, the GDP still did what the GDP would do, but the assets grew fast because there was like free money, more money, investable money coming from the governments, stimulating the economies. And we notice a very big divergence between what's happened in China and what's happened in the rest of the world. So we think as an investor, if you're going to be contrarian, you got to go where it's different to the other places for the fact that it will probably recover and probably normalize. Then if we look at the size of the markets, in other words. I don't think all the readers and listeners are often versed with how big China is. If you compare the market capitalization of China versus most other countries, the biggest market out There is the US market at $51 trillion value. Second is China at $6.2 trillion, then followed by the Euro stocks at 4.8 Footsie, say 2.8.
India 3.6. India is just over half the size of China from a market value equities and South Africa at 0.9. So China is roughly seven times bigger than our market cap on the JSE. So just put these markets into perspective. The next thing that's important is looking at the ability of the countries to stimulate you mentioned up front. You know, they've started trying some stimulus and I'm sure they're going to carry on until they find something that works. But their ability to stimulate is driven by two major factors. And one of them is the amount of debt you have to your GDP. Okay? And China for instance has 90% debt to GDP versus the US at 122 and Japan at 250. So the debt levels worldwide are actually very high. Now the interest rate that you pay on the debt is the other big thing. In China, the interest rate's like one and a half percent because inflation is at 0.4. And the US you're paying four and a half percent. So say you've got debt as a country and you've got to service that debt and you've got 122% of your country's GDP is the debt level. And now you're paying four and a half percent interest rate compared to another superpower who has only 90% of GDP versus your 122 and is only paying at 1.5% interest rate. Can you see? So the country that can stimulate and support the economy and the investors if trouble comes, because we don't know, might be another covert. There might be some other headwinds in life. Okay, is the country with the deepest pocket and the least overdraft in simple language. So China compares very favorably from a debt to GDP and the interest rate on the debt. The next thing that we look at is if we invest in the CSI 300 which is the index we're using in this offering. It's very, very nicely diversified across mainland China companies. So there's a composition pie chart which shows the actual breakup of the market. And the biggest sector is Financials with 24.5% followed by technology with 17.4 industrial 16 and so on and so forth. But not massively dominated by any one share or let's say the biggest share in the market is consumer staples at 4%. So you don't have a massive dominance, but you got 300 shares very widely dispersed and you know, very nice underlying asset base to cover.
Then if you look at the next thing that we like about and why we've selected China, we look at the price earnings ratio that the market's trading at and it's trading at roughly 16 and the average from inception has been like 18.
So you're buying a market where the price earnings ratio is a bit below the long term average. Now you've probably seen that the US is trading massively above its long term average and so the most of the developed markets of the world. So as an investor you want to try and identify markets. This is at market level, at index level, where they're trading at compelling multiples. Especially if you confident that they've got the ability in future to have good earnings because then they'll re rate to the average or better and you've got a tailwind for your equity valuation. The other thing about the Chinese market is that the volatilities that we're buying these indices at are quite low. By historic norms they're trading at substantially below the long term average volatility. Which is quite strange in the sense that the equity markets in China have been depressed and have gone down. But in reality they went down four years ago and for four years they've just been bubbling along. They picked up a bit last year because last year the first of the stimulus has started coming through. And it looks as if now with the most recent discussions with Mr. Trump and his Chinese counterparts, that if they're anywhere reasonably friendly, you could get that the Chinese market actually does quite well. So that's what we fond of buying where the assets are well priced. Other things that we notice is that the dividend yields on those markets are at like 2 and a half percent versus interest rates for five year money is 1.4. Now when you get that it creates an opportunity because the forward price of the market is below spot because the dividends are higher than the interest rates embedded. And this makes call options very cheap. That's why it gives us a lot of upside potential. But let's say you as an investor wanted to buy an ETF and protect it. It would cost you roughly 11 and a half percent premium to protect $100 for five years. Now we'll show you in our structure, we don't have to lay out that money because we're going to use bonds that give us 100 back. So we don't have to buy protection like you have to buy car insurance or household insurance or medical insurance. Okay, so that's very favorable. The other thing that's very favorable about China, I see the latest numbers came out that they anticipate it's just had a 5% GDP growth, but their inflation is 0.4. Okay. So understand when you've got that type of growth and your inflation is so low, you're going to dominate exports to the world. Because even if someone wants to introduce a tariff on you, you just say, no problem, I'll add that tariff to my price because no one can produce that product at the price you can. So you've got lots of power in the fact that you got the cheapest manufacturer. So that's very good. And then the other thing we really like is the fact that they've got growing foreign reserves. So China has been a big buyer of gold, they've been a big buyer of US Bonds. As a country, the foreign exchange reserves have been growing. So in a world where people are really maxing out on their credit cards and the available cash to spend, the Chinese government is actually to a large degree sitting pretty because they don't have Those massive extensive GDPs and high funding costs. And they've got reserves both in bullion and in foreign exchange reserves. So those are the major reasons why in this offering we've really wanted to go for China.
[00:14:27] Speaker A: Yeah, there's like an investment masterclass in there. I mean, you've got tons of experience. I learn a lot from you when we do these. I'm sure everyone listening learns a lot. And I think you've run through just so much good stuff there, ranging from the macroeconomics through to understanding the volatility. And we'll get into some of that just now, you know, that helps make options a bit more affordable, etc. But even more than that, just stuff like trading below long term average PE multiples, I mean, that's something that I apply every single time I take single stock exposure. You can have academic debates all day long about whether something should trade at 10 or 12 or 15 or 20. But the strongest sign is is it trading below where it has historically been? And are there good reasons, yes or no? Because then you're actually using tons and tons of market data. You're not coming up with your own esoteric argument for should it be 10 or 12 or 14. You're saying, hey, this is where the market has been pricing and for the longest time now it's less, you know, is there a good reason or are they missing a trick? So just lots and lots of cool stuff coming through there. I'd almost encourage someone go and listen to that again, you know, because there's so much to learn in what was that, like 15 minutes? Basically, I think something I just want to reference so that people are certain, you know, which index we're talking about here. So it is the Shanghai Shenzhen CSI 300 index or CSI 300 for short. So not CSI Miami that you once watched on TV. CSI 300. So not a name that people are familiar with. Everyone knows the S and P and the NASDAQ and the top 40. And the other thing that I just want to pick up there was, you know, you talked about the relative market cap. It's quite incredible that if you add together the MSCI India and the FTSE 100, so that's India plus the UK, you're at roughly the same size. Not exactly, but it's very close. The same size as the Chinese market. I mean, that is quite extraordinary. You know, it really, really is so obviously an exciting market. Yes, it's had a tough few years, but, you know, investing is about understanding what's going to happen in future, not just what has happened. So there's some really cool stuff that you've raised there. However, there's also a lot of risk, obviously, and that's why structured products are very, very helpful, because China, the U.S. i mean, obviously with President Trump coming in, you've already referenced tariffs. There's a lot going on there. There's a lot of geopolitical uncertainty. We don't know what will happen. You know, there was this whole recent story with Tencent being added to that list of, you know, are they a company that assists the government with military type stuff? And a lot of this is just posturing and politics. And there's going to be more of it. I think the only thing we can be certain of is uncertainty, right? There's going to be more of this. You've got these two global powers who are having a bit of an argument. And it's the old joke of when the elephants are fighting, it's the grass that gets trampled. And the idea is to not make your money the grass. You don't want to be trampled by this stuff. And I think if you have naked exposure to China, so in other words, unstructured exposure, you're just holding an etf obviously it can just keep dropping, right? Cheap, can always get cheaper. I mean that's unfortunately a lesson that most of us have learned in the markets at some point or another. But you've done a lot of backtesting here. You've obviously structured this thing for downside protection. So I think let's deal with that before we get to the upside because I think the upside around China is relatively understood. It's the downside that worries people and scares people away. So how have you addressed that in this product?
[00:17:33] Speaker B: Firstly, what we looked at is just to say, you know, from the inception of that index in 2005, if we did the product we're doing is a five year share and it has 100% capital protection in dollars over the five years and it gives 130% gearing to the first 60% of any positive performance in the index. So it's, the index is at 4000 points, it ends at another number, that percentage, we times that by 1.3 until that percentage got to 60. So if it was 60, it maxed out at 78. And all the returns are in US dollars. So the capital is protected in US dollars and the growth is the formula and the payout from the banks that we trade with is in US dollars. So entire discussion is in US dollars. Now if we look at the five year rolling returns, there's a backtest in the presentation and we simulate that against what you would have had had you had the to having the index. In this case, this is the price of that index and the five year rolling returns are shown and we've superimposed on that historic if we had the product now what this demonstrates to US is roughly 27% of the time if you'd been an investor for five years starting a new five year every day for the last 20 years, 27% of the time, you would have lost money. That's the hurtful thing with China. That's what puts people off is that you have too much where you could have lost.
[00:19:03] Speaker A: I mean that's. Sorry, that's a big number, right? 27.6% of the time. I mean that's, that's more than you would typically see on a lot of other markets. Am I right?
[00:19:10] Speaker B: Absolutely. Because there's other markets all high now you see. So they're all because they very high in valuation. They back testing would show that they haven't done that. But that doesn't tell you what's going to happen tomorrow morning. That only says what happened Historically. But what happened historically says to us at Investec, we're not going to put our reputation at risk where people go into this Chinese market and then lose their money. Okay? So that's why we say the best way to address it for our own money and for clients, for their money is, is to have 100% capital protection in dollars. Okay? So that addresses the issue why the protection. The protection is very important. Now secondly, you can mitigate risk, as I said earlier in the discussion, by just going like you buy car insurance, like you buy household insurance or medical insurance. But it's very expensive to buy that on the Chinese markets in dollars for five years. Okay? That's why that's not a plausible solution because let's say you had $100 and you had to pay 12% to protect it, you're only getting 88% of the upside, okay? Will be that on the total return of the market.
Now our product here shows that historically this product would have beaten the direct market 86% of the time.
Why? Because in the negative 27% of the time, this thing would have given you naught, not a loss. Okay? And in the majority of the return where it was giving a mediocre return, you'd get 30% more. So the only time you lose out is if the market does more than 78, which happened to be about 14% of the time. Now we saying that could happen because of all the metrics that we've identified. But for our type of clients, we don't want them to face the risk of the downside. So we happy to say if it did more than 78, I made peace, I only got 78. 78 is 12.2% in dollars IRR with no capital at risk.
[00:20:59] Speaker A: You know, thank you very much. You'll take that all day, right?
[00:21:02] Speaker B: Exactly. You've got creditors. But I'm talking about the market risk. So the market risk, we address it also.
[00:21:08] Speaker A: And Yupi, sorry to interrupt there, but in terms of fees, I mean are those returns that back testing you've done there? So those returns are net of fees. So it's beaten the index that many times. Net of fees?
[00:21:16] Speaker B: Yes, our product is net of fees. The market is just the actual market before fees. Because it's just the index.
[00:21:21] Speaker A: Exactly. So that's the point I wanted to raise. Right? You can't buy the market. You're still gonna, even if it's an etf, it's gonna have a small fee. But I mean it adds up, you know, whereas what you're saying Here is this is net of fees. So if the return is zero, if it's capital protection time and you're just getting your money back, there aren't fees that come off that you're literally putting in 100 bucks. Getting back 100 bucks in dollars admittedly.
[00:21:42] Speaker B: But still your next question being how do we do this? So in our presentation we show the instrument breakdown. So there's this company that we incorporate in Guernsey. We list on the Bermuda Stock Exchange and the company buys the assets and there's only three assets and they buy them on day one. And we invested we the investment advisor to the company, recommending to the board of directors which assets to buy. And we don't run an active process so we don't have any changes to the assets during the five years. It's a five year fixed term. The investors who buy the shares, there is liquidity provided for them should they want to sell the shares. But most people, 98% of people keep it for the five year. Now in our pack we show that we start with $100. So let's take the listeners through how we spend $100. The first thing that we do is we contract with one of the major banks of the world. We'll talk about the credit separately, but it'll be one of the major four U.S. banks. And we buy a credit linked note from them that references one third each the tier two debt of five potential banks. But all the paper is investment grade paper that is better than SA government paper.
Now we spent 74% of the primary capital day one to buy that bond and it's bought inside this Guernsey company. The Guernsey company gets an annual tax exemption so it doesn't pay income tax on that growth. And it grows from 74 to 100. So that's how we protect the capital. 74% growing at about 6% yield. So it compounds to 75, 76, 77. When the sun sets in five years time, there's exactly a hundred dollars on that asset. And it's that asset that enables us to say to you, you can have your capital protected. Okay, now the second thing that we do is we put roughly seven and a half percent because this is a new company, seven and a half percent in a bank account which is for the distributor's annual fees, our annual fees, the lawyers, the auditors, because these companies are highly regulated, regulated in Bermuda, Guernsey and South Africa under the Companies act, being signed off by the Companies act for distribution in South Africa. Why I think it's such a good deal just to come from a fees perspective, the total fees for five years, which are all built in, is seven and a half. If you pick up the phone at your desk and phone a bank and ask for protection for five years, they charge you 12. Here the fees are built in and it's only seven and a half. So you can't do it cheaper, you've got no chance to do it cheaper. Okay, the third thing, and yeah, sorry.
[00:24:14] Speaker A: The other way to think about that is the per annum fee, right? Which I mean, works out to, what is it, almost one and a half percent a year.
[00:24:19] Speaker B: One and a half. Which is cheaper than active management.
[00:24:22] Speaker A: Well, that's what I wanted to say. Yeah, yeah. I mean there's many a unit trust, there's many an actively managed fund out there that doesn't have the capital protection. Yes, they might be making more investment decisions, but they don't give you the protection on the downside and you'll end up paying more than that typically, or at least that.
[00:24:35] Speaker B: The big thing is that, you know, just compare A to B, B is worth 11 and a half percent more because you don't have to buy protection, you've got protection. So it's like me saying to you, look, I've got two cars in the parking lot. One's a green one and one's a blue one. Okay, you can pick. I'm going to give them to you for free. Now, if you take the blue one, I've covered you at suntime for the next five years on your insurance. Which car is worth more? Because you know when you drive the blue one, if you drive into a Ferrari, you're covered, the insurance is paid. Okay? But you drive the blue one and you drive into a Ferrari, you're selling a flat in Cape Town because you got to pay.
[00:25:09] Speaker A: It sounds like personal hurt in that story. Rp, I hope you haven't driven into any Ferraris uninsured.
[00:25:15] Speaker B: You know, just be careful, you don't know what you drive into. So the next thing is that we spent 74 and seven and a half. So we clearly got 18 and a half left over day one. And what we do with the 18 and a half is we go to a panel of banks, they have to have a rating of at least S and P, A or better being cleared by us for credit. And we say to them, we're going to ask you a question. If we were to buy unlimited upside to the CSI 300 in dollars for five years as a call option, what would the call option cost? And it just coincidentally happens to be 18 and a half. But we don't think at Investec Capital markets we are where we work corporate institutional banking, that that market will easily do more than 60. So we say okay, we'll sell you a cap at a level of 60. And I say no problem. Then we rebate you 4.3. So this means the net is 14.2, 18 and a half less 4.3. But because you physically got cash of 18 and a half, if you divide it by 14.2, that's what gives you 1.3. That's 130% gearing.
So the leverage in this, the gearing doesn't come from borrowing money, you're not borrowing money. And like a hedge fund may do, you just have more premium available than what that call spread costs. So the principle is very simple. If you bought a new car and you went to suntime and you said I want to insure this car and they said It'll cost you R5000 rand a month and say it was a million rand car just for the discussion. And you said I'm going to use this car just around the house. So I don't think I'm going to have a claim of more than 600. And you said to them I'm prepared to limit my claim to 600. They said well we'll give you a rebate now you only cost 3,000amonth. Because for them they're only insuring a 600,000 rand car, not a million rand car. Because they look at what the claim potential is. It's the same principle. Okay, so let's have a look. What's going to happen over five years.
Either the stock has changed in China, the sub 300 shares go down. Let's say they went down 40%. We can't really easy foresee that because they're really low. But they can for the reasons we said. There's risk. Then the bond pays out the hundred. The fees and costs always amortized to naught and the option's worth nothing because that's when they refer to an option as underwater. It's out of the money because it's a call option. So if the market goes down, it's worth naught. Okay, but that doesn't stress us because the 74 still grew to 100. And we say to you, there's your hundred dollars back. Now it's your prerogative to buy the market the next morning available at 60.
The investor who bought the ETF or the unit trust or the direct shares, if that scenario Played out has got a big problem because their valuation shows they worth roughly 60 plus or minus the alpha, plus or minus dividends received. But that's the problem they stuck with. This investor avoids that problem by virtue of the structure. Okay. Thirdly, if the market is up anything up to 60%, so let's take for this discussion it's up 50%, then they take 50 times 1.3 then entitled to 65.
And what we'll do at that stage is come to them and ask them whether they want to sell their shares or keep their shares. And you can then if you keep the shares, lock in the profits you made and commercially and then obviously you're going to pay tax one day when you sell the shares. But that's on the sale of the shares. Okay. So that's really, you know, how we give, how we give that protection. Yeah. So then as far as the question about you know, how. Let's talk about the credit. Okay, so what is your risk here? You've taken out the market risk because of the structure as we've discussed. You have the risk to the suppliers of the assets. The suppliers of the assets are the banks. Now what we're going to use here is one or two or more of the following banks. Citigroup, Goldman Sachs, Morgan Stanley and Bank of America. And there's a full description of the credit risk and the summary of the amount of money and assets these banks have. And then they going to reference, one of them is going to reference to one third each either Barclays, SAS, Gen NatWest, Deutsche bank or Lloyds 1/3 each the tier 2 debt. And that's a credit linked note. And that note all the assets that you could potentially target. The all investment grade paper by international recognition and the document, you should have a good look at the documents. The, the probability of default is these days you can just go on Bloomberg and get the two year probability of default of any issuer or any instrument and it's very, very low. You can have a look and see. So you know, we're confident that those are good banks to use. We've done in the time that I've been at Investec in 23 years we've done 107 worldwide listings and of them 87 have matured of which we gave a profit 83 times 96% and we haven't had one loss. The other three we gave the people their money back. So our selection of the credit has been very, very successful historically. Obviously you've probably seen that US banks are coming out with Their profits. Last week there were quite a few declaring their profits. And with the interest rates where they are now and the economy, they're fairly strong. These banks seem to be well capitalized and the regulation is very high. So, so that's the risk, is the risk that any of those banks get a problem. The other risk is that the guy sells us the call options that he gets a problem. We've never had that in 23 years and we only use the best banks. And then obviously, as with any investment, you can have regulations change, you can have tax change, things outside of our control. Fortunately we haven't had that in the past. But I'm just saying as far as risk is concerned, but if anybody's interested in offering, the prospectus is available and the risks are spelled out very clearly. But I'm just saying in high level for this discussion, those would be sort of risks you'd contemplate, you know. So for us, we think that China has got very reasonable valuations as we speak. It's a great asset to add to a portfolio. They have a lot of capability to assist the public and corporates with a lot of spare cash and reserves in China as a country with low interest rates and low inflation. And I mean, I was staggered to find out that China, China only exports 15% of anything that they export to the USA. So 85% exports are non USA. So I think that one must be careful not to make too much of this whole tariff thing. I think it's a great ploy for politics and a great way to get votes. I'm not so sure that, you know, when you think logically about it, that you're going to implose so many tariffs because it'll unfortunately just result, I think, in inflation. In the US you're going to import this inflation because they're just going to add it to their price simply because there's no other supplier who can do it cheaper, you know. So I think that that's the real thing for us though, in our way, we structure product. You know, we really want to be sure here that we give the clients the best chance to not lose any money, okay? And give them the best chance to make substantial money in the context of having capital protection. Clearly, if you went live to that portfolio and the market did 90, you'd get 90, you know, but that's not the part of your money you necessarily want to deploy. You want to have diversification at a time where other markets are expensive into a market that's better priced. But because it's got some unknowns and, you know, uncertainties. We think if you get capital protection in dollars and the growth is on that market's performance, but in dollars, you know, that might be a nice addition to your portfolio.
[00:33:07] Speaker A: So yeah, all of that is really, really good and makes a world of sense. And this is the point, right? This is to help investors diversify. A portfolio in a way that is somewhat risk mitigated, takes into account some of the challenges of being in China. But as I always write, you have to get comfortable with equity risk because without the risk, you're not going to get the returns. That's literally how finance works. So you can't run away from risk, you just manage it and you try and manage it alongside the returns available to you. And that's exactly what a product like this tries to do, which is why I always find it so interesting. Of course, the other risk, which is very hard for you to mitigate but is something that investors must consider is their risk of making a mistake in terms of either how much money they put in or understanding their five year liquidity. Unfortunately, life happens, things do happen. Divorce, death, you know, let's call a spade a spade. The stuff happens, it's reality and just other things can go wrong for people financially, etc. So obviously, you know, you should always speak to a financial advisor. You should be always, you should always be doing that. You should always be putting an amount in here that you're comfortable with. But for when things happen, you know, is there a way to potentially get some money out within that five year lockup period? I know you do normally have some kind of liquidity mechanism. So I think let's just talk about that briefly.
[00:34:20] Speaker B: Yeah, sure. So obviously we've done this for 23 years. We've probably got across our products, 21,000 investors, deals on our books and we definitely very mindful of liquidity. So there are three levels of liquidity. The first level of liquidity is John wants to sell and Peter wants to buy. And they operate under the same distributor, under the same financial advisor and that just transfers from John to Peter. There's no costs involved. Like you want to sell an asset to me, I buy your asset. It's a willing buyer, willing seller. The second one which is mostly happens is that John wants to sell, but there's no direct buyer that says I'll buy your shares. So what Investec does is we then enter and we say that if you accept 1.25% early redemption fee, so early redemption of your share, then Investor will buy it. So that's what happens 99% of the time. We as a bank buy the shares and we then hold them in secondary stock. And then another person looks at there's a secondary stock schedule every month and they can ascertain if they want to buy it. They like the share. We show them a matrix which shows if the market goes up or down, how will that impact your secondary share? But John left, John sold his shares. Investec owns the shares and Investic on sells the shares. And the third level of liquidity is if Investec doesn't want to buy the shares. We've only had this four times in 23 years. Why would they not want to buy the shares? It's only if the capacity to buy the shares is full up. In other words, you've got a certain credit limit, you can't buy more than so much. Then we unwind the shares. What does unwind the share mean? We just go to that, to the market and sell that bond business. Now accumulated from 74, it's now price, say it's 80 or 82, 89 or it's got a price every day we sell that product that, that bond into the market. We also have contracted with the option provider that he gives us daily liquidity and that has already been taken into account on the screen, price the client's looking at and the fees and costs. They put in a bank account, 7 and a half and amortized once a year down to Vinaut. So whatever's left in the bank is then a credit. So then the client gets paid out. That takes a little bit longer. That takes about say three weeks, two and a half, three weeks. But that's only happened four times in history. What is more normal is that they want to sell their shares, they tell their advisor and we obviously authenticate that they've requested sale and the bank details and that's, you know, that it's going to the owner count and that normally takes, I would say, 10 days at the max. So it's not as liquid as what you own. Bulletin stock, you just press the button and tomorrow you've got what, two days time, you got the money in your counter stakes slightly longer. Yeah. So that's, that's how the liquidity works. And just to give you an Idea, over the 23 years that we've done this, we only find 1 to 2% of people actually ever sell early, but they can. And we, we recognize that if they couldn't sell, that would be a deterrent.
[00:37:16] Speaker A: Yeah, things do happen. So it's good that that mechanism is there. I think, you know, as we bring this podcast to a close and we encourage people to go and read the documentation. Listen to the podcast again. What is the minimum investment amount? Just so people understand what sort of numbers we're talking about. And then look, they should always be speaking to a financial advisor. But for those who want to do their own stunts, can they reach out directly or do they have to come to you through an advisor? You know, what are the different channels through which people can actually invest?
[00:37:43] Speaker B: Yes, so the majority of the business gets placed through financial advisors. We have roughly 310 companies worldwide that market and sell the product. So you know, it's very, very extensive. Mostly if you speak to your own financial advisor, they should have a license, but the licensing works on who's allowed to sell shares. And if you go through an advisor, then the minimum is $10,000. 10,000 US is a foreign share and you can use your 1 million allowance money cleared through SARS, you know, more than 1 million or money you already have overseas. If you buy in a trust or in a company, you can use asset swap, you can swap your rand to dollars and then they buy it for you. Investec's got capacity, most other banks have. And then if you go through a platform, so some people, you know, especially let's say younger investors or people that starting out in life, they go through like easy equities or dma, there are other online platforms that also make it available. So if you don't need advice, in other words if you just say I'm reading this document, which you can, they can link into your podcast and you, well I've answered all my questions, then I can just go online and buy. If you need advice. So you want to see how does this fit into a bigger portfolio? How much must I and what's the appropriate allocation etc, etc, etc, you know, then you can reach out to us. We, we know many good advisors, we can put you onto them. Our team by the way, we, we don't act as advisors so we manufacturers, we don't register under phase and that keeps it very simple and independent. You know, we assist all the advisors in the market. But I think that the first protocol would be anybody's got any questions or any uncertainty or wants to clarify anything, always welcome to check with us. We'll give you factual information about how it works, what it does, all that good stuff. Yeah. So that's really the essence of it.
[00:39:30] Speaker A: Excellent. Yeah Yapi, thank you. I mean certainly we Always encourage people, speak to your financial advisor, do the research. I mean, all of these things, we can't stress the stuff enough. The purpose of this podcast is to really give you the information on the product and also some understanding of some of the risks and opportunities in the Chinese market. And obviously you'll need to form your own views on that. I mean, the starting point of being interested in this product is, hey, I want to own the Chinese market. You know, if you only want to buy the Magnificent Seven in the US for the rest of your life, then this is not the one for you. But if you're looking for diversification, you're looking for emerging market exposure, you're looking for something a bit interesting, then this is well worth considering. So, yp, thank you so much. I'll make sure that the links to the documents are in the podcast notes. For those of you who are listening to this, maybe you don't have the transcript in front of you, just go onto the ghostmail website, go and find the links to the relevant Investec documentation, Go and check it all out. And Yapi, last thing before we close off is just the closing date for this investment. When do people need to be ready to act by?
[00:40:30] Speaker B: Yeah, so we're closing this one on the 7th of March.
[00:40:33] Speaker A: Perfect, thank you. So there's a bit of time, but not a lot of time. So, Yapi, thank you so much for your time today. It really has been another great podcast. I love having you on the show. I mean, we've done this a few times now. I feel like this is the third time. I'm not 100% sure, but it's lovely to have you back. So thank you. Good luck with this raise. I'm sure it'll be just as successful as all the others. And yeah, to those who are interested in the opportunity, as I say, go and read the documentation. You can't possibly read enough. And if you want to learn more about structured products, even the stuff that's closed previously, you can't necessarily get into anymore, go back and listen to some of the other podcasts with the Investec team because you're going to pick up a lot of themes that come through in how these things are structured and what they're all about. So I would recommend going and checking that out as well. The oppi, thank you for your time today and good luck with this one.
[00:41:16] Speaker B: Thank you.
[00:41:18] Speaker A: 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. Investech Corporate and Institutional Banking is a division of Investech Bank Ltd. An authorized financial services provider, a registered credit provider, an authorized 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.
