Endowment Warrants

[Mrs Bird]

Hi Everyone,

Just wondering if anybody has used this type of investment as part of a share portfolio?
Would somebody be able to comment on the pros and cons of this type of investment. I understand it is a long term investment strategy therefore money you have is tied up for 6-10 years. It also depends on the quality of shares you select and the type of dividends it pays.

Is it a useful investment to have or not worth the effort?

I would appreciate feedback from anyone...

Thanks, Mrs Bird

 

[geoffw]

I'm not sure about endowment warrants as against other warrants, say installment warrants. Many of these products are issued by Macquarie Bank.

Peter talked about these yesterday- come tomorrow and he may cover them at the SIG

From what I can remember (I dodn't have my notes) they are a way of gearing a portfolio- useful for super funds where direct gearing is not allowed. You receive full exposure to the share, with its divideneds and price changes- but you pay a higher ineterest rates for the privilege.

Peter described IW's as buying shares on layby. You do have to fork out the full sum eventually (if you do not sell off the share in the meantime).

 

[see_change]

The advantage of endowment warrents ( as far as I recall ) is that they are one of the only ways to use leverage in a SMSF.

See Change

 

[Sunfish]

Hi Everyone,

Just wondering if anybody has used this type of investment as part of a share portfolio?
Would somebody be able to comment on the pros and cons of this type of investment. I understand it is a long term investment strategy therefore money you have is tied up for 6-10 years. It also depends on the quality of shares you select and the type of dividends it pays.

Is it a useful investment to have or not worth the effort?

I would appreciate feedback from anyone...

Thanks, Mrs Bird

I bought some years ago. NZTelecom it was.

Like all derivatives it is leveraged, which means that you buy the "rights" to a share (complete with dividends) at a discount to the trading price on the day. The difference between the amount paid on the warrant and the issue price is carried by a bank. Banks charge interest.

They can work but the selection is limited to tru blue chips and I (personally) am not disposed to such companies. PM me if you think I can help further. (I did study the concept 10 yrs ago)

Thommo

 

[geoffw]

My notes from Peter's talk- on Installment Warrants.

They are like buying on layby.You pay a deposit, and pay back in installments, up to five years. The dividend is paid as if you held the full share. Many are self funding. They can be used for cash flow, especially with companies paying a higher dividend yield- the yield is much higher because you have not paid the full cost of the share. 5%-10% is achievable without too much risk.

It's possible to write covered calls against them (and this is not a debate on coverfed calls)- but you do not want to be exercised, so you have to be very comfortable with trading out of a covered call position- ie, you've had perhaps two years+ experience in working with them. You don't want to write calls during divident month.

Installment Warrants are (as See_Change mentioned) a way to get leverage in a SMSF.

 

[Sunfish]

My notes from Peter's talk- on Installment Warrants.

They are like buying on layby.You pay a deposit, and pay back in installments, up to five years. The dividend is paid as if you held the full share. Many are self funding. They can be used for cash flow, especially with companies paying a higher dividend yield- the yield is much higher because you have not paid the full cost of the share. 5%-10% is achievable without too much risk.

It's possible to write covered calls against them (and this is not a debate on coverfed calls)- but you do not want to be exercised, so you have to be very comfortable with trading out of a covered call position- ie, you've had perhaps two years+ experience in working with them. You don't want to write calls during divident month.

Installment Warrants are (as See_Change mentioned) a way to get leverage in a SMSF.

Geoff, Endowment wararnts are, primarily, marketed to retail investors who haven't a clue how to write calls. Jeeez, I'm not thick but I've never written a call in my life. The buyer takes a punt that divs+cap gain will exceed interest paid. Remind you of -ve gearing? True, but on shares.

T

 

[geoffw]

Fair comment Thommo.

But these were comments from Peter to people who are closely related to Freeman Fox, so most of that particular audience are very familiar with the concept. Sorry not to include that info as I should.

 

[Sunfish]

Fair comment Thommo.

But these were comments from Peter to people who are closely related to Freeman Fox, so most of that particular audience are very familiar with the concept. Sorry not to include that info as I should.

It's Mrs Bird who wants to know, not me. With respect, I think she is a retail investor.

 

[Lplate]

Mrs Bird

IMHO it is another way of compulsorily saving for people with smaller (and possibly regular) funds to invest. I see personal super in the same light.

Maybe there are more profitable ways to invest, however it is lower risk relatively speaking (bank ensures that only blue chips are offered) and you can punt with smaller sums.

Maybe others can correct this view.

Lplate

 

[geoffw]

It's Mrs Bird who wants to know, not me. With respect, I think she is a retail investor.

This is a public forum. While Mrs Bird may or may not be a retail investor, there are many people who read what is in the forum, and there is the vague possibility that it may be useful to soemone. I don't make apology for pointing out a possibility.

It's a fair point that it a technique not for the average retail investor, and I think that I covered that in my original post. That's now been clarifiied though in case there was doubt, so thanks for that.

 

[Mrs Bird]

Thankyou so much to Geoff, Thommo, Sea change and L-plate for responding to my thread. I wasnt sure if I would get any replies so thanks

My reason in asking is that my father favours this type of investment and has been quite successful over a number of years. He did tell me however they have "fallen out of favour" with investors in the last few years. I gather because it is mainly designed for very conservative investors prepared to wait for the warrants to mature.

Geoff, back to installment warrants, by your description they sound very similiar to endowment warrants. With EW, the dividends pay off the warrant over a few years and no tax is paid on these dividends ,only when it matures do you start being taxed. I am very interested in learning more about installment warrants so I will do a search on the forum for more info.

Another question, could anybody tell the the main difference between Endowment and Installment Warrants...

Once again, thankyou to everyone who has responded so far.

Mrs Bird