Question: I’ve sold most of my bank shares but I still have some NAB and CBA. I am wondering whether or not to buy the NAB Capital notes 2. What is your advice on this subject?
Answer (by Paul Rickard): Thanks for the question. There is no real way to compare bank shares with bank capital notes. The former is real equity, while the latter is closer to fixed interest. With the capital notes, you will never receive more than the $100 you pay for them upfront – so there is no price upside.
I would consider any purchase of hybrid securities as part of my fixed interest/bond allocation.
As far as an offer of hybrid securities, the margin of 4.95% on the NAB Capital Notes is relatively attractive.
Question: We are running an SMSF and were offered by Citibank a structured product with yield 6.5% (AUD) -8%(USD). We are not sure if this is an approved product for a Superannuation fund and wonder what your view is on structured products? Our understanding is that the Citibank structured product is based on the four big banks performance and after three years if the any of the four big banks’ price is below 50% we will lose capital by the extent to which any bank price is below 50%. There is no Capital Gain to us if the bank prices rise.
Answer (by Paul Rickard): I am not a huge fan of structured products per se unless they meet a specific need that you can’t readily undertake yourself. Most structured products result in the retail investor indirectly selling an option (in this case, you are selling a put option, with the premium paid to you through a higher yield).
If you are really comfortable with the risk/return tradeoff, then go ahead – else otherwise, my advice would be to exercise caution.
Can your SMSF invest in structured products? Unless it is restricted in your investment strategy, then the answer will generally be “yes”. That said, to avoid any potential misunderstanding in the future, I would suggest that the Trustees meet and amend the investment strategy to specifically allow structured products.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
