Lyxor Asset Management of Societe Generale is launching the Swing Guaranteed Fund Currencies Series to offer fund investors capital guarantee plus yearly coupon, while maximizing returns at the lowest risk through global investment at the same time.
Like many guaranteed peers, the fund will invest a large portion of the assets into fixed income instruments to meet the guaranteed obligation at maturity. Net of the upfront management and establishment fees, the remaining assets will be invested in a call option. The call option is linked to an 18-stock basket of global companies, like BP, Coca-Cola, General Electric, ING, Novartis and Toyota; they are primarily the leading brands of their respective sectors worldwide.
In its lock-in coupon mechanism, the fund delivers coupon returns to its investors yearly during the first three years and on its maturity date. Dependent upon the 18 stocks' performance, the actual coupon rate is determined by multiplying the fund's participation rate and the smallest absolute price variation in the stock basket between two observation periods. Investors will receive the higher of the calculated coupon return or the guaranteed minimum.
In order to reap the maximum benefits from equity market's volatility, all stocks in the basket should exhibit either large positive or negative price variations between the observation periods. For example, if the average daily prices of the stocks in the basket fall at least 15% of the previous valuation, at a participation rate of 45% (the minimum for the AUD share class), investors would be rewarded a yearly coupon of 6.75%.
On the other hand, if the components in the stock basket do not experience huge price swings on the valuation dates, investors will earn only the minimum coupons in all years, in addition to the capital guaranteed at maturity in June 2007. Essentially, each stock in the basket has to exhibit at least 5% change in price (either up or down) on the valuation dates for the fund to offer bonus coupon returns.
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Table 1. Structural Differences of the Three Share Classes of the Swing Fund
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The three share classes also have different participation rates with at least 30% for the USD class, 40% for the Euro class and 45% for the AUD class. While the non-USD classes have higher participation rates to enhance ultimate returns, investors should not overlook the exchange rate risks that may offset the additional returns gained unless investors choose not to convert the proceeds to US or Hong Kong dollars at maturity.
The fund charges an annual fee of 0.86%, covering both management fee and establishment expense, but levies no initial or realization charge. The full-term charges of 3.87% is lower than most of its guaranteed peers.
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