Absa Fund Linked Solutions – Product capability

Ubaid Nursoo, Quantitative Fund Analyst

Introduction

Absa Corporate and Investment Banking (Absa CIB), a division of Absa Bank Limited (Absa) has established a new business platform where investors can apply different strategies (protection, leverage, risk management) on South African-based Collective Investment Schemes, making use of an Absa-issued Note. We will however only be focusing on a Rand-based version of a very successful Dollar-based solution here, where an international asset manager is selling their Dollar based investors an 80% capital protected solution on a basket of Exchange Traded Funds (ETF’s) tracking the S&P 500 Index. In this instance Absa CIB is only providing the required capital protection by making use of Time Invariant Portfolio Protection (TIPP), implementing it through the Absa Fund Linked Solutions (AFLS) platform. The rapid growth of the AUM of this solution illustrates a clear global demand for capital protected exposure on international indices, especially with global economic and political uncertainty on the rise.

South African investors have similar concerns and as mentioned above, this document will be focusing on a Rand-based version of the same solution that can be created on the Absa Fund Linked Solutions (AFLS) Note platform. As is the case above, protection will be provided by making use of TIPP. So, what is TIPP and why is it different from the more traditional forms of capital protection offered through various structured product variations?

Time Invariant Portfolio Protection

TIPP, also known as continuous protection, has no fixed term (unlike many structured products) and an investor can choose to institute TIPP at any point and suspend TIPP at their discretion. Another unique feature of the TIPP is that the protected amount (i.e., the specified capital protection level) is a percentage which is applied to the highest closing Net Asset Value (NAV) of the portfolio comprising the performance asset (i.e., S&P 500 index) and the protection asset (i.e., low risk asset) during the term of the strategy. This means your capital protected amount grows with the NAV of the portfolio! Many existing structured products, with capital protection features, may only return your day one initial investment amount if the market is to fall below the protected level and require you to hold the product to term to get back at your invested capital.

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