By Jessica Wee
Before we delve into this product, please let me put it out there that ELI is an investment product offered only to high net worth individuals or sophisticated individuals. This category of investors are defined in Malaysia under Capital Markets and Services Act 2007 as:
- An individual whose total net personal assets, or total net joint assets with his or her spouse, exceeds RM3 million or its equivalent in foreign currencies, excluding the value of the individual’s primary residence
- An individual who has a gross annual income exceeding RM300,000 or its equivalent in foreign currencies per annum in the preceding 12 months
- An individual who, jointly with his or her spouse, has a gross annual income of RM400,000 or its equivalent in foreign
There are many forms of ELI but for our discussion here, I am referring specifically to an autocallable product or Kick-In, Kick-Out aka KIKO which is a high risk investment product because it is non-principal protected (you may lose all your investment amount)!
From my past experience as a private banker, only clients with high risk tolerance will invest in KIKO; The reason is because when an auto call event is triggered the client may receive their investment amount in the underlying shares in the worst case scenario (at a discount to market) and monthly coupons.
In the best case scenario, the client will receive the full investment amount in cash and the monthly coupons. KIKO is only suitable for investors who:
i) do not mind holding the underlying shares at a discounted price
ii) who enjoys seeing x amount of coupons being paid into their accounts monthly which is almost like their “salary/ monthly allowance”.
The coupon can be high or low depending on the risk profile of the stock i.e. bluechip stocks with little price fluctuation will yield low coupons. Despite its low coupon (close to Fixed Deposit rates), some clients may still invest in KIKO to have a chance of getting the blue chip stock at a lower than current market price in addition to getting a coupon.
For stocks with high volatility i.e. speculative stocks, the coupon can be very attractive i.e. in double digits per annum.
There is also a principal protected ELI i.e. minimum redemption investment (MRI), otherwise known as a SharkFin product which has gained popularity due to the lackluster performance of the local stock market in recent years.
SharkFin has features that allow investors to capture potential gains from a volatile market while protecting their principal. This means investors will at least receive their principal over a specific period (usually over 12-24 months). In exchange, investors would forego a huge chunk of their gains when specific conditions are met.
SharkFin would allow the client to participate in the share price appreciation of a specific stock. For example ABC stock, up until a certain level of 15%. However, once ABC’s share price hits 15% or above, clients would only receive a rebate upon maturity and gain just slightly more than their principal.
To further illustrate, if you assume the stock price goes up 1%, you get 1%. When it goes up 5%, or 15%, you get the same returns. But once it exceeds the knock-out level (of 20%), you no longer get participation, but a so-called rebate, which gives you a fixed return which is slightly higher (1-2%) than your principal amount.
In short, SharkFin investors would gain the most from the share price of a company moving within a given range. If not, investors would bear the cost of investing in the product and the opportunity cost, which are returns they could generate by simply putting their money in a fixed deposit or other safer investment instruments.
It is worth noting that the minimum investment amount for KIKO and SharkFin is at least RM50,000. Would you be able to take such a risk?