Gold diversification strategy dragging down portfolio income?
As part of a portfolio diversification strategy, many investors hold some exposure to gold through ETFs or perhaps even physical gold in the Perth Mint. A common concern is the lack of investment income unless the gold price increases and they often sell part of their gold holding to generate income. The investor wants to hold it for defensive purposes, but would also like to get paid some regular income from it.
Strategy
John holds $50,000 worth of gold ETFs inside his portfolio as part of a diversification strategy
After discussions with his adviser, John decides to sell his current holding of gold ETFs and replace them with $50,000 of Instreet Gold plus Yield Series 1
Over the next three years John will receive semi-annual coupon payments at a rate of 7.00% p.a. ($3,500 pa) and have upside to the gold price which is capped at 5% per month
John and his adviser decide that this regular payment of income is a good trade-off against having to forgo any monthly increases in the gold price above 5%
As John was already holding a gold price exposure through the ETFs he was already fully exposed to and understands the risks associated with gold related investments
With his investment in the Instreet Gold plus Yield Series 1, John still has gold price downside, but has the cushion of the coupon payments which means the gold price would have to fall by more than -21% at maturity from its level on the commencement date, for John to incur a loss on his investment
Outcomes
Over the three year investment term John would receive $10,500 in coupon payments, irrespective of what the gold price does
If the gold price falls over the investment term, John has a cushion for a fall of up to -21% before he incurs any loss
Throughout the investment term John has exposure to monthly increases in the gold price up to the cap level of +5%
Benefits of this strategy
John maintains his portfolio exposure to the gold price
John receives regular income irrespective of any changes in the gold price
If the gold price grows at a steady rate (of up to 5% per month) John fully participates
In any month where the gold price increases by more than +5%, John benefits from the first 5% but forgoes any gains beyond that level
If the price of gold falls by the maturity date, John has a cushion of 21% (from the initial gold price) before he sustains any loss. This compares to the 21% loss that he would have incurred if he had retained his ETF holding.
Important Information
Purpose of Document: The purpose of this Document is to provide indicative commercial terms only. The Documents commercial results are based on assumptions that may not be realistic. They are indicative only. Markets and market assumptions can change from the time and the commencement date of the Instreet Masti DPA product. Due care and attention have been used in the preparation of this document. However, actual results may vary and any variation may be materially positive or negative.
Document: This Document has been prepared by Instreet Investment Australia Limited ABN 24 622 827 589 (Instreet), a corporate authorised representative of AFSL 434776, and is current as at 12 August 2021.
Issuer and PDS: The Instreet Masti product is issued by Instreet Structured Investment Pty Ltd ACN 140 407 558 and the issue is arranged by Instreet. Instreet Masti is offered in a product disclosure (PDS) or Information Memorandum (IM). The relevant PDS or IM is available from Level 11, 2 Bulletin Place, Sydney, at the website www.instreet.com.au or by phoning 1300 954 678. In deciding whether to acquire or continue to hold and investment investors must first obtain the PDS and IM and carefully consider its contents.
General advice warning: The information contained in this Document is general in nature only. It has been prepared without taking account any potential investors’ personal financial situation, objectives or needs and the appropriateness of this information needs to be considered in that context. Advisers must form their own views on whether the Instreet Masti is appropriate after considering their clients’ objectives, financial situation and personal needs. We recommend you seek your own legal and taxation advice. The information may be based on assumptions or market conditions and may change without notice. This may impact the accuracy of the information. In no circumstances is the information in this Website to be used by, or presented to, a person for the purposes of making a decision about a financial product or class of products.
However, actual results will vary and any variation may be materially positive or negative.
No responsibility or liability is accepted by Instreet or any third party who has contributed to this document for any of the information contained herein or for any action taken by you or any of your officers, employees, agents or associates.
Past performance: Past performance is not a reliable indicator of future performance.
