RMB Asset Management has launched an active equity product with an options-based guarantee that the firm believes is the first of its kind in South Africa.
Brandon Zietsman, marketing manager in Johannesburg, explained that the product uses derivatives rather than insurance to guarantee an actively managed equity product. "That hasn't been done in this country."
First Rand Group, the parent of RMB Group, will act as counterparty on the options positions, Zietsman said. RMB will use equity collars and fence strategies to hedge downside risk on the Johannesburg Stock Exchange, he explained. The fence is similar to a collar but provides a tailored guarantee.
In a typical strategy the investor buys a put on the index and finances the purchase with the sale of a call option. "The innovation is that we are creating collars and fences on active management of the JSE, whereas normally collars and fences are written on indices, individual shares, or static baskets of shares."
RMB is launching the product partly to cater for the mature membership of defined contribution schemes. The product's main application is for defined benefit funds looking for absolute not relative returns with, for example, a 50% equity exposure guaranteed using options, Zietsman explained.
"The client selects the level of protection they are looking for--more protection reduces potential upside."
The fund was launched with seed capital of ZAR20 million (USD2.5 million), and the target is to reach ZAR3 billion in the first year, said Zietsman.