A SRS FUND THAT PLAYS ON STOCK VOLATILITY

DBS Asset Management has introduced a third series to their stable of Swing funds. Swing III is a bank-backed capital protected product with a six-year term. They have also introduced a new feature, that is a 1% minimum pay out guaranteed every 24 months. Furthermore, there will be no initial sales charge levied when investors buy the fund.

But the main draw of this product is the potential equity returns investors can receive based on a basket of 18 stocks selected by DBSAM. A participation rate ranging from 25% to 40% - this will be fixed when the offer for the fund closes on 20 December 02 - of the returns from the stock with the smallest absolute price variation is calculated at the end of every two years.

The fund does not buy the stock, an option is purchased instead. For example, at the end of two years, stock A registers a volatility range of 15%. It does not matter if the stock has risen or declined by 15% because only the absolute amount is considered. If the participation is 25%, returns will be 3.75%, which is higher than 1%. So an investor will receive a payout of $375 if he or she invested $10,000. And should the fund's net asset value increase significantly, investors are able to sell the fund anytime.

The participation rate is determined by the level of interest rates. Generally, if interest rates are low, bond prices rise, which makes it more expensive to buy bonds. This limits the amount that can be used to purchase the options, which makes up the fund's volatility portion. Therefore, the participation rate will drop.

Although a sales fee will not be charged, the first valuation of Swing III will see a one-off reduction of 6% or so due to charges like trustee fee and general expenses. Upon maturity, this reduction will be offset in the form of 100% capital back plus an accumulated 3% minimum payout.

The bank-backed guarantee is from French-bank Societe Generale, which has an 'AA-' minus rating from credit rating agency Standard & Poor's, 'Aa3' from Moody's, and 'AA' by Fitch. SocGen is the fourth largest bank in the Euro zone, with assets under management of 300 billion euros.

As with the previous launches of Swing I and II, the stocks' volatility will determine how the fund performs. There are 18 well-known global companies in Swing III: Microsoft, BP, Nokia, Sony, Toyota Motor, Fuji Photo Film, Pfizer, Novartis, Volkswagen, HSBC, Coca-Cola, Campbell Soup Company, du Pont, E.ON AG, L'Oreal, General Electric, Gillette, ING Groep, and KBC Bank. Generally, the more volatile the stocks are, the more investors will stand to benefit, but getting these stocks will cost more and option premiums will be much higher.

Swing III is open for cash as well as SRS investment. The six-year maturity period of this fund makes it worth considering for SRS investment because capital is protected and the potential upside from stock volatility is there. SRS is meant for retirement planning which makes longer term investments suitable. SRS investors enjoy tax savings. For example, an investor in the 16% marginal income tax rate bracket, who invests $20,000, will enjoy tax savings of $3,200 on his next income tax assessment. But to enjoy SRS tax savings, contributions must be made before 31st December.

It takes around one week or even less to process an investment using SRS funds, but for those who have not opened a SRS account yet, give yourselves an additional four to five working days. You can open an SRS account at OCBC through finatiQ.

When opening a SRS account to make contributions, you will need to offer documentary proof of your income in the preceding year by providing a copy of your IR8A. If your IR8A has been filed electronically with the IRAS, you will need your employer to fill up a declaration form stating your ordinary wages and bonuses for the previous year.

*Swing III closes for subscription on 20 December 2002