Global Growth Basket via Linked Endowment

Policy

CIB Index and Structured Solutions

2018
Global Growth Basket via Linked Endowment Policy

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Global Growth Basket via Linked Endowment Policy
Design Principles
• Off the back of the successful Global Fixed Return & Growth Protector feedback from some investors/advisers
was as follows: -

– We want potential for higher returns

– We want some currency exposure

– We happy to forego a minimum return but capital protection is a must

• As a result we have designed the Global Growth Basket, it:

– has the same capital at risk profile

– uses the same Index

– has no minimum return

– has geared exposure to maximise returns

– has currency exposure

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 Global Growth Basket via Linked Endowment Policy
Investment overview:
 Minimum investment amount of R250,000.00

 100% capital protected when held to maturity dates

 5y term ZAR Investment

 Returns linked to US and European share markets via Commerzbank Global Equity Risk Premia 15% Risk
Control Excess Return Index

 A minimum of 4 times the index performance capped at 80% return, PLUS

 Any positive Index Performance will also be exposed to the ZAR/USD exchange rate risk – capital NOT exposed
to currency risk only returns

 Offered via Absa Life Ltd linked endowment policy

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Global Growth Basket via Linked Endowment Policy
How the Investment works
• After five years, you will receive back your full ZAR Investment Amount

• PLUS participation in the Index performance (subject to maximum performance of 20%)

• At 400% participation, you could receive a maximum return of 20% x 400% = 80%

• Index performance (IP) is calculated as follows:

IP = Final Index Level minus Initial Index Level

• We calculate the percentage difference between ZAR/USD exchange rate on the Maturity Date and the
Investment Start Date.

• Any positive return in the index will then be adjusted by the movement in the ZA/USD exchange rate.

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Global Growth Basket via Linked Endowment Policy
Investment scenarios
For illustrative purposes we will use an Investment Amount of R100 000 with Index returns capped at 20% and
a participation rate of 400%:

• Where the Index Performance at maturity is above the Maximum Index Performance of 20%, the Enhanced Index
Performance will be 80% (i.e. 20% x 400%)
• Please note: ZAR/USD movement % is multiplied by the Index Performance and then added to get to the total
Investment Return at maturity (i.e. 15% x 80% plus 80% = 92%)

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Global Growth Basket via Linked Endowment Policy
If index performance is zero or negative:
• In this case you would be better off having invested in a 5 year fixed deposit

• You will still receive back full capital amount invested

• But you will receive no return on investment

• No foreign currency movement taken into account as this is only calculated on positive returns

If index performance is positive:

• You have the potential to earn a return much higher than that offered by a 5 year fixed deposit

• If a 5 year fixed deposit rate is 9.87%, an Index Performance of merely +2.5% will outperform the 5 year fixed
deposit. (2.5% x 4 = 10%)

• The annual Index Return since inception is 4.2%. With a participation rate of 400% this will provide an
enhanced return of 16.8%

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Global Growth Basket via Linked Endowment Policy
This investment will be suitable if:
• Client wants to invest in ZAR with full capital
protection
• Client is comfortable with committing to the
investment term of 5 years
• Client wants to diversify to markets outside SA
This investment may not be suitable if:
• Client wants a fixed return on capital invested
• Client is not comfortable with committing funds to
the full investment term
• Client does not want foreign currency exposure on
returns

• Client attracted to the growth potential of US and • Client is not comfortable with the risks of this
European markets investment

• Client accept that any positive Index Performance • Client is not comfortable with exposure to foreign
returns would be subject to foreign currency equities and the underlying index
exposure

• Client understands and is comfortable with the

underlying Index

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Global Growth Basket via Linked Endowment Policy
The Index
 We are moving toward “Smart Beta” multi factor indices - reasons include better pricing and better return
outcomes over long term

 Is an alternative to market cap weighted indices (S&P 500/ EURO STOXX 50 etc) and leverages the latest
global research around factor allocation and benefits thereof

 The Index is designed in collaboration between Absa and Commerzbank AG. The Commerzbank Global
Equity Risk Premia 15% Risk Control Excess Return Index

 Index has in the main two main features which we explain in detail further on:

 Allocates to equity factors or equity risk premia from US and European markets

 Has a Target Volatility level to limit drawdowns in periods of high volatility

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Global Growth Basket via Linked Endowment Policy
Risk Premia explained
 Market cap weighted indices are made up of both good and bad risks – the good risks are called “risk premia” –
those risks worth taking because they deliver outperformance over the market over the long term

 The global explosion in technology & indexation allows us to now harness those risk premia directly

 We’ve done that by accessing 4 factors from each geography (US/EUR) through indices provided by MSCI

 The CommerzBank Index is made up of the 8 underlying indices and simply equally weights the 8 factors (i.e.
12.50% per factor)

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Global Growth Basket via Linked Endowment Policy
• The Risk premia/equity factor in question are explained below:

Equity Factor/ Risk Premia What is it

Value Captured excess returns of stocks with low prices
relative to their fundamental value
Minimum Volatility Captures excess returns of stocks with lower
than average volatility or “beta” risk
Momentum Captures continued excess returns of stocks
which have recent positive price momentum
Quality Captures excess returns of stocks that are
characterised by low-debt and stable earnings
growth

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 Global Growth Basket via Linked Endowment Policy
 Because timing of when to be in each factor is very difficult, we equally weight across all 8. In other words you
have a 12.5% weighting to each factor in the overall Commerzbank Index

 To highlight this timing issue , the below graph illustrates the volatility of returns from the respective factors

 The black line shows that by equally weighting your exposure to the underlying Risk Factors, volatility of returns
are reduced significantly and in general you have a positive return outcome (i.e. above the 0% line) – this is not
the case if you simply allocated to one factor or tried to time them

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Global Growth Basket via Linked Endowment Policy
Target Volatility
 Because equity markets can be volatile we have deployed a target volatility level into the Index to ensure that
they risk level in the Index remains relatively constant

 As a general rule (not always the case) – markest with high volatility are generally falling and vice versa and its
stands to reason then that in periods of high volatility one would want less exposure to equity markets

 The target volatility allocation runs within the Commerzebank index and allocators between equity (ie the
equally weighted basket of factors) and cash

 The target annual volatility feature adjusts daily to changes in realised /actual volatility, for example:

 If realised annual volatility is 30% then the allocation to equity is 50% (15/30 = 50%)

 If realised annual volatility is 15% then the allocation to equity is 100% (15/15 = 100%)

 The minimum and maximum allocation permissible to equity is between 0 - 150%

 The target feature is intended to act as a safety-net during times of extreme volatility

 Important to note there could be occasions where the target volality index underperforms relative to the Index
without the target volatility step in it but this is only on the rare occasion where you have rising markets with
high volatility levels and historically these are neither frequent or long lasting

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Global Growth Basket via Linked Endowment Policy
Index Factsheet
 Produced by Commerzbank and has very useful information in it

 From the Index Performance graph you can see:

 How the Index performance is better than the market cap weighted benchmark

 What the allocation to equity have been historically (shaded grey area) – note how the allocation to equity
fell in 2008 and as a result the drawdown's were far less than the market cap weighted basket

 If the grey shaded area on the graph is the equity allocation then the white shaded area is the cash
allocation for that period – you read the % allocation off the right hand side Y axis (vertical axis)

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Global Growth Basket via Linked Endowment Policy
Other information about the Index:
 Total number of stocks currently in the Index (currently 770)

 The current top-ten holdings in the Index are:

 Index Performance as per Commerzbank March 2018 factsheet summarised below:

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Global Growth Basket via Linked Endowment Policy
Credit Risk
 If Absa Bank defaults on or before the maturity date and is unable to fulfill its obligations in terms of
this investment, investors could lose a portion or all of their entire initial capital and any positive
returns from the Index

 Financial institutions are rated to indicate to investors how capable they are of meeting any payment
commitments. Credit ratings are assigned by two leading ratings agencies: Standard & Poor’s and
Moody’s National

 Absa Bank Limited are rated by Moody’s National as Aa1.za and by S&P National as zaAA- at the time
of the preparation of this document

 This means that the rating agencies are of the opinion that the possibility of the bank going bankrupt
and unable to make payments is unlikely

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Global Growth Basket via Linked Endowment Policy
Access to your Investment
• You may access your Investment once during a restricted term of five years

• If you need to make an early withdrawal before the end of five years the entire Investment will be unwound at
the prevailing market value

• Early withdrawal could result in you losing some or all of your Investment Amount

• A surrender penalty may be payable on early withdrawals

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Global Growth Basket via Linked Endowment Policy
Other important information
Fees:

 Advice Fee (paid up front, including VAT) = 3,45% in total

 Administration Fee (paid up front, including VAT) = up to 1.725% in total

 Life Company (paid up front) = 1,00% in total

 100% allocation of the Investment Amount

Tax:

 Investors should be encouraged to seek independent tax advice

 Investment taxed under Five-funds approach in the Linked Endowment

 Proceeds will be taxed as Capital Gain at 12%

 Quote points out the net and gross returns payable

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 Global Growth Basket via Linked Endowment Policy
Beneficiaries
 The Policy comes to an end when the last surviving Life Assured dies
 Investor may nominate Beneficiaries to receive the Policy Benefits on death
 Can be nominated as a Beneficiary for Ownership or as a Beneficiary for Proceeds
 May nominate up to a maximum of 5 Beneficiaries for Proceeds but only 1 Beneficiary for Ownership
Beneficiary for ownership
- This Beneficiary will become the owner of the Policy after death of investor
- Investment will continue to run and not unwind upon death of investor
- Someone else other than Investor to be the Life Assured or there need to be more than one Life Assured.
- Policy comes to an end and investment will unwind on death of the Life assured
Beneficiary for Proceeds
- This receive payment of the Policy Benefit after death of investor
- Proceeds will be shared equally between those persons nominated unless specified otherwise
- If there is more than one Life Assured the policy will continue and will form part of the investor’s estate
upon death of the investor

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Global Growth Basket via Linked Endowment Policy
Product collateral suite:

 Investment Brochure

 Index Fact Sheet

 Quote

 Application Form

 Policy T&C’s

Administration:

 Done via AIMS/ ALI Platform

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Disclaimer
This brochure/document/material/report/communication/commentary (this commentary) has been prepared by the corporate and investment banking division of Absa Bank Limited –
a registered bank in the Republic of South Africa with company registration number: 1986/004794/06 and with its registered office at: Absa Towers West, 15 Troye Street, Johannesburg,
Republic of South Africa (Absa). Absa is regulated by the South African Reserve Bank. Absa has issued this commentary for information purposes only and You must not regard this as a
prospectus for any security or financial Product or transaction. Absa does not expressly, tacitly or by implication represent, recommend or propose that the securities and/or financial or
investment Products or services (the Products) referred to in this commentary are appropriate and/or suitable for Your particular investment objectives or financial situation or needs.
This commentary is not, nor is it intended to be, advice as defined and/or contemplated in Financial Advisory and Intermediary Services Act, 37 of 2002, (FAIS Act) or any other financial,
investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever (advice). You have to obtain Your own advice prior to making any
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on the information contained herein even if notified of the possibility of such damage or loss and irrespective of whether or not You have obtained independent advice. This commentary
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disclosed and therefore, prior to investing or transacting, You should fully understand the Products and any risks and significant issues related to or associated with them. The Products
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undertaking or guarantee concerning the accuracy, adequacy and/or completeness of the information or any view or opinion provided or expressed herein. Any information on past
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professionals who have professional experience in financial and investment matters. You should contract and execute transactions through an Absa Bank Limited branch or affiliate in
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no warranty, guarantee, representation or other assurance (express, tacit or implied) relating to the indices. The publishers and sponsors make no warranties (including merchantability
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scanning, recording, or by any information storage or retrieval system, without the prior permission in writing from Absa. The illegal or attempted illegal copying or use of this information
or views may result in criminal or civil legal liability.

Absa Capital, a division of Absa Bank Limited, Reg. No. 1986/004794/06. Authorised Financial Services Provider. Registered Credit Provider, Reg. No. NCRCP7.

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