Investment Road Test: Citi MLI Growth Kicker

PORTFOLIO POINT: Citibank’s new MLI Growth Kicker adopts Asian investors’ 'Two Pockets’ approach, with the safety of capital protection and the potential for growth from equities.

The new investment product market has well and truly reopened post the GFC with a growing range to suit the wide range of investor sentiment. Although the number of traditional gearing products has dwindled, investors looking to leverage their upside – and protect their downside – can still select from a range of relatively simple offerings.

The good news is that some (but not all) issuers have learned lessons from the GFC and are now issuing simpler and more transparent products, where investors can make a clear assessment of how they will behave in various market conditions. Citibank has just launched a simple two-year product, which provides capital back plus a minimum return of 10% paid at maturity, or the growth in the ASX 200 index capped at a maximum of 50%.

The Citi MLI Growth Kicker is a fascinating investment concept, which owes more to the investment style of Asian high net worth clients than it does to the traditional Australian approach and its simplistic ideals of “modern portfolio theory.” It’s often said that the “Two Pocket” approach emerged in Asia, where investors place a portion of capital on deposit in very secure bank accounts, with the low returns accepted as the by-product of capital security.

At the same time, those investors place an equal share into highly leveraged and often speculative investments, with the returns from the higher-risk investment being captured and added to the bank deposit as and when deemed suitable. The approach uses high rotation and turnover to move between asset classes, and shorter-term structured products are popular with those that adhere to the strategy. Compared to the weak performance of modern portfolio theory investing, with its slavish adherence to allocation across a range of asset classes using managed funds as the preferred vehicle, the “Two Pockets” approach has significant merit and will become more popular in Australia as the market recovers.

The Citi MLI Growth Kicker is very difficult to assess using the modern techniques. On the one hand it works like a fixed income asset, with the worst case (in falling markets) being that investors receive their money back after the two-year term. In a rising market, investors receive full exposure to the upside on the ASX 200, up to a maximum of 50% (the “barrier” level will be between 45% and 55%, fixed at the issue date, with the 50% barrier level being an indication of what the actual barrier would have been at the date of issue of the PDS).

However, if the barrier is breached (that is, if the ASX 200 index rises by more than the barrier level of, say, 50%), then the investor’s maximum return is fixed at 110%. Traditional asset consultants and financial planners would not know how to use or recommend this investment, as you do not know whether it is a fixed income or equity-style investment until maturity.

But for savvy investors looking for an alternative to term deposits, the Citi MLI Growth Kicker offers an excellent opportunity in rising markets to earn a minimum rate of 10% with capital protection and with the potential to enjoy what is tantamount to “free” capital protection with upside up to 50%.

In a falling market the investor’s return of capital is assured. The product gives an investor a very clear trade-off between, say, a term deposit with fixed return and capital certainty, versus the opportunity to enjoy full capital protection and growth returns of up to 50% (or capped at 110% if markets rise massively in the next two years).

Fees are reasonable and Citi will allow for early withdrawals (although there may be some cost involved and capital protection is only available for investments held until maturity). If only the PDS wasn’t so complex!

The score: Three stars
0.5 Ease of understanding/transparency
0.5 Fees
1 Performance/durability/volatility/relevance of underlying asset
0.5 Regulatory profile/risks
0.5 Innovation

Tony Rumble is the founder of the ASX-listed products course LPAC Online, a provider of investment training to financial services professionals. He is a customer of Citibank but has no interest in nor will receive any monetary benefit from the investment reviewed.