STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 1
For Financial Advisers Only
Ungeared Investment

Ausbil Australian Emerging Leaders Fund

Ausbil Australian Active Equity Fund, Eley Griffiths Group Small Companies Fund, Perpetual Wholesale
Concentrated Equity Fund, Aberdeen International Equity Fund, Platinum International Fund, Colonial First State
Wholesale Global Resources Fund, Platinum Asia Fund and BlackRock Global Allocation Fund (Class D units)

Perpetual Wholesale Australian Fund, Vanguard Australian Shares Index Fund and Vanguard International Shares
Index Fund (Hedged)


T. Rowe Price Global Equity Fund and Perpetual Wholesale International Share Fund
Premium China Fund
Geared Investment

Ausbil Australian Emerging Leaders Fund, Ausbil Australian Active Equity Fund, Eley Griffiths Group Small
Companies Fund, Perpetual Wholesale Concentrated Equity Fund, Aberdeen International Equity Fund, Platinum
International Fund, Colonial First State Wholesale Global Resources Fund and Platinum Asia Fund

Perpetual Wholesale Australian Fund, Vanguard Australian Shares Index Fund and BlackRock Global Allocation
Fund (Class D units)


T. Rowe Price Global Equity Fund, Vanguard International Shares Index Fund (Hedged) and Premium China Fund
Perpetual Wholesale International Share Fund
Product Summary
Perpetual Protected Investments – Series 4 (the Product) aims to
provide investors with a return linked to the performance of an
underlying fund while preserving at maturity at least 100% of the
initial investment. Investors can select from an investment menu of
15 funds across Australian equity, international equity and specialist
asset classes. The Product is a closed-ended unlisted registered
managed investment scheme that provides quarterly liquidity.
The Product provides capital protection at maturity through the
use of a dynamic management technique (Dynamic Management)
which is also known as Constant Proportion Portfolio Insurance
(CPPI). In addition to this, the trustee purchases a Put Option from
UBS AG to cover any gap risk should the Dynamic Management
fail. A separate Dynamic Management will be applied to each
underlying fund on the investment menu. The Product directly
holds units in the relevant underlying fund and will dynamically
allocate capital between the underlying fund and call options
issued by UBS AG, which economically function similar to a zero
coupon bond. The Product’s exposure to the underlying fund can
range from a maximum of 100% to a minimum of 0%. If the
Product experiences 0% exposure to the underlying fund, it will be
fully cash-locked and will not regain exposure to the risky asset.
The Product can lock in gains during the term if the underlying
fund experiences strong performance.
The Product aims to generate returns in the form of a capital
gain at maturity, and may distribute little or no income during
the seven-year term. Geared investors can apply for a 100% full
recourse loan from Leveraged Equities, which is mortgaged to
the product.
CONTENTS
Product Summary
Pros & Cons
Summary of Quantitative Testing
Technical Appendix
1
7
8
10
Analysis conclusion
In this report, Adviser Edge rates the 15 investment options on
the menu separately rather than giving one rating for the entire
product. For each investment option, two ratings will be
awarded, one referring to non-geared investment and one
referring to a geared investment.
In general, most of the investment options in the Product are
rated above average for three main reasons.
Firstly, quantitative testing demonstrated that the Product has an
appropriate and efficient protection mechanism. The rules used
to determine the level of exposure to the underlying fund and
buy/sell trigger fit well with the investment choices on the menu
and the profit lock-in system. Dynamic Management has shown
the ability to maximise upside potential while providing at least
100% protection at maturity.
Secondly, the fees charged to the investors for the provision of
Dynamic Management and Put Option are reasonable. Lower
fees allow to the Product to perform more similarly to the
underlying fund in an upward trending market and reduce the
chance of deallocation in a bearish market.
Adviser Edge provides this report only under the conditions explained in “Important Information” at the end of this report.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 2
For Financial Advisers Only
Thirdly, the borrowing offered by Leveraged Equities is
unbundled from the investment, which offers geared investors
greater tax benefits by increasing the level of tax deductibility
of the interest expenses.
The Product’s primary drawback is that under poor market
conditions the Product can still be fully deallocated into cash and
can be cash-locked for the entire term of the investment. Given
that the Product has a life of seven years, a cash-locked event at
the starting phase of the investment will result in a poor outcome
for investors.
Rating snapshot
Average
Credit
Reliability
Liquidity
&
Worthiness
Transparency
Ease of
Tax
Portfolio
Effective Value
Purchase,
Redemption
ness
& Reporting
Risk-Return Rating
Non-geared
Geared
Superior
Superior
Ausbil Australian Emerging Leaders Fund
Ausbil Australian Emerging Leaders Fund
Ausbil Australian Active Equity Fund
Ausbil Australian Active Equity Fund
Eley Griffiths Group Small Companies Fund
Eley Griffiths Group Small Companies Fund
Perpetual Wholesale Concentrated Equity Fund
Perpetual Wholesale Concentrated Equity Fund
Colonial First State Wholesale Global Resources Fund
Colonial First State Wholesale Global Resources Fund
Platinum Asia Fund
Platinum Asia Fund
Aberdeen International Equity Fund
Aberdeen International Equity Fund
Platinum International Fund
Platinum International Fund
BlackRock Global Allocation Fund (Class D units)
Above Average
Above Average
Perpetual Wholesale Australian Fund
Perpetual Wholesale Australian Fund
Vanguard Australian Shares Index Fund
Vanguard Australian Shares Index Fund
BlackRock Global Allocation Fund (Class D units)
Average
Average
T. Rowe Price Global Equity Fund
T. Rowe Price Global Equity Fund
Vanguard International Shares Index Fund (Hedged)
Vanguard International Shares Index Fund (Hedged)
Perpetual Wholesale International Share Fund
Perpetual Wholesale International Share Fund
Premium China Fund
Below Average
Below Average
Premium China Fund
Adviser Edge’s ratings are not based on an opinion about the underlying fund itself, but the past performance of that fund within the
structure. Adviser Edge acknowledges that the underlying funds’ behaviour may change in the future and past performance should not
be used as a guide for future performance.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 3
For Financial Advisers Only
Investor Suitability
Adviser Edge considers the Product to be suitable for most
risk-averse and risk-neutral investors looking to gain exposure to
one or more funds on the investment menu as one component
of a diversified portfolio. For risk-averse investors, the profit
lock-in mechanism and Put Option to cover any gap risk at
maturity are the major benefits. The Product does not
incorporate any internal gearing and is never more than 100%
allocated to the underlying fund. Risk-seeking investors can gear
into the Product by taking out a loan from Leveraged Equities or
another source of capital. Alternatively, they can consider
investing in the funds directly.
The Product is targeted at investors who have a strong view
regarding ongoing returns for a particular fund or a group of
funds. For geared investors using the loan, the high interest rate
emphasises the necessity of selecting funds that can deliver
strong returns with medium to low volatility, necessary to
out-perform the after-tax cost of borrowing.
Because of the dynamic exposure to the underlying fund,
advisers should regularly review the Product within an investor’s
portfolio to ensure that desired exposures are achieved. The
Product can be used as a lower risk substitute than direct
investment to the underlying managed funds and their
underlying geographic or industry sector.
Perpetual Protected Investments – Series 4 Fund – Product Characteristics
Asset Class
Australian Equity
Foreign Exchange
Borrowing
Investment Horizon
Market Outlook
International Equity
Commodity
Hedge Fund
Volatility
Property
Fixed income
Internal Only
No
Partial
Full
Choice
< 1 yr
1 – 3 years
3 – 5 years
5 – 7 years
> 7 years
> 10 years
Short-term
bullish
Short-term
bearish
Short-term
neutral
Long-term
bullish
Long-term
bearish
Long-term
neutral
Interim Cash Flow
Net cash outflow1
No cash flow
Net cash inflow
Counterparty Risk
Low
Medium
High
Low growth – low risk
Medium growth – medium risk
High growth – high risk
Market Risk*
Self-managed Super
Funds
Yes
No
* This refers to the Product in isolation, not the investor. The suitability to a particular investor depends on the investor’s overall portfolio construction. A Low Risk product is closer to high grade
fixed income, whereas a High Risk product is closer to direct equity.
1
The Product may pass on the distributions from the underlying fund to investors. However, it is expected that all distributions will be reinvested to reduce the chance of deallocation and
increase the profit lock-in. If the distributions are reinvested, investors may still be liable to pay income tax from other sources of revenue, thus resulting in a net cash outflow.
Product Details
Legal Structure
Issuer/Responsible Entity
Perpetual Investment Management Limited (PIML) (Perpetual)
Investment type
A closed-ended unlisted registered managed investment scheme.
Investment manager
Perpetual Investment Management Limited (PIML)
Lender
Leveraged Equities
Offer close date
18 June 2010
Maturity
31 May 2017. The term is six years and eleven months.
Liquidity
Investors can request a cash withdrawal of all or part of the investment on a quarterly basis. There
is potential to redeem the investment at any time via a transfer of underlying funds from Perpetual
Protected Investments – Series 4 to investors’ equivalent funds account outside of the Product. All
transfers and redemption require prior written consent of PIML.
Delivery
At maturity, investors have the choice to roll the investment into a new Perpetual capital protected
product (if available), to redeem the investment into cash, or to hold the applicable units of the
underlying funds.
Minimum investment
The minimum amount that an investor may invest is A$50,000, with additional multiples of A$5,000.
The minimum investment in any particular investment strategy is A$10,000, with additional multiples
of A$500.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 4
For Financial Advisers Only
Economic Features
Investment strategy
PIML employs a CPPI-style mechanism called Dynamic Management. The mechanism dynamically
allocates capital between the underlying fund and call options in order to achieve at least the
protected amount at maturity. The call options function similarly to a zero coupon bond and provide
capital protection for Product.
Underlying investments
15 managed funds; six Australian equity fund, five international equity funds and four specialist
funds.
Participation
Initial and maximum participation is 100%. The participation can change over time due to the
Dynamic Management rules.
Capital protection
The capital protection is primarily achieved by Dynamic Management. A gap risk Put Option is also
used as a second layer of protection to mitigate the risk of the Dynamic Management failing to
perform and the Product’s NAV being less than the protected amount at the end date.
Gains lock-in
The level of protection will increase by 50% of the difference between the portfolio value and the
protection floor (bond floor), when the portfolio value reaches 180% of the protection floor.
Distributions
All distributions will be reinvested. However, Perpetual has the discretion to pay out distributions.
Distributions will vary according to the fund selected by the investor.
Borrowing to invest
A full recourse investment loan from the loan provider (Leveraged Equities) to fund 100% of the
investment amount will be made available.
Indicative interest rates as at 22 February 2010 are:
Variable Interest Rate
8.80% p.a.
Fixed Interest Rates
Term (years)
Monthly in arrears
Prepaid annually in advance
1
9.52% p.a.
9.41% p.a.
7
10.84% p.a.
10.64% p.a.
Fees
Upfront Fees (PDS 16)
Establishment Fee (may be negotiated with advisers): 2.20%
Ongoing Fees (PDS 16)
Administration Fee of daily investment value: 0.75% p.a.
The put option premium is 0.75% p.a. of the protected amount reducing to Nil if there is no
allocation to fund units.
Product Highlights
• This is the fourth issue of the Perpetual Protected series.
There are no significant changes to the structure. There has
been an adjustment to the available underlyings and the
unbundling of the gearing from the Product. For prior issues
a limited recourse loan was available, whereas for this issue a
full-recourse investment loan is expected to be made
available by Leveraged Equities.
• Perpetual Protected Investments – Series 4 is a capital
protected product. The Product employs a CPPI-style
mechanism called Dynamic Management on each underlying
fund and has a gains lock-in feature. Please refer to the
Adviser Edge research report Capital? Protection? A
Quantified Guide to Finding the Best Protection (5
August 2008), available at www.adviseredge.com.au, for an
explanation of CPPI.
• Investors have a choice of 15 managed funds that cover
Australian equity, international equity, and specialist asset
classes. Within the Australian and international equity
sectors, both actively managed funds and passive index funds
are available for selection. All underlyings can be considered
as medium to high volatility investments.
• The call options in this Product have the same economic
characteristics as fixed income investments. The function of
the call options is to provide capital protection in a falling
equity market.
• The Product can be considered as a conventional CPPI
product with a fixed maturity date. In a downward trending
market, the Product will gradually reduce its exposure to the
underlying equity and increases holding in the call options.
There is a possibility that the Product’s exposure to the
underlying fund can reduce to 0%, at which point investors
are fully cash-locked.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 5
For Financial Advisers Only
protection through the purchase of call options, investors
have direct credit exposure to the call option issuers. PIML
has employed UBS AG as the issuer of the call option.
• In the event of a full cash-lock, investors will no longer have
any exposure to the underlying fund for the remaining term
of the investment and there is no capital protection until the
end of the investment. Therefore, if investors decide to
withdraw before maturity, there is a possibility of capital loss.
• Should the Dynamic Management strategy fail to return the
protected amount, a Put Option has been provided by UBS
AG to fund any shortfall. Investors are also exposed to the
credit risk of UBS AG should the Put Option be required at
maturity.
• The call options in the Product which represent a fixed
income investment earn an income yield equivalent to a bank
bill swap mid with no additional margin.
• The Product does not have any internal gearing, so even if the
underlying fund performs extremely well it will not have more
than 100% exposure to the underlying fund. This reduces the
potential upside of the Product but also lowers the volatility.
• UBS AG is rated A+ by both S&P and Fitch, and Aa3 by
Moody’s. Two out of the three rating agencies have given a
stable outlook for their rating.
• PIML outsources the dynamic management/capital protection
to UBS AG. PIML will monitor performance on a daily basis by
running its CPPI model and reconciling against the capital
protection provider’s calculations.
• The Product aims to reinvest all the distributions from the
underlying funds in order to achieve a higher gains lock-in
and reduce the probability of deallocation. However, the
Product may make distributions to investors at the discretion
of Perpetual. The level of income and franking credit
distributions passed through to the investor will vary based
on the fund selected.
• Direct ownership of the underlying funds allows investors to
time capital gains after maturity, as investors can choose to
continue holding units in the underlying fund.
• The Product has a quarterly direct cash withdrawal facility.
There is also an alternative method for earlier redemption,
which is to transfer, at any time, the unit of an underlying
fund from the Product to another account owned by an
investor. This method may allow some investors to liquidate
their position more quickly than the standard quarterly cash
withdrawal.
• If the Product remains 100% allocated to the underlying
fund, there will be no direct credit risk associated with
counterparty. However, in the event that the call option
provider defaults, there is still a possibility of disruption to the
Dynamic Management mechanism, which may affect the
value of the investment. Where the Product requires capital
Transaction Flow Diagram
Investors
Perpetual Protected Investments –
Series 4
Put Option Issued by UBS AG
Call Option Issued by
UBS AG
Dynamic Management
Managed Fund
Cash Account
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 6
For Financial Advisers Only
Asset allocation
Fixed income
investments,
0%
Equity, 100%
-20%
0%
20%
40%
60%
Percent of Notional
80%
100%
120%
The Asset Allocation graph shows the initial allocation within the
Dynamic Management. At the inception of the Product, the
strategy has a target exposure of 100% to the underlying fund
and 0% exposure to the call options which function as fixed
income investments. The allocation can change during the term
of the investment and exposure to the underlying fund can
decrease to 0%.
Risk-return spectrum
The returns from the Product are less risky than a direct
investment in a well-diversified, large capitalisation equity
portfolio. The Product has a lower risk as a result of the
following:
• Dynamic Management only allows a maximum exposure of
100% to the underlying fund.
• The Product will lock-in profit whenever the NAV increases
above 180% of the protection floor.
• The Product aims to return a minimum of 100% of the initial
investment back to investors at maturity.
Fat tail view
In the fat tail section, Adviser Edge focuses on the downside fat
tail of the Product, which is the probability of the Product
returning 0%, or below -20%. Adviser Edge believes that the tail
risk of the Product for non-geared investors will depend on the
underlying fund selected. On the other hand, if the investors
gear into the Product through the full resource loan then they
will be subject to an above average fat tail regardless of the
underlying fund chosen.
For a non-geared investor, the Product can only lose part of the
initial investment in an extreme scenario where the UBS AG fails
to fulfil its obligation in providing full capital protection or
covering gap risk when it is needed. However, that possibility is
addressed in the credit risk section and is not considered in this
fat tail. Non-geared investors will receive an amount at maturity
which is equal to or greater than the initial investment. A return
of only the initial investment amount at maturity represents a
nominal return of 0% or a negative real return due to the time
value of money. Adviser Edge considers the CFS Wholesale
Global Resources Fund and the Premium China Fund to have an
average fat tail due to the funds’ relatively high level of volatility,
which can increase the chance of deallocation. An investment
with one of the remaining funds tend to have a below average
fat tail, particularly with the BlackRock Global Allocation Fund
and the Platinum International Fund, which have historically
demonstrated a low level of volatility.
Geared investors have much bigger fat tail because, if the Product
is fully deallocated into cash, the investors may only receive back
the investment amount. This means that the investors will have
needed to cover the loss of interest expenses for seven years.
Impact of underlying asset performance on the Product
over time
Decreasing
Constant
Increasing
The Product functions in a similar way to other CPPI-related
products. It is subjected to rising bond floor over the investment
term. As such, it is vital that the underlying fund performs well
during the early stages of the term to guard against full
deallocation into call options. Adviser Edge concludes that the
underlying fund’s impact on the Product performance will
decrease over time.
Capital gain vs. income
Capital Gain
Income
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 7
For Financial Advisers Only
Pros
Risk and return
• The investment menu provides several asset classes and
different investment strategies for selection. It offers
well-established funds with strong track records.
• The majority of the active managed funds in the investment
menu have historically demonstrated strong out-performance
against their benchmarks. Most of the funds are also highly
rated by a number of independent research houses.
• The back-testing of the Product showed strong returns for
most of the underlying funds, particularly the Australian
equity and resource linked funds. The aim of the back-testing
was to examine how well the structured fit with the
underlying funds rather than to predict future performance
using historical returns. Based on the back-testing, Adviser
Edge believes that the structure is suitable to the majority of
funds given the level of volatility.
• The automatic gains lock-in feature has been shown to be
quite effective in periods of strong market performance,
particularly in the early stages of the investment period.
• Further interest rate rises expected in the near to mediumterm should lower the protection floor, which will reduce the
chance of deallocation.
Portfolio value
• The Product could be used as a substitute for direct
investment in a portfolio setting as it offers moderate returns
with much lower volatility. However, it must be constantly
monitored to ensure that the levels of exposure to the equity
are in accordance with portfolio requirements.
• Diversification is improved by a wide selection of underlying
funds and the Dynamic Management’s gains lock-in feature.
Reliability and transparency
• Adviser Edge considers UBS AG to be experienced and
reliable at providing CPPI-style mechanisms for structured
products. PIML is also experienced, and has the capabilities to
monitor the dynamic management investment process and
execution.
• This Product is the fourth offer of the Perpetual Protected
Investment series. The previous products have successfully
conformed to its investment mandate.
• The Product has a clear and reliable management structure,
and most of the Product is governed by predefined rules and
formulae. The only area that involves slight discretion is the
income distribution to investors.
Liquidity
• The likelihood of the Product suffering closure or illiquidity is
deemed to be low. All underlying funds invest in equities
with very liquid market. The funds are expected to have low
chance of closure due to the depth of their respective
markets.
• In general, the Product is intended to be held to maturity.
However, Adviser Edge believes that investors should be able
to exit the investment quickly at a fair and known price if
circumstances demand.
Tax features
• Direct ownership of the underlying funds allows investors to
continue holding units in the underlying fund and to defer
capital gains after maturity.
• The expected loan will be a full recourse loan and the full
interest should be tax deductible, as opposed to only up to
the RBA secured home loan rate as in the case with
protected borrowing.1
• The Product enables access to capital for a wide range of
Australian retail investors. The Product allows leveraging
through full recourse borrowing.
Credit worthiness
• Direct ownership of the underlying funds reduces
counterparty risk when the product is fully or partially
allocated to the underlying managed fund.
• The credit ratings of the call option issuer are at the high end
of the current spectrum for banks. UBS AG is rated A+ by
S&P and Fitch, with Moody’s awarding an Aa3. Two out of
three rating agencies place a stable outlook on their rating.
1
dviser Edge does not purport to be a taxation specialist and the comments made here
A
are of a general nature based on the knowledge of Adviser Edge from previous publicly
available structured products. All investors should seek specialised and personalised
taxation advice regarding the Product. The comments throughout this product assessment
assume that the investor is an Australian resident individual not carrying on a business in
trading investments.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 8
For Financial Advisers Only
Cons
Risk and return
• The CFS Wholesale Resources Fund and the Premium China
Fund have demonstrated medium to high volatility, which is
not desirable for CPPI-style capital protection. Although the
Product has added a gain lock-in feature, high levels of
volatility may reduce the Product’s effectiveness.
• Following the GFC, many structured products in the market
have adopted various features to mitigate the risk of ‘cash
lock’. However, the possibility of cash lock still exists with this
Product.
• Underlying fund income is required to be re-invested.
Ungeared investors will need to fund any income tax liability
out of other sources.
Portfolio value
• Most of the underlying funds are equity-based investments,
which are indirectly linked to global equity markets. The
recent slump in global equity markets has demonstrated
medium to high positive correlations between most funds,
meaning that any combination of funds is likely to behave
similarly during a global equities downturn.
Credit worthiness
• Investors will be subject to a single counterparty risk from
UBS AG to provide capital protection and to cover gap risk at
maturity.
Liquidity
• In some extreme market situations, the underlying funds’
managers may restrict withdrawal, which can cause the
Product to suffer illiquidity.
Summary of Quantitative Testing
In the quantitative analysis section of this report, Adviser Edge
examines the merits of each available investment option by
critically assessing the followings:
• The quality of the underlying fund
• The effectiveness of the structure when applying to each
underlying fund
Based on the above analyses, Adviser Edge awarded two ratings
for each investment option: one for non-geared investors and
one for geared investors.
Non-geared investment
To assess the quality of each investment option for non-geared
investors, Adviser Edge compared the performance of the
Product against direct investment in the underlying fund, and
against other investment choices available to investors such as a
cash investment. Adviser Edge also benchmarked the Product
against relevant market or regional indices to determine how well
the Product serves the purpose of the investors who hold a
strong view for a particular section or region.
Geared investment
To assess the quality of each investment option for geared
investors, Adviser Edge assumes that the investors will enter the
Product with the full recourse loan from Leveraged Equities, and
that they have the highest marginal tax rate at 46.5%. All interest
expense from the full recourse loan is assumed to be tax
deductible, which lowers the after-tax cost of borrowing. An
investment option is only considered to be suitable if it has the
potential to out-perform the cost of borrowing on a post-tax basis.
Conclusions of the quantitative testing
Investments with the Ausbil Australian Emerging Leaders
Fund, the Ausbil Australian Active Equity Fund, the Eley
Griffiths Group Small Companies Fund and the Perpetual
Wholesale Concentrated Equity Fund
These investment options are considered to be superior for
both non-geared and geared investors. The underlying funds
have strong track records of out-performing their benchmarks.
The funds have proved their ability to generate alpha over time
while maintaining a moderate level of volatility. The rules and
structure of the Product work well with these underlying funds,
allowing upside potential to be maximised and thereby
increasing the chance and magnitude of gains lock-in during
the investment term.
The strong performance of the investments would benefit
non-geared investors who hold a strong outlook for the Australian
equity market. Although the Product would not always outperform a direct investment in the underlying fund, it has a good
chance of out-performing market indices and a cash investment.
Investors should note that the Product under-performs a direct
investment in the underlying fund most of the time (in particular
during very strong markets), as some returns are sacrificed in order
to achieve full capital protection. Adviser Edge considers the
sacrifice reasonable and in line with other CPPI style products.
For geared investors, the strong out-performance of underlying
funds plus the profit lock-in mechanism in the structure make the
investments very likely to out-perform the cost of borrowing on a
post-tax basis if the overall market performs strongly, as expected
by the investors.
Investments with the Perpetual Wholesale Australian
Fund and the Vanguard Australian Share Index Fund
These investments are considered to be above average for both
non-geared and geared investors. The Perpetual Wholesale
Australian Fund has demonstrated moderate out-performance
against the benchmark, although the out-performance is less
consistent. On the other hand, the Vanguard Australian Share
Index Fund has a clear investment mandate of tracking the S&P
ASX300 Accumulation Index with low management costs.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 9
For Financial Advisers Only
Adviser Edge believes that the investment options still provide a
good opportunity for non-geared investors to achieve solid
returns and out-perform other investments available.
Compared with the previous group, geared investors may need
to have a stronger conviction of the Australian equity market or
the fund, as these investment options have relatively lower
chance of out-performing the cost of borrowing.
Investments with the Aberdeen International Equity
Fund and the Platinum International Fund
These investment options are considered to be superior for both
non-geared and geared investors. Although the international
equity market has not been performing as well as the Australian
equity market, the two underlying funds have shown strong
out-performance against the benchmark. The funds have also
maintained a low level of volatility which makes the structure
much more efficient, with higher potential upside and less
chance of deallocation. (Figure A8, Technical Appendix)
Adviser Edge believes that these two investments are best for
non-geared and geared investors with strong view for the global
equity market in the next seven years, as the consistent outperformance of the underlying funds combined with the efficient
structure will be likely to produce returns above other investments
(managed funds or indexes) or the cost of borrowing.
Investments with the T. Rowe Price Global Equity Fund,
the Vanguard International Shares Index Fund (Hedged)
and the Perpetual Wholesale International Share Fund
These investment options are considered to be average for both
non-geared and geared investors. Vanguard International Share
Index Fund has shown much higher volatility compared to other
funds in the same category over the past seven years, which
make it less favourable when combined with the structure. The
high level of volatility is explained by the fact that the Vanguard
International Share Index Fund fully hedges its currency exposure.
Over the past seven years, and particularly in the last two years,
there has been a strong correlation between the international
equity market and the Australian dollar value. As a result of that,
movements in currency have partially offset equity market
movements for un-hedged international funds, while fully
hedged international funds have experienced higher fluctuations
in the unit price. The other two actively managed funds have
demonstrated a poor ability to generate alphas. Since the
inception of each fund, their performance has been relatively
similar to the benchmark, but with higher volatility.
Adviser Edge believes that investors need to have a very strong
conviction regarding the global equity market or the funds, as
these investments may not consistently out-perform a cash
investment or the cost of borrowing.
Investments with the CFS Wholesale Global Resources
Fund and the Platinum Asia Fund
These investment options are considered to be superior for both
non-geared and geared investors. Although the CFS Wholesale
Global Resources Fund has historically had higher volatility
compared with other funds on the investment menu, the fund
has demonstrated strong out-performance and returns on the
back of the resource boom. In addition to this, Perpetual has
modified the structure to accommodate the high level of
volatility, in order to improve the returns from the Product. On
the other hand, the Platinum Asia Fund has a proven track record
of substantially out-performing the MSCI Asia Ex Japan Index,
while maintaining its volatility approximately at or below 20%
p.a. in most cases.
Adviser Edge concludes that for investors who continue to
believe the resources and Asia markets will outpace other asset
classes, these two investment options provide a good
opportunity for investors to generate significant returns. The
quantitative back-testing has demonstrated that the gains lock-in
mechanism adds substantial values to the performance of these
investment options. (Figure A7, Technical Appendix)
Investment with the BlackRock Global Allocation Fund
This investment option is considered to be superior for nongeared investors and above average for geared investors. This
underlying fund historically shows moderate and consistent
returns, with the lowest volatility of all the available underlying
funds. In the past three years the volatility has ranged between
10% and 15% p.a.
Adviser Edge believes that the fund is good for non-geared
investors because the low volatility and consistent returns from
the fund allow the structure to have much greater chance of
locking in gains during the investment term and avoiding
deallocation. The absolute return strategy tends to work best with
CPPI style structure. Based on quantitative analyses, Adviser Edge
believes that the investment has a high chance of out-performing
cash investments or other market correlated investments.
However, Adviser Edge does not believe that this investment
option is superior for geared investors, because the structure
does not incorporate any internal gearing. As such, the moderate
and consistent returns may not be sufficient to out-perform the
cost of borrowing in most of the scenarios.
Investment with the Premium China Fund
This investment option is considered to be below average for nongeared investors and average for geared investors. Although the
fund has generated strong returns in absolute terms over the past
seven years, its relative performance against the benchmark has
been very poor. In addition to this, the fund tends to have higher
volatility compared to most of the available underlying funds.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 10
For Financial Advisers Only
Adviser Edge believes that the investment is below average for
non-geared investors, even though the investor may hold a
strong view on the Chinese equity market. The underlying fund
has consistently under-performed the market benchmark, and
the high volatility may cause the Product to benefit less from the
rising market. The high volatility also can cause the product to
deallocate more frequently, as demonstrated by Figure A9 in the
Technical Appendix. Although the investment should outperform a cash investment most of the time, its performance
may be below average compared to other investments linked to
the Chinese market.
Adviser Edge believes that the investment is average for geared
investors because, while the fund is under-performing other
investments in the same section, its strong returns in absolute
percentage terms are still very likely to boost the performance of
the Product above the cost of borrowing.
Technical Appendix
Underlying funds
The following three tables summarise the historical performance and volatility of the fifteen underlying funds and relevant benchmarks.
Figure A1: Historical performance of the Australian equity funds
Australian equity funds
6 Months
1 Year
3 Years
Annualised
5 Years
Annualised
7 Years
Annualised
Total Returns as at 31 January 2010
Ausbil Australian Active Equity Fund
9.7%
40.5%
-0.3%
9.5%
14.8%
Perpetual Wholesale Australian Fund
10.4%
44.8%
0.2%
8.5%
13.9%
Perpetual Wholesale Concentrated Equity Fund
9.5%
47.0%
2.7%
9.8%
14.6%
Vanguard Australian Shares Index Fund
9.7%
35.4%
-3.6%
6.4%
10.8%
Benchmark – ASX 300 Accumulation Index
9.9%
35.7%
-3.5%
6.6%
11.1%
Ausbil Australian Emerging Leaders Fund
10.3%
44.2%
-1.5%
8.1%
17.0%
Benchmark – 70% ASX Midcap 50 Accum +
30% Small Ord
8.0%
41.2%
-7.6%
4.2%
11.6%
Eley Griffiths Group Small Companies Fund
10.7%
58.7%
-3.0%
7.9%
N/A
Benchmark – ASX Small Ordinaries
8.5%
52.8%
-7.8%
4.2%
11.3%
Ausbil Australian Active Equity Fund
19.9%
20.6%
25.7%
21.7%
19.1%
Perpetual Wholesale Australian Fund
15.6%
16.6%
22.4%
18.9%
16.6%
Perpetual Wholesale Concentrated Equity Fund
16.0%
17.4%
23.1%
19.3%
16.9%
Vanguard Australian Shares Index Fund
17.7%
20.2%
25.6%
21.2%
18.5%
Benchmark – ASX 300 Accumulation Index
17.3%
19.5%
25.1%
20.9%
18.2%
Ausbil Australian Emerging Leaders Fund
20.2%
21.0%
24.5%
21.0%
18.5%
Benchmark – 70% ASX Midcap 50 Accum +
30% Small Ord
17.9%
20.2%
24.4%
20.3%
17.6%
Eley Griffiths Group Small Companies Fund
15.4%
23.1%
23.6%
19.3%
N/A
Benchmark – ASX Small Ordinaries
18.1%
21.6%
25.3%
21.0%
18.2%
Standard Deviation as at 31 January 2010
All actively managed funds in the Australian equity category have performed strongly. The Ausbil Australian Emerging Leaders Fund has
generated the highest out-performance against the benchmark over the last seven years.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 11
For Financial Advisers Only
Figure A2: Historical performance of the global equity funds
Global equity funds
6 Months
1 Year
3 Years
Annualised
5 Years
Annualised
7 Years
Annualised
Total Returns as at 31 January 2010
Aberdeen International Equity Fund
1.6%
2.4%
-7.4%
4.4%
6.3%
Perpetual Wholesale International Share Fund
1.8%
-6.5%
-10.5%
-1.6%
1.8%
Platinum International Fund
3.5%
14.1%
3.7%
8.1%
10.0%
T. Rowe Price Global Equity Fund
-0.3%
3.1%
-12.7%
N/A
N/A
Benchmark – MSCI Daily TR Net World Ex
Australia
1.8%
-2.5%
-11.5%
-1.2%
1.2%
Vanguard International Shares Index Fund
(Hedged)
8.9%
32.0%
-8.4%
1.9%
7.5%
Benchmark – MSCI Daily TR Net World Ex
Australia Hedged AUD
7.7%
35.1%
-7.6%
1.4%
7.3%
Aberdeen International Equity Fund
9.6%
15.2%
18.4%
15.6%
15.3%
Perpetual Wholesale International Share Fund
9.3%
14.7%
19.3%
16.4%
15.9%
Platinum International Fund
9.1%
12.3%
16.2%
13.7%
12.8%
T. Rowe Price Global Equity Fund
11.5%
17.7%
23.4%
N/A
N/A
Benchmark – MSCI Daily TR Net World Ex
Australia
10.0%
13.8%
17.1%
14.7%
14.6%
Vanguard International Shares Index Fund
(Hedged)
14.8%
20.9%
28.5%
22.7%
20.1%
Benchmark – MSCI Daily TR Net World Ex
Australia Hedged AUD
15.5%
21.7%
24.5%
19.8%
17.8%
Standard Deviation as at 31 January 2010
The Aberdeen International Equity Fund and the Platinum International Fund are clearly the best performers in this category. Platinum
International Fund has consistently maintained low volatility and generated strong alphas.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 12
For Financial Advisers Only
Figure A3: Historical performance of the specialist funds
Specialist funds
6 Months
1 Year
3 Years
Annualised
5 Years
Annualised
7 Years
Annualised
Total Returns as at 31 January 2010
BlackRock Global Allocation Fund (Class D units) (Aust)
8.7%
24.2%
2.4%
N/A
N/A
Benchmark – HFRX Global Hedge Fund Index Hedged
AUD
5.7%
12.1%
-3.7%
0.5%
N/A
Benchmark – MSCI Daily TR Net World Ex Australia
1.8%
-2.5%
-11.5%
-1.2%
1.2%
Colonial First State Wholesale Global Resources Fund
5.3%
26.5%
0.4%
12.4%
15.6%
Benchmark – HSBC Global Mining Index Hedged AUD
7.9%
42.3%
2.2%
16.2%
17.7%
Platinum Asia Fund
1.1%
28.8%
6.7%
15.9%
19.4%
Benchmark – MSCI AC Daily TR Net Asia ex Japan
-0.3%
23.3%
-1.4%
9.0%
10.4%
Premium China Fund
-0.9%
37.1%
7.4%
16.7%
15.1%
Benchmark – MSCI Daily TR Net China
-7.9%
16.6%
3.6%
19.0%
18.2%
BlackRock Global Allocation Fund (Class D units) (Aust)
8.1%
10.5%
14.1%
N/A
N/A
Benchmark – HFRX Global Hedge Fund Index Hedged
AUD
3.1%
2.9%
5.4%
4.7%
N/A
Benchmark – MSCI Daily TR Net World Ex Australia
10.0%
13.8%
17.1%
14.7%
14.6%
Colonial First State Wholesale Global Resources Fund
21.0%
25.2%
33.1%
28.1%
24.6%
Benchmark – HSBC Global Mining Index Hedged AUD
21.8%
27.2%
33.9%
29.0%
25.8%
Platinum Asia Fund
16.3%
20.3%
21.8%
18.5%
17.9%
Benchmark – MSCI AC Daily TR Net Asia ex Japan
18.1%
24.3%
29.1%
24.4%
22.9%
Premium China Fund
18.1%
20.2%
25.6%
21.7%
20.6%
Benchmark – MSCI Daily TR Net China
23.6%
30.0%
39.3%
33.0%
30.8%
Standard Deviation as at 31 January 2010
BlackRock Global Allocation Fund which aims to deliver consistent absolute returns has the lowest volatility of all underlying funds. Both
the Colonial First State Wholesale Global Resources Fund and the Platinum Asia Fund had strong double-digit returns over the last
seven years. While the Premium China Fund also has performed strongly in percentage terms, the relative performance against its
benchmark is poor.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 13
For Financial Advisers Only
Back-testing Analysis
This section shows the back-testing result for all underlying funds. All back-testings except the T. Rowe Price Global Equity Fund and
the BlackRock Global Allocation Fund have a full seven year period from 31 January 2003 to 31 January 2010. Adviser Edge has
conducted partial back-testing for the remaining two funds due to lack of historical data.
Figure A4: Australian equity funds
Investment
Start Date
End Date
Product
Return
p.a.
Underlying
Fund Return
p.a.
Product
Volatility
p.a.
Underlying
Maximum
Fund Volatility NAV (with
p.a.
100 base)
Gains
Lock-in
Ausbil Australian Active 31/01/2003
Equity
31/01/2010 12.9%
14.9%
12.7%
19.0%
303
130%
Ausbil Australian
Emerging Leaders
31/01/2003
31/01/2010 15.2%
17.0%
13.8%
18.4%
360
166%
Eley Griffiths Group
Small Companies
31/01/2003
31/01/2010 14.9%
16.0%
10.5%
16.9%
352
161%
Perpetual WS Australian 31/01/2003
31/01/2010 9.3%
14.0%
13.0%
16.3%
280
84%
Perpetual WS
Concentrated Equity
31/01/2003
31/01/2010 10.3%
14.6%
13.3%
16.4%
276
83%
Vanguard Australian
Shares Index
31/01/2003
31/01/2010 9.9%
10.9%
12.5%
18.3%
262
91%
In a rising market, the Product would have generated strong returns linked to the underlying fund while maintaining much lower
volatility.
Figure A5: Global equity funds
Investment
Start Date
End Date
Product
Return
p.a.
Underlying
Product
Fund Return Volatility
p.a.
p.a.
Underlying
Maximum
Fund Volatility NAV (with
p.a.
100 base)
Gains
Lock-in
Aberdeen International
Equity
31/01/2003
31/01/2010
4.1%
6.3%
13.3%
15.2%
183
24%
Perpetual WS
International Share
31/01/2003
31/01/2010
0.8%
1.8%
13.9%
15.4%
150
0%
Platinum International
31/01/2003
31/01/2010
8.5%
10.0%
12.7%
12.8%
183
23%
T. Rowe Price Global
Equity
30/09/2006
(partial
backtesting)
31/01/2010
-4.0%
-8.1%
9.5%
15.5%
113
0%
Vanguard International
Share Index
31/01/2003
31/01/2010
9.2%
7.5%
10.1%
19.7%
223
83%
CPPI style structure works best with underlying fund that has low volatility. As demonstrated by the investment with the Platinum
International Fund, the Product performed similarly to the underlying fund which means smaller amount of return is sacrificed to
provide the capital protection.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 14
For Financial Advisers Only
Figure A6: Specialist funds
Investment
Start Date
End Date
Product Underlying
Product
Return Fund Return Volatility
p.a.
p.a.
p.a.
Underlying
Maximum
Fund Volatility NAV (with
p.a.
100 base)
Gains
Lock-in
BlackRock Global
Allocation
30/06/2005
(partial
backtesting)
31/01/2010
2.8%
6.4%
5.7%
9.6%
138
18%
CFS WS Resources Fund 31/01/2003
31/01/2010
15.9%
15.6%
15.0%
24.5%
348
177%
Platinum Asia
31/01/2003
31/01/2010
15.0%
19.4%
14.9%
17.8%
326
121%
Premium China
31/01/2003
31/01/2010
11.3%
15.2%
15.7%
20.5%
227
102%
Investment with the CFS WS Resources Fund would have locked in significant gains over the last seven years. Based on the backtesting, this investment would have been the best performer of all options on the menu.
Scenario Analysis
Figure A9: Scenario with full deallocation
Premium China Fund
Figure A7: Scenario with multiple gains lock-in
Protection Floor
Colonial First State Wholesale Global Resources Fund
Underlying Fund
600
Investment Level (w/ 100 base)
500
400
300
200
100
0
1
2
3
4
5
6
7
Time (years)
The above graph is based on actual historical performance from
January 2001 to January 2008.
Figure A8: Product with a low volatility underlying fund
Platinum International Fund
Protection Floor
Underlying Fund
Product NAV
Investment Level (w/ 100 base)
250
200
150
100
50
0
100
80
60
40
20
0
0
0
1
2
3
4
Time (years)
Product NAV
Product NAV
Investment Level (w/ 100 base)
Protection Floor
Underlying Fund
120
5
6
7
The above graph is based on actual historical performance from
January 2003 to January 2010.
0
1
2
3
4
Time (years)
5
6
7
The above graph is based on actual historical performance from
July 1999 to July 2006.
STRUCTURED PRODUCT RESEARCH
Perpetual Protected Investments – Series 4
February 2010
Page 15
For Financial Advisers Only
Important Information
Although all reasonable care has been taken to ensure that the
information contained in this document is accurate, neither Adviser
Edge nor its respective officers, advisers or agents makes any
representation or warranty, express or implied as to the accuracy,
completeness, currency or reliability of such information or any other
information provided whether in writing or orally to any recipient or
its officers, advisers or agents.
Adviser Edge and its respective officers, advisers, or agents do not
accept:
– any responsibility arising in any way for any errors in or omissions
from any information contained in this document or for any lack
of accuracy, completeness, currency or reliability of any
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This document contains statements which reflect current views and
opinions of management and information which is current at the
time of its release but which may relate to intended or anticipated
future performance or activities. Such statements and financial
information provided have been estimated only and are based on
certain assumptions and management’s analysis of the information
available at the time this document was prepared and are subject to
risk and uncertainties given their anticipatory nature. Actual results
may differ materially from current indications due to the variety of
factors. Accordingly, nothing in the document is or should be relied
upon as a promise or representation as to the future or any event or
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other written or oral information made available to it and will
rely on its own inquiries and seek appropriate professional advice
in deciding whether to further investigate the business,
operations and assets of the business; and
– to the extent that this document includes forecasts, qualitative
statements and associated commentary, including estimates in
relation to future or anticipated performance, no representation
is made that any forecast, statement or estimate will be achieved
or is accurate, and it is acknowledged that actual future
operations may vary significantly from the estimates and
forecasts and accordingly, all recipients will make their own
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Performance Calculations
All tables and graphs in this report use calculations by Adviser Edge.
The product issuer has not provided or checked any of our
quantitative results.
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Report Date
4 March 2010