New Way To Manage Share Portfolio Risk
Sydney Morning Herald
Saturday December 3, 2005
WE INSURE homes and cars and sometimes our lives and incomes. Now it's also possible to insure shares.
For sophisticated share traders, there have always been ways to take out protection against a fall in the value of shares, using the options market. But for many the complexities of options and other derivatives are daunting.In any case, using derivatives has never been as easy as buying insurance. Tag Pacific aims to change that with the launch of ShareCover, which allows investors to buy what amounts to share insurance as easily as buying car or home and contents insurance.A few minutes on the ShareCover website is all it takes to set up the cover. Technically it's not insurance, but as far as investors are concerned it looks and behaves exactly like it."It's very much like insurance," says Nathan Wise, head of financial services for Tag Pacific. "You pay a premium for the peace of mind of knowing that you are going to have a certain dollar value at the end of the day."You choose the shares you want to cover - the menu is limited at the moment but is expected to expand in the near future - tell ShareCover how many shares you want to insure and the website calculates your premium. There are two levels of excess - the higher the excess, the lower the premium. The cost of cover depends on which shares you want to insure.Say you hold 1000 ANZ Bank shares and want to protect yourself against a fall in their value (at the time of writing, ANZ shares were trading at $23.80). It would cost about $360 with a 20 per cent excess or about $930 with a 10 per cent excess.Shares seen as more risky are more expensive to insure. For example, it costs about twice as much to insure $23,800 worth of Telstra shares as to insure $23,800 of ANZ shares.The excess works the same as with any insurance product: it's the amount of the claim that you agree to pay before the insurance kicks in.Behind the scenes, ShareCover buys an over-the-counter put option from investment bank UBS and then issues the investor with a ShareCover certificate, which is valid for 12 months.In 12 months' time, if the value of ANZ shares has fallen by more than 10 per cent or by 20 per cent (depending on which excess you chose), you make a claim on ShareCover.If you bought the cover with 20 per cent excess, the share price has to fall to $19.04 or less for it to be worth claiming. The excess means you bear 20 per cent of the loss - in this case, $4.76. If the price were to fall to, say, $15 you'd be covered for $4.04 per share, or $4040 all up, for the $360 premium.If you buy cover with a 10 per cent excess it's more expensive because it's more likely a share price will move by 10 per cent, and therefore more likely that you'll claim. If the ANZ share price were to be $15 in a year's time, you'd bear the first $2.38 of the loss but be covered for the remaining $6.42-a-share loss, or $6420 all up, for an outlay of $930.Buying a ShareCover certificate could scarcely be simpler. Log onto the website, choose the shares you want to protect and how many, and key in your details (including credit card details). Within seconds the transaction is completed and you'll be issued with a certificate."We tried our very best to get the product into its simplest form, and to break down the barriers that would prevent someone from taking out cover," Wise says."That was the objective of the project. I think we got there. As we developed it, our biggest obstacle was figuring out if we could make the offer in this form, given the compliance issues."Our approach has been to get the product out there, as proof of concept, if you like."Wise says the product is structured so you don't have to own the shares you want to cover. Because you pay for a ShareCover certificate in cash, and Tag settles its trades with UBS in cash, you can pay the premium and cover shares that you don't actually own. If the price of the shares you've covered falls, ShareCover will pay out (minus the excess) just as if you owned the shares.Wise says the service was designed from an individual investor's perspective, rather than the perspective of an institutional investor, which would be familiar with how options and derivatives markets work."Under the bonnet is a very sophisticated technology platform that we have built through a company we have an investment in, called Unique World," Wise says. "It offers the product to the public in the form you can see on the website. It has a live feed from the ASX, so we know the state of the market and what is going on. It's hooked up to a payments gateway [and] there's a link to UBS in order for us to be able to manage our risk in a real-time manner."But the consumer doesn't have to know any of this, and that's the beauty of the product and the beauty of our system."
© 2005 Sydney Morning Herald