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Phillip L&I Products: Leading The Way to Equip Traders with Another Powerful Tool

By December 2, 2021 No Comments

Phillip L&I Products: Leading The Way to Equip Traders with Another Powerful Tool

Leveraged and Inverse (“L&I”) Products, are financial products that use financial derivatives to amplify investment returns. Typically, Leveraged and Inverse products track indices and reset daily leverage and inverse exposures respectively to deliver daily returns that are multiple times of the daily returns of the tracked indices in same direction for Leveraged Products (e.g. 2x) and in opposite direction for the Inverse Products (e.g. -1x).

If structured as listed funds, exchange-traded L&I Products can be powerful speculative or hedging tools for traders. Leading the way to bring such alternative products to the local market, Phillip Capital Management is introducing the first L&I Products to Singapore investors and traders.

Investor Suitability

Due to the use of financial derivatives to replicate the underlying Index and achieve the leverage effect, L&I products and their features are of higher complexity by nature. Classified as Specified Investment Products (“SIPs”), investors or traders should possess a high level of investment knowledge and sufficient trading experience to wholesomely assess the product structure, associated risks, as well as costs and benefits before they invest in L&I Products.

Investors should also take note that the feature of reset leverage exposure on a daily basis will produce compounding effects that amplify gains or losses when holding the L&I Products for more than one day. Given this backdrop, L&I Products are more suitable for sophisticated investors (SIP-qualified) or investment professionals who actively monitor and manage the investment holdings on a daily basis.

Phillip MSCI Singapore Daily (2X) Leveraged Product: Product Feature

L&I products typically are designed to achieve their stated performance objectives on a daily basis. In our case, the Phillip MSCI Singapore Daily (2X) Leveraged Product’s published leverage factor is 2 times and will apply to returns for that day only.

To illustrate the daily reset feature and its compounding effect, consider the following example in a bullish and upward-trending market:

For holding periods longer than 1 day, it is important to note that the performance may vary from the leverage factor. Due to the daily reset feature at the end of each trading day, the performance of the underlying Index and Phillip MSCI Singapore Daily (2X) Leveraged Product will be measured from the closing levels recorded on the previous trading day.

In other words, subsequent performance is calculated based on the performance achieved the day before. Thus, over a period of more than 1 day, returns will be compounded. From the illustration above, should an investor hold a position in a Leveraged (2X) product till day 4, he would have made a cumulative return of 46.41%, more than 2 times the performance of the underlying Index of 21.55%.

Phillip MSCI Singapore Daily (-1X) Inverse Product: Product Feature

An inverse product conversely delivers the opposite of the daily performance of the underlying Index. That means investors can make money when the market or the underlying Index declines, but without having to sell anything short.

Nonetheless, the daily reset process and its compounding effect work in a similar way for holding periods longer than 1 day. Due to the daily reset feature at the end of each trading day, the performance of the underlying Index and Phillip MSCI Singapore Daily (-1X) Inverse Product will be also measured from the closing levels recorded on the previous trading day.

In other words, subsequent performance is calculated based on the performance achieved the day before. Thus, over a period of more than 1 day, returns are compounded. For illustrative purpose, consider the following example of a      -1X Inverse Product in a downward-trending market:

From the illustration above, should an investor hold a position in a -1X Inverse Product till day 4, he would have made a cumulative return of 21.55% while the cumulative return of the underlying Index is at negative 18.55% and the cumulative return of the underlying Index at an inverse factor of -1X is at positive 18.55%.

Limitations and Key Risk

Although L&I Products can generate favourable returns in a one-directional market as illustrated above, returns may not be favourable in volatile market conditions. This is because, inherent to daily reset feature, basing subsequent performance to that achieved the day before also means that L&I Products progressively also compound prior gains or losses with the leveraged factor to derive the value of the closing position.

In a volatile but flat market, the Index returned a flat performance of -0.05% by day 4 while the Leveraged 2X Product underperformed the 2X of the Index’s return, posting a performance of -0.20% in day 4.

In this case scenario, should an investor hold a position in an Inverse -1X Product till day 4, he would have underperformed the -1X of the Index’s return.

A Powerful Leveraging/Hedging Tool

By now, investors should understand that L&I Products are not designed to be traded where the market is moving sideways or to be held for more than one day without close monitoring and active management. Ideally, investors should use Phillip L&I Products to tactically increase leveraged exposure or to hedge their positions in the Singapore market; depending on what views they hold of the market.

Source: Tradingview; PCM. For full chart: https://www.tradingview.com/x/yBcnrYOY/

            Example 2: Hedging Against  Uncertainties

Conversely, when the Covid-19 crisis began escalating into a full-blown pandemic, the investor could hedge his long positions with Phillip MSCI Singapore Daily (-1X) Inverse Product to minimise the downside on his portfolio (because the Inverse Product delivers the opposite of the performance of the MSCI Singapore Index.

Source: Tradingview; PCM. For full chart: https://www.tradingview.com/x/KDAAJ03L/

In both cases, the use of Phillip L&I Products would be more capital-efficient because it offers exposure at lower capital requirement compared to buying up all the underlying stocks themselves or against other financial derivatives.

Furthermore, unlike futures or contract-for-differences (“CFDs”), investors of L&I Products are not directly subjected to margin calls as the technical aspect of managing the daily margin requirements will be undertaken by the Fund Manager.

Summary of the Difference Between L&I Products Versus Other Financial Products that Offer Leverage

# In the extreme scenario where MSCI Singapore Index falls 50% for a leveraged product or rises 100% for an inverse product in a given day, maximum loss for L&I Products may exceed principal amount invested.

Important Information

This publication and the information herein is provided by Phillip Capital Management (S) Ltd (“PCM”), the Manager, for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in the Phillip MSCI Singapore Daily (2X) Leveraged Product (“Leveraged Product”) and the Phillip MSCI Singapore Daily (-1X) Inverse Product (“Inverse Product”) mentioned herein (the “L&I Products”) that are structured as listed collective investment schemes. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for important information of the Products and obtain advice from a financial adviser (“FA”) before making a commitment to invest in the Products. A copy of the Prospectuses and PHSs of the Products are available from PCM or any of its Participating Dealers (“PDs”). The Leveraged Product tracks the performance of a leveraged position of the MSCI Singapore Index (“Index”) on a daily basis whereas the Inverse Product tracks the performance of a short position of the Index on a daily basis. The Leveraged & Inverse (“L&I”) Products are only suitable for sophisticated trading-oriented investors who constantly monitor the performance of their holding on a daily basis, and are in a financial position to assume the risks from investing in futures. The L&I Products may not be suitable for all investors. The L&I Products are designed to be used as short-term trading tools for market timing or hedging purposes and are not appropriate for long term (longer than one day) investment. The performance of the L&I Products, when held overnight, may deviate from the leveraged performance or inverse performance of the Index due to the effect of “path dependency” and compounding of the daily returns of the Index.

The Inverse Product will completely use futures-based synthetic replication strategy to move in the opposite direction from daily performance of the Index. The Leveraged Product uses a combination of direct investments into the underlying securities of the Index, and invest in SGX MSCI Singapore Free Index Futures (“SiMSCI Futures”) as synthetic replication strategy for the purpose of optimizing returns and efficient portfolio management. The 2X leverage exposure of the Leveraged Product and the -1X inverse exposure of the Inverse Product will be reset at the end of each trading day, thus the positive or negative returns will be compounded daily. When held more than one day, the cumulative performance of the Leveraged Product may deviate from 2X while the Inverse Product may deviate from -1X of the Index’s cumulative performance. When the value of the Index decrease, 2X leverage exposure will trigger an accelerated decrease in the net assets value (“NAV”) of the Leveraged Product as compared to the Index. Investing in the L&I Products may suffer substantial losses during periods of high volatility or you may still suffer a loss on your investment even if the value of the Index increases or is flat. Investments are subject to investment risks. It is possible that entire value of your investment could be lost. In the extreme scenario where the Index falls 50% for the Leveraged Product or rises 100% for the Inverse Product in a given day, maximum loss for the L&I Products may exceed principal amount invested. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future performance. There can be no assurance that investment objectives will be achieved. PCM does not intend to hedge any foreign currency exposure that the L&I Products may have and may engage in securities lending or repurchase transactions for the Leveraged Product. Any regular dividend distributions, either out of income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the NAV of the Leveraged Product. Upon launch of the Leveraged Product, please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions. MSCI had announced that foreign listings will become eligible for the MSCI Singapore Index. As Index constituents listed on foreign exchanges have different trading hours, this may lead to an increase in the tracking error and imperfect correlation between the value of the Index and the L&I Products’ performance. Exchange-traded L&I Products are not like typical unit trusts as the units of the exchange-traded L&I Products (the “Units”) will be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectuses of the L&I Products for more details. The L&I Products are classified as Specified Investment Products and Capital Markets Products Other Than Prescribed Capital Markets Products. The information herein is not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The L&I Products are not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the L&I Products or related thereto. The L&I Products may invest in ETFs or unlisted funds managed by the Manager. This publication has not been reviewed by the Monetary Authority of Singapore.

The L&I Products are not sponsored, endorsed, sold or promoted by MSCI, any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI Index (collectively, the “MSCI Parties”). The MSCI Indexes are the exclusive property of MSCI. MSCI and the MSCI Index names are service marks of MSCI or its affiliates and have been licensed or use for certain purposes by the L&I Products. None of the MSCI Parties makes any representation or warranty, express or implied, to anyone regarding the advisability of investing in funds generally or in the L&I Products particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names of the MSCI Indexes which are determined, composed and circulated by MSCI without regard to the L&I Products or the issuer or owners of the L&I Products or any other person or entity. None of the MSCI Parties has any obligation or liability to the issuer or owners of the L&I Products or any other person or entity in connection with the administration, marketing or offering of the L&I Products.

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FATCA NOTICE

With effect from 1st July 2014, this FATCA Notice (the “Notice”) forms part of the terms and conditions of our products and services (the “Terms and Conditions”) governing your relationship (“you”, “your”, “yours” referred to herein include joint-account holders and beneficiary holders of an entity who are a natural person) with Phillip Capital Management (S) Ltd and its related corporations (collectively referred to herein as “PCM”, “us”, “we” or “our”) and should be read in conjunction with those Terms and Conditions, including those under our Personal Data Protection Notice.The existing terms and conditions of any contractual agreement entered into between PCM a nd you (the “Existing Terms and Conditions”) remain in full force and effect. In the event of any conflict or inconsistency between the provisions of this Notice and those of the Existing Terms and Conditions, the provisions of this Notice shall prevail.

We may from time to time update the Terms and Conditions listed here to ensure their consistency with our future developments,industry trends and/or any changes in legal or regulatory requirements. Such updates will be published at http://www.phillipfunds.com/ .

On March 18, 2010, the United States of America’s (“U.S.”) Hiring Incentives to Restore Employment Act of 2010 (Pub.L.111-147H.R.2847)) (the “Act”) was enacted into law. Section 501(a) of the Act added a new chapter 4 (sections 1471-1474) to Subtitle A of the U.S.’s Internal Revenue Code (Code).Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (as defined in section 1471(d)(4)) (FFIs) with respect to certain U.S. accounts (as defined in section 1471(d)(1)) of specified U.S. person, and imposes withholding, documentation, and reporting requirements with respect to certain payments made to certain foreign entities.

PCM will be obliged to comply with the provisions of FATCA under the terms of the inter-governmental agreement (“IGA”) Model I between the U.S. and Singapore and under the terms of Singapore’s subsidiary legislation which will be issued pursuant to Singapore's Income Tax Act (Cap. 134) to implement the IGA. “FATCA” or “Foreign Account Tax Compliance Act” means Chapter 4 (sections 1471 to 1474) to Subtitle A of the U.S. Internal Revenue Code.

“FATCA” or “Foreign Account Tax Compliance Act” means Chapter 4 (sections 1471 to 1474) to Subtitle A of the U.S.Internal Revenue Code.

“U.S. person” means a U.S. citizen or resident individual, a partnership or corporation organised in the U.S. or under the laws of the U.S. or any state of the U.S. thereof, a trust if: (i) a court within the U.S.would have authority under the applicable law to render orders or judgments concerning substantially all issues regarding the administration of the trust; and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust, or an estate of a decedent that is a citizen or resident of the U.S..This definition shall be interpreted in accordance with the provisions of the U.S. Internal Revenue Code.

  • You shall provide all required documentation or information, including but not limited to your date of birth, countries of citizenship, countries of permanent residence, countries of tax residency and associated taxpayer identification numbers, which may be required to enable PCM to ascertain your U.S. tax status and share information and /or documents relating to you and/or your account(s) with domestic and international authorities for the purpose of complying with all the requirements of FATCA, the IGA between Singapore and U.S or other countries,any applicable Singapore or international laws or regulations.
  • You represent and warrant that you have provided to PCM all documentation or information in relation to change in your tax status or as required by PCM for compliance with all the requirements of FATCA, the IGA between Singapore and U.S or other countries,any applicable Singapore or international laws or regulations. You shall provide all required documentation or information within seven (7) days of a request from PCM in writing or otherwise.
  • You shall notify PCM in writing immediately in the event of any change that affects your tax status for the purpose of complying with the requirements of FATCA, the IGA between Singapore and U.S or other countries,any applicable Singapore or international laws or regulations. Such change that affects your tax status may include any change of the country or territory of your domicile or residence or any change of your nationality or obtaining of any new nationality. In these instances, you shall provide all information and/or documents as required or requested by PCM.
  • You acknowledge and agree that when you fail to provide accurate and timely information pursuant to this Notice, for the purpose of complying with the FATCA, the IGA between Singapore and U.S or other countries, any applicable Singapore or international laws or regulations, PCM may deem you as a recalcitrant and/or a reportable person and report this information to the Singapore Inland Revenue Authority, in accordance with applicable laws and regulations, which will in turn report to the IRS.
  • It is the existing policy of PCM that investment products and investment accounts managed by PCM (“PCM Products and Services”) are not being offered or sold to U.S. Persons and that subsequent transfer of PCM Products and/or Services to a U.S.Persons are prohibited.
  • If investment accounts or products managed by PCM are beneficially owned by a U.S. Person or if PCM deemed you as a recalcitrant and/or a reportable person,PCM may compulsorily cancel your pending subscription order or capital injection,terminate the contractual relationship with you and withhold an amount for transferring to the relevant tax authorities as required under the FATCA, the IGA between Singapore and U.S or other countries, any applicable Singapore or international laws or regulations. PCM shall have no liability for losses,fees, costs, expense, damages, liabilities of any kind which you may have suffered in connection with such cancellation, termination, withholding amount and/or as a result of our complying with the requirements of FATCA, the IGA between Singapore and U.S or othercountries,any applicable Singapore or international laws or regulations,even if we make an incorrect assessment and decision.

PDPA

PERSONAL DATA PROTECTION NOTICE

With effect from 1st July 2014, this Personal Data Protection Notice (the “Notice”) forms part of the terms and conditions of our products and services (the “Terms and Conditions”) governing your relationship (“you”, “your”, “yours” referred to herein include joint-account holders and beneficiary holders of an entity who are a natural person) with Phillip Capital Management (S) Ltd and its related corporations (collectively referred to herein as “PCM”, “us”, “we” or “our”). Without prejudice to the existing terms and conditions of any contractual agreement entered into between PCM and you (the “Existing Terms and Conditions”), which remain in full force and effect, this Notice shall be read in conjunction with the Existing Terms and Conditions. In the event of any conflict or inconsistency between the provisions of this Notice and those of the Existing Terms and Conditions, the provisions of this Notice shall prevail.

We are required under the Personal Data Protection Act (“PDPA”) to put in place the necessary arrangements to protect personal data and comply with the PDPA. Personal data includes any data and information, whether true or not, about an individual (a natural person) who can be identified from that data or information, such as your name, NRIC, passport or other identification number, telephone numbers, address, email address and any other information relating to individuals which you or your authorized representative have provided to us or we are likely to have access to (“Personal Data”).

This Notice outlines the purposes for the collection, use and/or disclosure of your Personal Data by PCM, how we protect your Personal Data and your rights with respect to the collection, use and/or disclosure of your Personal Data. This Notice supplements but does not supersede nor replace any other consents which you may have previously provided to us in respect of your Personal Data, and your consents herein are additional to any rights which we may have at law to collect, use and/or disclose your Personal Data. We may from time to time update the Terms and Conditions listed here to ensure their consistency with our future developments, industry trends and/or any changes in legal or regulatory requirements. Such updates will be published at http://www.phillipfunds.com/.

1. PCM may collect, use and/or disclose your personal data for any of the following purposes listed below (collectively “Permitted Purposes”):-

i) carrying out activities, duties and obligations in connection with our products and services which you have applied for, including evaluating your eligibility and credit profile, verifying the identity or authority of your representatives, administration of your account and/or managing our overall relationship with you (including but not limited to the outsourcing of any of our functions to service providers or vendors, due diligence checks, accounting and portfolio valuation, billing and collections, business continuity and print management);

(ii) developing new services and/or products;

(iii) providing you with marketing, advertising and promotional information, materials and/or documents related to financial products and/or services that we may be selling, marketing, offering or promoting, whether such financial products or services exist now or are created in the future;

(iv) marketing and promotional events, including but not limited to images, photographs or videos of you during the events;

(v) meeting or complying with PCM’s internal policies and procedures and any applicable rules, law, regulations, codes of practice or guidelines, orders or requests issued by any court, legal or regulatory bodies (both national and international) (including but not limited to disclosures to regulatory authorities or financial industry self-regulatory bodies; conducting audit checks (internal/external), surveillance and investigation; handling of customer feedback or complaint; dispute resolutions; recording of telephone conversations and/or electronic communications with you; conducting checks or investigations for prevention and/or detection of financial crimes such as money-laundering, financing of terrorism, fraud and/or bribery etc.);

(vi) legal purposes, including but not limited to obtaining legal advice and enforcing or defending our legal and/or contractual rights against you;

(vii) risk management, statistical and trend analysis;

(viii) processing and/or storing data and/or information related to your relationship with PCM.

2. PCM, in order to facilitate the discharge of its duties and obligations to you, may be required to disclose your Personal Data for the Permitted Purposes and/or for processing of the Permitted Purposes on a need-to-know basis, to any of the following entities and the directors, officers, staff, employees and agents of any such entities, whether located within or outside Singapore (“Relevant Persons”):-

(i) any associate or related company of PCM and the directors, officers, staff, employees and agents of any such person;

(ii) any actual or proposed assignee or transferee of any of PCM’s rights and obligations or any actual or proposed delegate of any of PCM’s functions and duties under its contractual relationship with you;

(iii) any relevant governmental, supervisory or regulatory authority or court of law, including the Monetary Authority of Singapore, to which PCM is or may be subject;

(ix) any person in order to give effect to any instruction from you or any person acting or purporting to be acting on behalf of you;

(x) any person as PCM may consider necessary in order to comply with any order, directive or policy of any court or governmental or regulatory authority in any jurisdiction;

(xi) any person when required to do so in accordance with the laws of any applicable jurisdiction or rules of any professional self-regulatory bodies or securities exchanges;

(xii) any agent, contractor or third party service provider who provides their services in connection with the operation of PCM’s fund management business, including but not limited to the custodians, trustees, fund administrators, registrars, banks, legal firms, accounting and auditing firms, printing firms, IT service providers, credit reference agencies, credit bureaus, data screening entities for the purpose of due diligence checks and the prevention and detection of financial crimes.

3. PCM’s related companies and third party service providers shall be bound by the same provisions as set out in this Notice and we will require them to ensure that your Personal Data are kept confidential and secure.

4. You represent and warrant that your Personal Data provided to us is accurate and complete for us to make a decision that affects you or to disclose your Personal Data to the above-mentioned Relevant Persons on a need-to-know basis. Where applicable, when you provided Personal Data relating to another individual (e.g. your dependent, spouse, children and/or parents) to us, you represent and warrant that such Personal Data is accurate and complete and the consent of that individual has been obtained for the collection, use and disclosure of his/her Personal Data in accordance with the provisions listed in this Notice.

5. We will retain your Personal Data to the extent that one or more of the Purposes for which your Personal Data was collected, used and/or disclosed is/are still valid and for legal, regulatory reporting or regulatory investigations purposes for which retention may be necessary.

6. PCM may terminate any contractual relationship which you may have with us, if any information provided to us is insufficient, misleading or erroneous or if any information that is required to be disclosed to any regulatory authority for compliance with any law or regulation is not provided by you.

7. You may request access to or make corrections to your Personal Data records. Depending on the information requested PCM may charge a small fee when you request access to your Personal Data. Upon your request and subject to the provisions under the PDPA, PCM will respond accordingly within reasonably possible time. Please submit your request to our Data Protection Officer via pcm@phillip.com.sg.

8. You may withdraw your consent to any use or disclosure of your Personal Data for any or all of the Purposes as set out in this Notice by giving written notice to us. If you withdraw your consent(s), depending on the nature of your request, we may not be in a position to continue to provide our products or services to you or administer any contractual relationship in place. Such withdrawal may be considered a termination by you of any agreement you may have with us. Where there is any breach of your contractual obligations or undertakings, PCM’s legal rights and remedies are expressly reserved in such event.