Warrant provides alternative to dealing with fund managers

Friday 6th April 2001

There are other ways of getting an equity fund, without dealing with managers. The Challenger Securities endowment warrant is an example, although there are many others. Challenger is part of a convoluted corporate structure associated with the Packer empire in Australia.

The warrant is an instrument, quoted in its own right on the Australian Stock Exchange, and tradeable. An investment of $2000 covers 60% of the current share price of the 20 top Australian companies. The rest is covered with a non-recourse loan, currently bearing interest at three basis points above the Australian 90-day bank bill rate.

The warrant gives the right to buy the underlying share portfolio in 10 years' time at today's prices. Australia's top 20 companies are equally weighted in the warrant - each company is 5% of the total warrant.

A variation allows a warrant on a single company. Such warrants differ from the ill-fated warrants issued on New Zealand companies in recent years, in that nothing more has to be paid.

The exercise is a bit of a passive fund, a bit of a managed fund (the top 20 change each year), a bit of leverage (interest offsets capital gain) and portability through the stock exchange.

That form of investment is relatively small change when related to the managed funds industry, but is one of many forms of personal indirect investment, including passive equity funds, index funds and various "cap stock" funds. Take your pick.

- P V O'Brien

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