The BT Equity Income Series – Can complexity sell?

Source: Tria Investment Partners Managed Funds Review December 2014, Morningstar

In 2012 BTIM launched its direct to market Equity Income Series, two funds targeting the pre- and post-retirement sectors. The funds were launched with a flourish of targeted marketing materials and communications designed to communicate the benefits to investors.

Going against the post-GFC trend towards simple, low-cost products, the funds are relatively complex and come at a total cost of 114 and 154bps for what amounts to a higher than 50% exposure to cash. Nevertheless, the funds have been attracting flows and are now (before even achieving a three year track record) nearing capacity.

* Estimated maximum (may be lower)

The funds are a relative success story in an otherwise challenged market for Australian equities funds, and one that begs the question: what went so right, when the approach appears counter to prevailing wisdom?

Products succeed for varied reasons, not all of them tangible. But this seems to be one case of really understanding the customer need: income and capital certainty in retirement.

The strategy meets this specific customer need by producing a ‘secure’ forecast income with downside protection, something competing funds cannot boast. There are no other products, as far as we are aware, that forecast quarterly distributions up to six months in advance – a considerable innovation.

BTIM achieves this by combining a familiar equity income approach (‘quality’ Australian companies paying high dividends plus franking credits) with a collar option strategy executed by three risk and options traders to generate the additional income. Capital is protected through the purchase of put options over the S&P/ASX 200 Index. An innovative structure deals with the problems derivatives strategies normally create for unit trusts.

(We did warn you it’s not simple!)

At launch BTIM faced few direct competitors in this niche, outcomes-orientated Australian equity income segment. The Zurich (Denning Pryce) Equity Income Fund is arguably one of them, using a derivatives strategy to increase income and limit downside risk in an Australian equity portfolio. BTIM’s product protects capital with specific design features: less exposure to the share market as well as the derivatives strategy (put options over the S&P/ASX 200 Index). Further, BTIM declares the monthly income distribution for each quarter a quarter in advance, allowing investors to predict their cash flow. So BTIM’s Equity Income Series is well differentiated.

BT has satisfied a customer need with a differentiated product. The use of derivatives means it’s complex, which is the interesting part: how did complexity sell?

Identifying a customer need and designing a product that satisfies it can only succeed if the benefits are effectively communicated to customers. For more complex products this includes education and support and in this case, BTIM excelled. At launch a dedicated micro site was available for investors and advisers to answer the inevitable questions as to how the product worked and the outcomes it expected to produce. BTIM also invested in a significant amount of support and educational material and launched an interactive online income forecasting tool.

Clearly complexity doesn’t sell product in and of itself. Yet it doesn’t have to impede success, either. As long as products are designed to directly meet a specific client need and have the requisite communications and marketing support, we believe there might just be a resurgence in complex products.