Endowments

Endowments are long-term investment-style warrants providing you with the ability to leverage or diversify your portfolio. They are also one of the few leveraged investments for Self Managed Super Funds (SMSF).

They are typically issued with 10 years to expiry. At the time of issue you usually pay between 30 and 65 per cent of the market value of the underlying securities, and the remaining value plus other costs (outstanding amount) at the end of the term. The idea is that dividends paid by the underlying securities should pay off the outstanding amount. For this reason, investors tend to buy and hold endowments until expiry.

  • The exercise price is not fixed but varies over the life of the warrant. This outstanding amount is reduced by the value of dividends and other distributions paid on the underlying securities, and increased by interest charged on the outstanding amount.
  • At expiry, if you exercise the warrant and pay the balance of the outstanding amount (if any) the issuer will transfer the underlying securities to you.
  • If the outstanding amount falls to zero before the warrant's expiry date, you may only have to pay a nominal exercise price such as one cent in order to receive the underlying securities.
  • The fourth letter of the ASX warrant code for endowments is 'E'.

Benefits of endowments

  • Leverage
    Gain a leveraged exposure to the movement of the underlying asset. By paying a fraction of the underlying asset upfront you are able to increase your exposure for the same capital outlay.
  • Diversification
    Endowments can help you diversify your portfolio. By using endowments you are able to gain an equivalent exposure to an underlying asset on a per share basis, while having remaining funds available to invest elsewhere in the market.

Risks of endowments

  • The underlying asset fails to perform as you expected.
  • When investing in endowments, the maximum amount at risk is your initial investment (plus transaction costs).
  • As endowments offer a leveraged exposure to the underlying asset your profits and loses will be magnified.


Example of an endowment

Warrant code CBAECE
Underlying instrument Ordinary shares in Commonwealth Bank of Australia
Expiry date 18 August 2006
Outstanding amount when issued -14 February 1996 $9.95
Outstanding amount as at 16 August 2004 $1.6498
Market price of CBA shares (as at 26 November 2004) $31.84
Exercise style European
Conversion ratio 1

CBAECE endowments give you the right to buy one ordinary share in CBA on 18 August 2006.

In order to exercise the endowment you will have to pay any outstanding amount. The amount payable will depend on the dividends paid on CBA shares during the life of the endowment, and the amount of interest charged on the outstanding amount during its life. 

If the dividends pay off the outstanding amount and accrued interest before the expiry date the fully paid share will be passed to you.

The disclosure document outlines the terms and conditions for each warrant series. You should be familiar with those prior to trading. You can access information on how to find a disclosure document on the ASX website. Alternatively, you may contact your adviser or the warrant issuer.

To learn more about endowments, visit our online warrants class or view alternative educational offerings.