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There may be more to consider when we decide to build an investment portfolio for the medium to long term. Any financial adviser would tell you to diversify your portfolio across various shares, asset classes and instruments as well as time frames, so let us explore some of the other opportunities that are available. It is with this in mind that I intend to start a series of articles that relate to the use of an alternative asset class and one which has not received much attention lately. We shall look at the merit of trading (and later investing) in warrants, starting with a general introduction.
The range of financial instruments which fall under the all encompassing banner of warrants has evolved over time to such a degree that it is now hard to define characteristics which are particular to all warrants. Some warrants may actually be tailor made to suit an individual’s investment objectives and therefore have nothing in common with all other warrants out there! It can get even more complicated. Warrants don’t have standardised terms. The terms may vary significantly between different series (even between warrants of the same type) and different warrant issuers. This is determined at the time of conception. When the warrant’s components are initially being put together, they must be suitably attractive to the investing community.
As already insinuated, warrants may be issued over a diverse range of underlying assets. Not only are solitary shares and debentures considered, but a whole basket of goods may be on offer. This has obvious advantages to a trader who has a view on a particular sector or market, but cannot find an appropriate Index CFD. I remember before my days as a bond trader being involved in equity operations and settling some rather unusual warrants. During the mid-nineties a large number of investing institutions wanted to gain as much exposure as possible to the new emerging European, Middle Eastern and African (EMEA) markets. Most notably the Gas and Oil giants from the former Soviet Block were expected to excel following privatisation. Rather than buying shares in individual companies on decidedly ‘dodgy’ foreign stock exchanges, some European banks offered the opportunity to buy warrants over a basket of different securities and thus get exposure to the whole sector.
Now we are seeing a similar opportunity in emerging Asian markets (most notably Vietnam, where the Ho Chi Minh stock exchanges returned 150% in 2006, compared to the US S&P 500 average return of 8 %!). Even outside of the world of equities, warrants may be issued over underlying assets as diverse as precious metal commodities, whole stock indices or even currencies. In fact, an issuer will offer warrants in anything that may appeal to an investor or trader.
With the potential to trade markets that CFDs have not yet broken into, and the ability to leverage positions in Self Managed Superannuation Funds (SMSF), we will continue our journey into the world of warrants next time.
Stay Sharp,
John Jeffery
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