Capital Guaranteed Structured Product in 2023 - MSCI World exposure

[Persius]

I've read the previous threads on structured products and know that the general advice has been to stay away from them.
I'm wondering if enough has changed in the last few years to make some of these products more interesting now.
Firstly, interest rates have increased, so providers don't have to offer the more convoluted products with potential for loss, as they had done in the years of ultra low interest rates. Secondly, it appears the the documentation is a bit more clear about what is being offered.

Anyway, in particular, I was interested in the "BCP 100% Protected MSCI World Bond 2". It's got 100% capital security over its 5-year term. You get 130% participation in any positive returns of the Index, which is the MSCI World index. The returns are capped at 40.3%, which translates to 7% CAR. Minimum investment is €20,000

Flier:
Brochure:
KID:

I know that there are high fees in these products, but they are built in to the product. So your minimum return really is your initial capital invested, say €20,000. It's not that fees are deducted from this. Likewise, your maximum return is initial investment + 40.3%. Again, no fees deducted from this. At least, that's how I read the documents.

It tracks the MSCI World index, not some makey-uppy index like some other products have tracked. And the final rate of the index at maturity is calculated by taking the average over the last 6 months.

According to the KID, it is issued by "Goldman Sachs Finance Corp International Ltd, part of The Goldman Sachs Group, Inc." and is "guaranteed by The Goldman Sachs Group, Inc.". As I see it, the main risks are that the Goldman Sachs group becomes insolvent (no investor compensation scheme applies), or the MSCI World index ceases to exist, allowing GS to restructure the product any way they see fit.

Another risk is that you die before the end of the 5 year term. If this is in a pension wrapper, then you are forced to sell before maturity and could make a loss in this case. And one other risk is that the taxation status of this investment is unclear.

Given that the best 5-year deposit rates are 3.5%, this product does seem reasonably attractive. Of course, it's a bet, as you may just get your initial capital back, thus missing out on the interest you could have gotten if left on deposit. But equally, you could get 7% CAR.

Am I missing any other obvious risks or downsides?

 

[jpd]

These products are designed so that the providers make money no matter

it's a Head we win, Tails you lose every time

 

[Gordon Gekko]

Structured products are snake oil. They’re sold by low-end brokers in shiny suits. Avoid like the plague.

 

[Duke of Marmalade]

Interesting. You are absolutely right that there has been a sea change in these type of products. Mostly driven by a return to "normal" interest rates and only over the last year or so but also following strong intervention by the Central Bank against some outrageous misrepresentation.
I think the KID is the most reliable of the supporting documentation, I don't think you can game the KID.
It says the worst return is 0% per annum, which reflects the guarantee.
The median return and indeed the maximum return is 7% per annum.
The costs are 1.5% per annum, which is not excessive, but the returns are after costs.
Unlike earlier offerings from this source the tax advice is that these are subject to income tax and not CGT. That is a negative; not sure about USC and PRSI but probably they will also apply so at the upper end that is a 52% deduction from the return.
IMHO it is not totally to be rejected. You can take it at face value. Not my cup of tea but is there better over 5 years?
As to the comment that the provider always wins, that is true of any retail product.

 

[Persius]

Regarding the tax, if you invest within a pension fund, is this then irrelevant? Am I correct in saying that there is no tax due on the gains in a pension fund. Only tax due on the "income" that you eventually draw down from it via the annuity and/or ARF route?

 

[Duke of Marmalade]

Regarding the tax, if you invest within a pension fund, is this then irrelevant? Am I correct in saying that there is no tax due on the gains in a pension fund. Only tax due on the "income" that you eventually draw down from it via the annuity and/or ARF route?

Good point. Tax treatment not relevant in a pension wrapper.

 

[Itchy]

Given that the best 5-year deposit rates are 3.5%, this product does seem reasonably attractive. Of course, it's a bet, as you may just get your initial capital back, thus missing out on the interest you could have gotten if left on deposit. But equally, you could get 7% CAR.

Am I missing any other obvious risks or downsides?

Surely given the constraints, risks/return associated with this product, and the current rate environment, it would only be suitable for a very specific investment objective rather than as a return seeking investment, in and of itself. It seems that the main selling point here is that the buyer can engage their complexity bias without risk to their capital? A risk free bet. For example, a 5-year EU sovereign bond has better credit, liquidity and market risk characteristics than this product with a better guarantee of return than this product with lower fees.

 

[cremeegg]

Anyway, in particular, I was interested in the "BCP 100% Protected MSCI World Bond 2". It's got 100% capital security over its 5-year term. You get 130% participation in any positive returns of the Index,

What does 130% participation in any positive returns mean ?

If the index is up 10% do you get 13% ?

Is this product vulnerable to becoming ‘cash locked’ ?

 

[Steven Barrett]

It tracks the MSCI World index, not some makey-uppy index like some other products have tracked.

Then why wouldn't you assume the investment risk yourself? If you think the MSCI World index is a stable index that will produce positive returns over the long term, there is no need for a guarantee. The maximum you can get back over 5 years is €28,051.

Over the last 5 years, the MSCI has produced an annualised return of 10.65%. That equates to €33,173.

Of course, that is just the last 5 years and the next 5 years will be different. But whereas the structured product has a definitive 5 year term, investing yourself has an open ended term, so if you are down after 5 years, just don't cash in your money and let it run longer.


Steven
www.bluewaterfp.ie

 

[Duke of Marmalade]

Some people like guarantees. Irish govies will give a guaranteed return of c. 2.5% p.a. over 5 years.
Some people have an appetite for full equity exposure so as to have an expectation but not a guarantee to enjoy the full equity risk premium (consensus estimate about 4% p.a. over govies.)
Some people are in between and in particular some people have an almost irrational fear of losing any of their capital and almost regard interest at risk as being easy come, easy gone. A fairly priced structured product can be suitable for this constituency.
IMHO it is not for financial advisors to try and change their risk appetite but rather to give a fair description of the risks.
I think you could almost completely ignore the algorithm. 130% with 40.3% cap, so what? MSCI index, so what? 6 month averaging, so what? Regard it as a Black Box and ignore the machinery. Go straight to the KID. Minimum return zero. Average return 7% p.a. Max return 7% p.a. This is higher than the yield on govies so some of the equity risk premium is being provided. Seems a reasonable middle road.

 

[ClubMan]

Average return 7% p.a.

This is a problem with these smoke and mirrors products.
There are 5 "average return" figures in the KID and you picked one.
And even that is based on all sorts of assumptions.

 

[Duke of Marmalade]

There are 5 "average return" figures in the KID and you picked one.

Sorry for my loose description. I meant the figure after 5 years for the Moderate scenario. This is defined in regulations as the median of the simulated future outcomes. I meant "average" in this "median" sense but I now notice there are 8 "average" returns quoted with average in these situations meaning the average return over the term of the relevant scenario.

And even that is based on all sorts of assumptions.

A fair point, but really only one assumption - that the previous 5 years data are used to simulate the future. It is a big weakness in the regulations.

 

[ashambles]

The uncertainty over taxation is interesting.

BCP say they think it's income tax - (maybe because it's a derivative/option based product?)

"It is our understanding that the this product should be subject to Income Tax where applicable.. "

Cantor Fitz with similar products think it's CGT

https://cantorfitzgerald.ie/wp-content/uploads/2023/06/100PC_CAPITAL_PROTECTED_PROFIT_LOCK_IN_BOND-BROCHURE.pdf

"Based on our understanding of rates of tax, current legislation, regulations and practice, we expect the final Payments from this Bond may be subject to Capital Gains Tax (CGT)"

I was told by BOI that their structured product was exit taxed as a fund. But the BOI fund was simpler.

Income tax could suit people looking to leave employment or who've left employment, if the usual tax bands and credits apply.

 

[Gordon Gekko]

IMHO it is not for financial advisors to try and change their risk appetite but rather to give a fair description of the risks.

I would challenge that view. If someone’s risk appetite is not consistent with their goals, something has to give. Either the goals or the risk appetite. My other half’s risk appetite is low but she’s smart enough to realise that there’s not much future in that.

 

[ashambles]

BCP charges from the linked brochure.

100% of your investment is allocated to the Bond and any returns generated are based on 100% of the invested capital,not your invested capital minus any applicable fees. There are no annual management fees.Total fees for the Bond are 4.55%

The actual % payable to BCP will be notified to you after the start date of this product.

It's not clear to me how that 4.55% is paid - is it wrapped up in the scheme or do they bill you after the start date.

 

[Steven Barrett]

IMHO it is not for financial advisors to try and change their risk appetite but rather to give a fair description of the risks.

In my experience, people's perception of risk is a lot worse in their head than in reality. They think that there is a pretty good chance of losing all their money in high risk investment. And that would be true but for the investments I recommend, there is little chance of that happening as long as capitalism is still alive. When it is explained to them that investing in the biggest companies in the world is deemed high risk, they are happier to invest more in equities than previously.

So yes, you are right, it is up to us to give a fair description of the risks. But our first job is to make sure that we both have the same understanding of risk. For the funds I offer, it is the degree that your money can fluctuate in value. That is a lot different to losing all of your investment.

You will find that a lot of advisors don't ask clients what their understanding of risk is and use poorly designed risk profiling tools to decide where the money goes without asking any follow up questions.


Steven
www.bluewaterfp.ie

 

[cremeegg]

Hands up who here is not a pensions expert or actuary.

Just me I think.

Can some one explain what 130% participation in a positive return means.

I once invested in a guaranteed structured product and ended up 5 years later with my money back but no gain. Even though the underlying index was up over the period. This, as I understand it, was because the index slumped in the middle and the managers shifted the investment to support the guarantee so although the market recovered there was no money exposed to that. This I understand is called becoming cash locked. Is that possible in this product.

 

[ClubMan]

Can some one explain what 130% participation in a positive return means

I would expect that if the "base" return was R then your return would be R x 1.3? But how R is calculated could be convoluted.

I once invested in a guaranteed structured product and ended up 5 years later with my money back but no gain. Even though the underlying index was up over the period. This, as I understand it, was because the index slumped in the middle and the managers shifted the investment to support the guarantee so although the market recovered there was no money exposed to that.

It really depends on the nature and detailed terms and conditions of the product to explain this.

This I understand is called becoming cash locked. Is that possible in this product.

Ditto.

 

[cremeegg]

@ClubMan
Thanks for the reply.

While I am neither a pensions expert nor an actuary, I can count. This is what I see.

A guaranteed return in 5 years means that the provider must invest circa 78% of the capital in a risk free investment for 5 years (if they can find a risk free investment paying 5%).

130% participation in a positive return seems to suggest that they invest the balance in some exotic derivative which might under some conceivable circumstance pay a return of 66% over the 5 years (130 - 78)/78 = 66%

really only one assumption - that the previous 5 years data are used to simulate the future. It is a big weakness in the regulations.

Given that most of the past 5 years have been low interest rates and low inflation, and the next five years may be very different, I suggest that this may be more than a weakness. That the product may be structured to take marketing advantage.

I can picture some bankers getting together saying, 'how can we structure a product that will look well in back testing during a low interest low inflation environment and be attractive to customers worrying about a high inflation, high interest rate environment'.

 

[Duke of Marmalade]

A guaranteed return in 5 years means that the provider must invest circa 78% of the capital in a risk free investment for 5 years (if they can find a risk free investment paying 5%).

130% participation in a positive return seems to suggest that they invest the balance in some exotic derivative which might under some conceivable circumstance pay a return of 66% over the 5 years (130 - 78)/78 = 66%

It is right to run this rough slide rule over these things though I would get it slightly different. Yes let's say 80% to secure the guarantee and 5% for costs and profit. That is 15% to play with at the tables. The KID says that a maximum return of 40.3% (remember the 100% is already secured) and that more than half the times you will get that maximum. So you are right that it looks a bit too good to be true though not quite as ridiculous as your sums.

This may be down to your next observation.

Given that most of the past 5 years have been low interest rates and low inflation, and the next five years may be very different, I suggest that this may be more than a weakness. That the product may be structured to take marketing advantage.

I can picture some bankers getting together saying, 'how can we structure a product that will look well in back testing during a low interest low inflation environment and be attractive to customers worrying about a high inflation, high interest rate environment'.

Yes, I stand ejected. It is silly how the regulations say the KID should be based on the recent 5 years. As for back tests these show an average return of 20% which is actually much worse than what the KID says for the median. I have seen much, much worse from this very source. Like a KID saying there is a 10% chance of losing 66% of your capital but the back tests saying that none of thousands of them produced any loss.