# "Earn 5% a year even in a falling market"



## Brendan Burgess (1 Jan 2022)

From the front page of the Irish Times today


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## Brendan Burgess (1 Jan 2022)

(After discussing this backwards and forwards in later posts, this is how this terrible product works.) 

*Product summary*

This is a weird product where the customers takes on a small but real risk of a huge loss over 10 years in exchange for a small return over three or four years.

Say you invest when the index is at 100.

If the stock market does well and the index rises, you will get 5% a year for three years and then they will mature the bond.  In other words, if the stock market does well, they won't have to pay you 5% a year for 10 years.

If the stock market does badly and drops to 70 at any time, they will stop paying the 5%.  If it recovers to 70, they will resume the 5% and pay you the missed annual payments.

If the index recovers to 90 at any time, they cash the investment. You get your money back.

If the stock market does badly and does not recover above 70, but stays above 50, before the ten years is up, you will get your initial investment back.

If the stockmarket ends the 10 years below 50, then your capital will be cut accordingly. For example, if the index falls to 40, you will get no dividends and 40% of your initial investment back.

*The index is very unusual*
The underlying index will rise every year by reinvested dividends which are about 2.5% a year.
But... they also knock the index back by 5% a year to allow for dividends.
So, if the underlying market remains constant over ten years, the index will fall by about 25% anyway.

So, it does not take much of a drop to fall below the 70% trigger point after which the annual 5% will not be paid.

And it doesn't take much more of a drop to fall below the 50% level at which your capital is reduced.

Brendan


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## Brendan Burgess (1 Jan 2022)

This would be a very uncomfortable product to own. You would always be on edge. 

On the one hand, you would want it to be below 90%, so that it remains open and you continue to get your 5% annual coupon. 

But you don't want it to dip below 70%, as you won't get your coupon any longer.

And if it's around 70%  in the final years, you will be on edge, as a drop below 50, will see you losing a big chunk of capital. 

Brendan


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> So the underlying  index has to rise by 5.26% a year to keep its value*?*


No.  the decrement is taken daily and would precisely cancel any underlying 5% growth.  Earlier versions had 3.5% decrement.  It was supposed to proxi a deduction for dividends as the underlying index is NTR (Net (of witholding tax) Total Return).  I think 5% seems on the high side for dividends on these ESG stocks.


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## cremeegg (2 Jan 2022)

Duke of Marmalade said:


> No.  the decrement is taken daily and would precisely cancel any underlying 5% growth.  Earlier versions had 3.5% decrement.  It was supposed to proxi a deduction for dividends as the underlying index is NTR (Net (of witholding tax) Total Return).  I think 5% seems on the high side for dividends on these ESG stocks.


Again in English please.


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## MrEarl (2 Jan 2022)

BCP have been flogging "capital guaranteed" products etc. for a few decades now, so they've clearly got a customer base.

Has anyone ever done a review of how their offerings subsequently performed?

I've never put much time into any of their products, as my starting point tended to be that they were committing most of your investment to either an associated derivative provided by an investment bank, or their fees, leaving very little opportunity for upside (for the investor).


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## cremeegg (2 Jan 2022)

MrEarl said:


> BCP have been flogging "capital guaranteed" products etc. for a few decades now, so they've clearly got a customer base.
> 
> Has anyone ever done a review of how they subsequently performed?
> 
> I've never put much time into any of their products, as my starting point tended to be that they were committing most of your investment to either fees, an associated derivative, leaving very little opportunity for upside (for the investor).


This 'decrement' product is not even capital guaranteed, see ad. 

It seem to be some new snake oil that has been developed as capital guarantee products are no longer profitable enough for the suppliers.


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## cremeegg (2 Jan 2022)

I see that a decrement index is 'A decrement is an overlay applied to an underlying index.'

Decrement Application
Subtracting from return is the most popular type of decrement application, and it can be combined with both fixed-percentage decrement and fixed- point decrement. Oh goody. See here https://www.spglobal.com/spdji/en/documents/education/education-a-guide-to-sp-decrement-indices.pdf

The actual index referred to in the ad is the 'S&P ESG Select equal weight 50 decrement index' factsheet here https://www.spglobal.com/spdji/en/i...eight-50-point-decrement-index-series-3/#data

I cannot see what the actual decrement applied is, or even if it is applied by S&P as part of the index or by BCP, or if the definition of the decrement can be changed during the life of the product.

Am I correct in saying that a decrement index is and index after shrinking the return on some real life index.


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## Gordon Gekko (2 Jan 2022)

In general, structured products are a joke. Rory Gillen has written some good stuff on them.

I mean, people here are pretty financially literate, and I find myself having to read-up on these products and actually think about them properly.

And this is for something that tends to be flogged to the general public on the front page of the Irish Times!

The investors are potentially like lambs to the slaughter, only rising markets keep bailing them out.

“Picking up dimes in front of steamroller” springs to mind.

As it has become harder to earn guaranteed or close to guaranteed returns, these products have become more and more nuanced and more complex.

It’s now getting to the stage where there’ll be a product based on the North Korean Share Index, but denominated in Turkish Lira, where you’ll get a guaranteed 5% a year for five years, unless Ronaldo scores 30 goals this season, Brendan Burgess wakes up on his left side more than 27 Tuesday mornings during 2022, and Tiger Woods wins a tournament outside of North America before 13 March 2024.

And yet these are marketed to retail clients (i.e. everyone including grannies) for relatively small amounts of money. What in God’s name are the Central Bank doing or thinking?


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## Brendan Burgess (2 Jan 2022)

It seems that if this index falls by more than 30% you will lose this amount of money. 

But even if the underlying index does not change over the ten years, a 5% compounded excrement would result in a 40% fall?  

So the underlying index stays the same, but you lose 40% of your money.

But you get a 5% annual yield.

Brendan


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## MrEarl (2 Jan 2022)

Gordon Gekko said:


> What in God’s name are the Central Bank doing or thinking


Probably busy growing vegetables on their window ledges, like a certain Minister, that I won't name (ie fiddling, while Rome burns) 

Its very clear to me that the Central Bank has little interest in consumer protection, and we'd be far better off putting the responsibility for overall consumer protection, elsewhere.


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> It seems that if this index falls by more than 30% you will lose this amount of money.
> 
> But even if the underlying index does not change over the ten years, a 5% compounded excrement would result in a 40% fall?
> 
> ...


_Boss_, I think it's 50% and remember the basic index is Total Return which has dividends reinvested which is not the case for household names like FTSE 100 or Stoxx 50.  These excrements originally were meant to proxy the dividends of NTR indexes but at 5% that looks a tad rich.  (I know GG has already cracked the sh1t joke or did you mean it, you sly devil?)


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## Duke of Marmalade (2 Jan 2022)

cremeegg said:


> Again in English please.


The _Boss_' question was that if you took the excrement at the end of the year then you would need to have grown 5.26% to stand still as (1.0526 * .95 =1) .  But by taking the decrement (joke over) daily this doesn't happen - can't explain why in English but the math works.


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## Brendan Burgess (2 Jan 2022)

I checked out their website. It's too complicated for me to understand.  But it seems that under a favourable scenario, you will get an annual return of 3%





Bizarrely, it seems to decline the longer you hold it.

You are risking 70% of your investment to get a return of 35%.

This is not what I would have expected from the Irish Times advert.

Brendan


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> If the index excluding dividends falls by 5% per annum, will it be
> 100 - 5% fall + 3% dividends - 5% decrement ?
> 
> Brendan


Yes.  It is basically the primary index - 5%.  The primary index here is a NTR index which is not the usual household variety (FTSE 100 etc. are capital only), so there is sort of a conscience salvo in decing 5% to make it more familiar to the housewives. Used to be 3.5% (I think) on this S&P ESG thing but now on series 4 it is 5%.  I guess the dec is like any drug, you start off on moderate doses but then have to increase your fix.


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> I checked out their website. It's too complicated for me to understand.  But it seems that under a favourable scenario, you will get an annual return of 3%
> 
> View attachment 6002
> 
> ...


_Boss _this KID is very hard to understand, but I guess most KIDs are and I intend the double meaning.  PRIIPS was one of the few good reasons for Brexit.
I don't understand the reducing return in the Moderate scenario either.  The ** refer you to a clarification that the figures are not actually for 10 years but that they assume the product kicks out early.
hat is one criticism I have of this product - it is described as being recommended for10 years.  Well firstly it is quite unlikely to make the 10 years and secondly it if it does that is bad news for it means the index has performed badly and you will be lucky to even get your money back.
I will be following up soon with a more detailed (stochastic) analysis of the product.


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## Gordon Gekko (2 Jan 2022)

And this is being marketed to Joe Public via the front page of the Irish Times…


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> So the underlying  index has to rise by 5.26% a year to keep its value?


Half right _Boss_.  5% p.a. taken daily knocks out 5.12% annual growth.


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## Pinoy adventure (2 Jan 2022)

So not worth a punt ?? 
Even with somebody else’s money


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## Brendan Burgess (2 Jan 2022)

The index is some artificial index that may rise or fall.  It is reduced by 5% every year.  So to stay still, it has to increase by 5%.

1) At the end of year 1, if the index is above 70% of its initial value, I will get 5%. If it's below 70%, I will get nothing.
2) At the end of year 2, if the index is above 70% of its initial value, I will get 5%.
3) At the end of year 3, if the index is above 70% of its initial value, I will get 5%.

4) At the end of year 3, or any subsequent year, if the index is above 90%, the bond will mature, and my money will be refunded.

So my maximum return is 5% per annum which is paid on the initial investment, so the compound return is 4.1%

But whenever the index is below 70% of its initial value, I will get no coupon.
If the index subsequently returns to 70% of its initial value, I will get the missed coupons.

If the index is at or above 50% of its initial value after 10 years,  I will get my initial money back.
If the index is below 50%, my initial investment will be reduced accordingly. So if the index falls 60%, then my investment will fall 60% i.e. I will get only 40% of my money back and I will probably not have got the 5% a year either.

From the brochure:


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## Brendan Burgess (2 Jan 2022)

*Potentially bad outcome *

The index falls below 70% before the first anniversary and stays below it for the duration. I will get no annual payment.

If it falls below 50% by the end of year 10, my investment will fall by the same amount. 

So I could invest €100k today, get no return, and get back €40k after 10 years. 

*Best possible outcome *
If the index is above 90% at the end of year 3, I will get my money back and 5% nominal a year.


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## Brendan Burgess (2 Jan 2022)

The early repayment "opportunity". 

This is not an opportunity for me. This is an opportunity for the issuer.

If this "opportunity" did not exist, and the underlying index did well, I would get a return of 5% a year for 10 years. 
But if it looks as if the index is going to do well, then they have an out. 

Brendan


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## Brendan Burgess (2 Jan 2022)

The best outcome for an investor is the following combination: 
1) By the end of year three it has fallen to between 70% and 90%. I will get my coupon and it won't be matured. 
2) For subsequent years including the tenth year, it stays between 70% and 90% of the initial value, so that I get my annual coupon and my full investment returned. 

In those circumstances I will get a 4% Compound Annual Return.


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> The index is some artificial index that may rise or fall.  It is reduced by 5% every year.  So to stay still, it has to increase by 5%.
> 
> 1) At the end of year 1, if the index is above 70% of its initial value, I will get 5%. If it's below 70%, I will get nothing.
> 2) At the end of year 2, if the index is above 70% of its initial value, I will get 5%.
> ...


That is right.  The only real loss the punter can suffer is if after 10 years it is below 50%.  But with that welter burden of 5% p.a. decrement the chances of this, whilst small, are not negligible.  My model indicates a 4% chance of a 60% loss.  That is what the punter is staking for the likelihood of fairly modest upside.
I have 2 difficulties with that.  The first is more one of principle: is this a valid customer proposition? - small risk of mega loss for the likelihood of modest gains.  It is an asymmetry very much counter to the usual retail propositions.
But my main objection is that the totally faulty backtesting is suggesting that the punter is taking no risk whatsoever.  Not to lose on 1,949 occasions out of 1,949 equates to a completely negligible risk even for those well versed in statistics.  The risk is in fact 4% or 80 occasions on 2,000 proper forward looking simulations.  These are not simulations as claimed, they are backtests of an unprecedented prolonged bull market.

The 4% risk of mega loss should be highlighted and indeed the KID which is required by regulation to be based on proper forward looking stochastic projections gives a very negative outlook for the product - but who looks or even begins to understand the KID?
This is a fundamental flaw in consumer protection regulation.  The KID gives a reasonably fair view of the prospects for those actuaries that pretend to understand it but the marketing sweeps that all away and allows the CBI to point to the KID as being compliant.


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## Brendan Burgess (2 Jan 2022)

Is this 5% or 1/2% ? 






I presume it's 50 on 957 which is about 5%

Brendan


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## Brendan Burgess (2 Jan 2022)

So if someone read the Irish Times ad, and bothers to read the brochure, they will see this:




This sounds to be like a risk-free investment even if it does say: 





Brendan


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## Brendan Burgess (2 Jan 2022)




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## Brendan Burgess (2 Jan 2022)

This is just plain wrong. 




An investor is taking on direct equity risk.   A 4% risk of a major loss of capital and no annual return. 

There are not high levels of capital protection. 

Investors are not getting exposure to equity based returns.


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## Duke of Marmalade (2 Jan 2022)

Indeed _Boss _and it shows that all those statutory warnings are as useful as the pictures on cigarette packs for smokers.  
In fact they are counter productive as they give the impression of customer protection being to the fore when the marketing dismisses them as the mere statutory disclosures which you would find in your average packet of paracetamol.


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> View attachment 6007


These are not particularly objectionable as they do illustrate how the product works.


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## Brendan Burgess (2 Jan 2022)

This seems to be a fair summary, but is so much at variance with the Irish Times ad.


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## Brendan Burgess (2 Jan 2022)

This is hard to see as it has to be rotated and enlarged to read it.





So everything is kosher?


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> Is this 5% or 1/2% ?
> 
> View attachment 6003
> 
> ...


Yep, so it is not quite 5% p.a. but 50 per annum deducted from an initial index of 1,000.  Same thing more or less.  That's why they keep issuing new series to start with a fresh 1,000 but that of itself is no big scam.


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## Brendan Burgess (2 Jan 2022)

Duke of Marmalade said:


> And this where to me I find the proposition very, very bizzarre. Who is prepared to take a 4% chance of losing c. 60% over 10 years for a reasonably bankable 5% p.a. over say 3 or 4 years? It is the opposite of the lotto - the punter's *loss* is the big if reasonably remote figure set against modest likely gains.



A great summary which I have added to the initial post to save people reading the thread.


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## Duke of Marmalade (2 Jan 2022)

Brendan Burgess said:


> This seems to be a fair summary, but is so much at variance with the Irish Times ad.
> 
> View attachment 6009


Yep, but extremely hard to fully understand.  Just a broad helicopter view would tell you to give this one a wide miss.  I wonder how much time is spent by BCP in taking their prospects through this KID.


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## DK123 (2 Jan 2022)

Remember if it sounds to good to be true it usually is.And please BCP spare a thought for the ordinary simple common sense highly successful investor in the street who has no clue and is lucky that he does not understand what this is about and only understands simple bricks and mortar and perhaps blue chip companies.K.I.S.S.[m y humble opinion]


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## Gordon Gekko (3 Jan 2022)

Is this a deposit based product (via Barclays) or a note structure?

i.e. are the returns subject to DIRT or CGT?

And if it’s a deposit based product, is the investor’s credit risk with all singing all dancing Barclays or Barclays Uganda LLC.com as these things tend to be?


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## Duke of Marmalade (3 Jan 2022)

Gordon Gekko said:


> Is this a deposit based product (via Barclays) or a note structure?
> 
> i.e. are the returns subject to DIRT or CGT?
> 
> And if it’s a deposit based product, is the investor’s credit risk with all singing all dancing Barclays or Barclays Uganda LLC.com as these things tend to be?


Good questions.  It is structured as a Note and as the brochure says these have been marketed for over a decade as being subject to CGT and their advisors argue that this should still be the case.  But, and this is new, the brochure advises that the situation is now unclear with the Revenue - wow!  
Of course pension investors do not have this concern.


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## Brendan Burgess (3 Jan 2022)

Gordon Gekko said:


> And if it’s a deposit based product, is the investor’s credit risk with all singing all dancing Barclays or Barclays Uganda LLC.com as these things tend to be?



From the flyer

_Barclays Bank Ireland plc is the Issuer of the Bond,
which is a subsidiary of Barclays plc. In the event Barclays
Bank Ireland plc fails to meet its liabilities, you could lose
some or all of your money_


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## Duke of Marmalade (3 Jan 2022)

Duke of Marmalade said:


> _A summary of the results are as follows:_
> ...
> _"Mature" with 150% paid out in total:  4%
> Mature with money back only (but possibly some earlier 5% dividends):  5%
> Mature at a loss averaging -58%:  4%_


These figures came from a model which assumed the average return on the stocks is 7% p.a. (before 5% p.a. decrement).
I note that the Society of Actuaries specify a maximum return of 4.5% p.a. may be assumed on equities.
Running the simulations on this reduced assumption gives the following comparable results:
_"Mature" with 150% paid out in total:  5%
Mature with money back only (but possibly some earlier 5% dividends):  6%
Mature at a loss averaging -70%:  7%_

Comment:  A 7% chance of losing 70% of initial investment is far from a negligible risk, despite the "backtesting" supposedly indicating that on c.2,000 observations there was no loss whatsoever.


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## Duke of Marmalade (3 Jan 2022)

DK123 said:


> Remember if it sounds to good to be true it usually is.


That about sums it up.
Whilst it needs a stochastic analysis to properly understand the metrics of this product one can do back of the envelope calculations.
It is reasonable to posit a high chance of it kicking out after 3 years paying +15% and reducing chances of kicking out in subsequent years at +5% p.a.  Barclays can be earning very little on their € deposits so, finger in the air, they must anticipate these 5% p.a. pay-outs to cost them, let's say, 20% in total. 

And what pays for  that?  The chance that the product bombs out after 10 years at less than 50%, let's say at an average loss of 60%.  So to make the numbers stack up for Barclays that suggests a 1/3rd chance of this bomb-out and not zero chance in 1,949 as suggested by the brochure.  And I haven't even allowed for expenses, commission and profit.


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## Brendan Burgess (4 Jan 2022)

Gordon Gekko said:


> Is this a deposit based product (via Barclays) or a note structure?



From the brochure 






TAXATION
The Bond is a listed Note and all
investment returns will be paid gross of
tax. A tax return is required each time a
coupon is paid. The current Irish
legislation surrounding Capital Gains
Tax (CGT) does not allow for a clear
categorisation of such products as being
subject to CGT. Similar products that
have been marketed in Ireland for over a
decade now have been subject to CGT.
Based on this practice and on
independent taxation advice received, it
is our understanding that this product
should be subject to CGT. Revenue law
and practice can change at any time.
BCP are not tax advisers and are not
offering tax advice on this product.
Investors should satisfy themselves
independently of the taxation treatment
of the Bond in relation to reporting
requirements and the implications of
non-disclosure.


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## Monksfield (12 Jan 2022)

To reply to an earlier question I understand that a very high proportion of BCP's structured products have paid out / avoided blowing up (those with 'soft' capital protection). Now it has to be acknowledged that they have had a fair wind at their backs in terms of markets.

But the decrement feature is nasty. And to my mind the credit risk is under-priced by most people looking at these structures. Where is the counterparty's 10 year  credit priced? Where would investors be positioned in the capital structure? About every decade or two, banks manage to get themselves into bother.


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## Steven Barrett (23 Feb 2022)

Well done lads on getting a write up in Sean Keyes from The Currency on this. Pity papers more mainstream papers don't highlight how bad these products are for investors. 

In times of high inflation, zero interest rates and volatile markets, people sitting in cash and looking for some sort of return are easy prey for people peddling this rubbish. 


Steven
www.bluewaterfp.ie


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## benbuffett (23 Feb 2022)

I was just looking at these products on their website. The one that offers 10% p.a called the BCP European Defensive ESG Kick-Out Bond 4 looks a lot better than the Target Coupon Bond one. I would be spreading my risk, I have funds in Stocks, ETF's (Not doing so good lately) and some Multi Asset funds in Zurich so I think its worth a small punt or am I complety off the mark?


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## Duke of Marmalade (23 Feb 2022)

benbuffett said:


> I was just looking at these products on their website. The one that offers 10% p.a called the BCP European Defensive ESG Kick-Out Bond 4 looks a lot better than the Target Coupon Bond one. I would be spreading my risk, I have funds in Stocks, ETF's (Not doing so good lately) and some Multi Asset funds in Zurich so I think its worth a small punt or am I complety off the mark?


The bond closes today!
It does look better.
You will get 10% p.a. for a period which depends on when it kicks out.  The most likely outcome is 1 year. 
But there is no such thing as a free lunch.  To have the chance to get 10% p.a. you must run the risk of losing over 50% of your investment after 10 years if things go wrong.
Maybe you like that sort of “gamble”, it wouldn’t be for me.
The key info you are missing is what is the chance of that loss.
They say they tested this over 1,300 times over the last so many years and it never failed.
That is so misleading as these 1,300 so called tests are simply repeated observations of the same bull market.
The artificial nature of the index with its 5% fixed decrement makes this much more likely to have steep drops than an “ordinary” index.
Ask them what do their nerds really think the forward looking (not back tested) chances of loss are.


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## benbuffett (23 Feb 2022)

Duke of Marmalade said:


> The bond closes today!
> It does look better.
> You will get 10% p.a. for a period which depends on when it kicks out.  The most likely outcome is 1 year.
> But there is no such thing as a free lunch.  To have the chance to get 10% p.a. you must run the risk of losing over 50% of your investment after 10 years if things go wrong.
> ...


Thanks Duke, yes I just saw it is closing today so not ideal for me.

I am not a gambler, but a small amout won't hurt. I am building wealth and adding capital on the online platforms and picking some obsure ETF's in the cyber space and emerging markets, but as I said above its not going the best for me lately. This is why I want to lock something away instead of looking at it everyday! 

Forward looking?? If they knew that they would be sorted and so would I.

Thanks - Mr Buffett.


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## Duke of Marmalade (23 Feb 2022)

benbuffett said:


> Forward looking?? If they knew that they would be sorted and so would I.



 By forward looking I don’t mean they know the future!
But the market continually puts a price on future outcomes just as PaddyPower bets on Cheltenham.  Their nerds hedge this product in the market and know exactly what price they are getting on a 50% fall in this artificial index over 10 years.  They certainly don’t run 1,300 back tests, one for each day of the recent bull market.  But they think that is good enough for you.  You should say, “no thanks I want to know what the market’s assessment is of the forward looking odds.”


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## benbuffett (23 Feb 2022)

Duke of Marmalade said:


> By forward looking I don’t mean they know the future!
> But the market continually puts a price on future outcomes just as PaddyPower bets on Cheltenham.  Their nerds hedge this product in the market and know exactly what price they are getting on a 50% fall in this artificial index over 10 years.  They certainly don’t run 1,300 back tests, one for each day of the recent bull market.  But they think that is good enough for you.  You should say, “no thanks I want to know what the market’s assessment is of the forward looking odds.”


Yes that makes sense, I didnt think of it that way! Cheers


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## Steven Barrett (23 Feb 2022)

benbuffett said:


> Thanks Duke, yes I just saw it is closing today so not ideal for me.
> 
> I am not a gambler, but a small amout won't hurt. I am building wealth and adding capital on the online platforms and* picking some obsure ETF's in the cyber space and emerging markets*, but as I said above its not going the best for me lately. This is why I want to lock something away instead of looking at it everyday!
> 
> ...


They are obscure for a reason, people aren't putting money into them because they are too risky or a bad investment. Otherwise, people would plough money into them. 

Building wealth take times and is boring. Stick to quality companies and grow your money over the long term. It's a lot less volatile and has a more certain future. 


Steven
www.bluewaterfp.ie


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## noproblem (23 Feb 2022)

Steven Barrett said:


> has a more certain future.


Maybe the word "certain" could be changed


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## Gordon Gekko (23 Feb 2022)

The biggest issue with these products is that they’re not aimed at me or Brendan Burgess or Colm Fagan or Steven Barrett or Sarenco.

They’re aimed at Granny Murphy who was used to getting 3-5% on her cash deposits.


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## Duke of Marmalade (23 Feb 2022)

Gordon Gekko said:


> They’re aimed at Granny Murphy who was used to getting 3-5% on her cash deposits.


And if you will pardon the black humour it is the grandkids who should be more worried about that precipice in 10 years time!


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## AJAM (3 Mar 2022)

I do think product like this (as long as they are represented accurately and not mis-sold) have a place in the market.
However with the Irish tax regime, dividends are taxed at your marginal rate. For a high rate tax payer that means your 5% dividend is closer to 2.5% after tax. The risk vs reward does not make sense. You're better off in State savings at 1% p.a. guaranteed with no DIRT.


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## Steven Barrett (4 Mar 2022)

Gordon Gekko said:


> The biggest issue with these products is that they’re not aimed at me or Brendan Burgess or Colm Fagan or *Steven Barrett *or Sarenco.
> 
> They’re aimed at Granny Murphy who was used to getting 3-5% on her cash deposits.


That's where you are wrong my friend. Who do you think sells them?!! There's a nice commission to be made off of these products. Wrap them into a pension or an ARF, and there's a payment for the pension/ARF and another for the structured product. There's a lot of money can be made from taking money off people's hands for them. 




Steven
www.bluewaterfp.ie


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## Gordon Gekko (4 Mar 2022)

Steven Barrett said:


> That's where you are wrong my friend. Who do you think sells them?!! There's a nice commission to be made off of these products. Wrap them into a pension or an ARF, and there's a payment for the pension/ARF and another for the structured product. There's a lot of money can be made from taking money off people's hands for them.
> 
> 
> 
> ...


Indeed.

But you’re one of the good guys.

And these aren’t aimed at the good guys.


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## Duke of Marmalade (4 Mar 2022)

Steven Barrett said:


> That's where you are wrong my friend. Who do you think sells them?!! There's a nice commission to be made off of these products. Wrap them into a pension or an ARF, and there's a payment for the pension/ARF and another for the structured product. There's a lot of money can be made from taking money off people's hands for them.
> 
> 
> 
> ...


Good point worth discussing.  The adverts on the front page of the IT are aimed at punters mostly.
But I think the majority of brokers (at least want to) believe that they are making a good recommendation for their customers.  Many will be (or let themselves be) persuaded by a pseudo scientific assertion that on 1,939 backtests the product produced the 5% p.a. and never, ever failed to do so.
I attach a brochure for a very similar style of product currently on offer in the UK.  This is how these products should be presented and I agree with @AJAM that it may appeal to some, provided they know exactly what they are getting into, certainly wouldn't be my cup of tea.

Page 9 of this brochure explains quite well the devious nature of the Fixed Decrement index.   Punters won't understand the implications but capable and conscientious advisers should.
But most importantly it has no backtests whatsoever.  Not even a reference to how it would have performed in the past.
There are illustrations of various possible scenarios from good to disastrous loss of capital which IMHO are on balance reasonably fair.
Maybe the CBI should outsource consumer protection to the FCA if they do not have the bandwidth for these complex products.


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## Steven Barrett (4 Mar 2022)

Gordon Gekko said:


> There’s an elephant in the room here. I’m not going to mince my words.
> 
> Most brokers are scum.
> 
> ...


Gordon 

Some of the stuff I have seen would make your skin crawl. Clients being charged the absolute maximum amount possible on everything. There are enough people in Ireland who have no idea about charges or personal finance for these people to dupe. Or they exploit the non disclosure requirement on company paid pensions (why hasn't this been amended?!!!) to not disclose the massive fees they are charging people.


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## Zebedee (4 Mar 2022)

My understanding is that national regulators have the power to ban products. Binary options were banned for retail investors a few years ago. If the excellent analysis that Colm and Brian was brought to their attention, why didn’t they act?


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## Zebedee (4 Mar 2022)

From CBI website in 2019 

Director General (Financial Conduct) Derville Rowland said: “The use of our new national product intervention powers demonstrates our continuing commitment to act decisively and robustly to address investor protection concerns. The Central Bank is banning the sale of binary options to retail investors as we consider them a fundamentally flawed product, which have no place in the investment plans of retail investors. They are no more an investment than betting on a horse.


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## Duke of Marmalade (4 Mar 2022)

Zebedee said:


> My understanding is that national regulators have the power to ban products. Binary options were banned for retail investors a few years ago. If the excellent analysis that Colm and Brian was brought to their attention, why didn’t they act?


Interesting info Z.  I know that some want this product banned.  But I think I am with @AJAM that these kick-out products are maybe okay for a small minority of investors provided they know the risks they are taking.  The real problem that was brought to the CBI's attention was the gross misrepresentation of the chances of significant capital loss.  BCP presented this as zero chances out of 1,939 backtests all taken daily recursively in a 7 year period of the longest bull market in history.  Woods and Fagan calculated from their models that the chances of an average 70% loss of capital was 15% or c.300 times in proper "clinical" tests, far from zero.  Backtesting of these products is banned by the FCA but the CBI see no problem with them.


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## Duke of Marmalade (5 Mar 2022)

jpd said:


> How can they be "okay for a small number of investors"?
> 
> The only people to profit from these are the providers - everyone else is worse off


Don't get me wrong, these products would not be for me.  And the misrepresentation is a scandalous reflection of the ineptitude of our consumer protection guardians.
But you are wrong that these cannot be a win/win situation.  In fact the whole basis of the retail investment industry is that it can be win/win.  In other words that there is enough return on investments to feed provider, distributor and customer.
"The Currency" has produced Fagan/Woods calculations and these indicate 14.6% chance of losing 70% of your investment, 4.7% chance of getting your money back and 80.7% chance of getting 5% return per year for anything between 3 and 10 years, let's say 5 years.  So that's an overall expectation of 80.7% x 25% - 14.6% x 70% = c. 10% which is more than on deposit or in state savings.
But to avoid any thoughts that I am defending the product it is outrageous that BCP suggest that there has been no downside on these products in 1,939 tests - that makes it look like a no brainer to punters hungry for yield.

These are not like gambling which is clearly a zero sum game with the punters losing on average.


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## Colm Fagan (8 Apr 2022)

An update to AAM readers:  BCP Target Coupon 3 closes for new applications today.  Brian Woods and I have done a lot of work on this product. It's even worse for investors than we imagined - and we're still not sure we've got to the bottom of it.   Based on what we know for sure, we reckon that the odds that investors will lose more than half their money are shorter than 4-1 against, much shorter than for any of the horses in tomorrow's Grand National.    The "decrement index", an invention we discovered for the first time when researching a previous version of this product, deducts over 6% a year from total returns at current market levels.    Yet the brochure still shows 2,261 "successful" back-tests, all giving the investor 5% a year and their money back after 3 or 4 years.


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