# There's no such thing as a good tracker bond.



## darag (17 Jun 2003)

Seeing more and more of these products getting the
thumbs down here, it seems we may be coming to a
consensus on tracker bond products?  I can't remember
the name of the particular product that I first debated
on this site but I do remember being in a distinct
minority in criticizing these products.  Since then it
seems there has been a swing in opinion.

However a lot of the criticism is targeted at the
difficult to understand nature of the derivative portion
of these products.  Alternatively there seems to be a
lot of discussion about the likelihood of various things
happening which would affect the value of the derivative
and I think this misses the point.

I believe that fundamentally these products can never
never be a good investment.  Given a lump of money to
invest, how would it ever be advisable to stick 85% into
a fixed term, fixed income product and put the other 15%
on the horses?  (In fact you'd probably be getting
better value as the bookies margins are typically around
10% while I'd be surprised if the providers are
pocketing less than 2%.)  Buying derivatives is a pure
gamble for the personal investor and that's what you're
buying with a portion of your money with these products.

Because the investor losses are limited, there wont be
the same outrage when most of these products fail to
deliver any sort of decent return.

Should the Guide to Savings and Investments but update 
to warn against these products?

daRag.


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## ClubMan (17 Jun 2003)

I'm not sure that it's possible to rule tracker bonds out in all circumstances and they may have their place in a balanced savings/investment portfolio for some people. However I am definitely suspicious/dubious about the more arcane/complex ones. Unfortunately some tracker bonds represent the triumph of marketing spin & style over substance (e.g. advertisements in which the max potential return is highlighted regardless of the, often slim, chances of this actually coming to pass!). Many people, relatively clued in amateurs and even professional industry insiders and commentators included, don't understand all the nuances of some of the more complex products so what hope the average punter will do so? Ultimately, I suspect that tracker bonds sell largely on the basis of the warm fuzzy feelings of safety (stock market returns without the risk and all that crap) that they instil in people, whether or not such claims stand up to objective scrutiny. For what it's worth the guide goes further than I personally would but already contains a fairly blunt warning about them:

_*TRACKER BONDS*

Do not confuse these with tracker funds. A tracker fund is a very sensible low cost investment which buys the shares in an index and which rises and falls in line with that index.

A tracker bond is a completely different animal. You invest for a fixed period - say 3 years. The bank links your return to the return on the index its tracking. But this is often capped at 10% a year or 50% of the return on the index. They also provide some form of guarantee e.g. that you will get at least 70% of your money back. 

Avoid these products - they make a lot of money for the banks and brokers who sell them and very little for the unfortunate consumers who buy them._


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## Spinner (17 Jun 2003)

*No such thing as a good tracker*

darag,
Am not a big fan of trackers in general and have commented unfavourably on them many times before on AAM. Mostly it's for the reasons that ClubMan points out i.e. dodgy marketing, too complex etc.
Having said that I can't agree with your sweeping statement, I'm sure there are many trackers maturing around now after 3 or 4 years with lots of happy bunnies getting their money back - beats being 30% down, or a lot worse if you fancied Elan at the time!
I know of someone that recently matured from a Euroland 2 year tracker and was very happy to get the 90% of capital back as per the terms of the contract!

Spinner


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## darag (18 Jun 2003)

*Re: No such thing as a good tracker*

Spinner and Clubman.  "Dodgy marketing, complexity,
etc." certainly doesn't help but even if they were
marketed clearly and were simpler and more transparent,
I still think they cannot be appropriate.

I think it is fair to evaluate these products as two
separate investments - investing in a fixed income,
fixed term product and buying a complex derivative.

They are bundled together simply for marketing reasons
and there is no synergy between them nor is there any
benefit from buying them as a package.

The fixed income, fixed term bit can obviously be
apropriate for many people - for example the "happy
people" Spinner talks about - who are completely adverse
to risking their capital.  However such products can be
bought separately if such a product meets the investment
criteria of the punter.

It's the other bit (the complex derivative) which I
don't think can ever be considered a reasonable
personal investment.  These products are used by
institutions to balance risk, etc. and their purchase by
an individual can be considered to be a pure gamble.
Just because they are generally tied to some financial
variable doesn't make them any less of a gamble.  They
could just as easily be tied to the result of football
matches or a horse race.  Gambling is a perfectly
acceptable way to spend disposable income but it
shouldn't play a part in any investment strategy.


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## Alan Moore (18 Jun 2003)

*Still think trackers have there place......*

There are only two ways of making money (lotto excluded) i.e. through hard work or suffering. So you've got your lump sum and you want to make it work for you.

So you place it on deposit and you probably won't keep up with inflation. If you want more than this you HAVE TO take some risk.

You might invest in stocks and shares but then you could lose all. You may consider with-profits but the mechancis of this are far more complex and far less transparent than any tracker. Ask current Equitable policyholders.

An awful lot of people fall into the backet whereby they don't want the possibility of losing much but but like to participate in any market resurgence. 

Trackers are perfect for this, some offer some sort of guaranteed return plus a small percentage of any market gains. Some offer not to lose more than a small percentage of the capital for a larger percentage or even mulitple of market gains.

Makes sense to me although I do think that some are very complex and aren't designed for financial novices.

At lastly I want to comment on Darags statement:

"Gambling is a perfectly acceptable way to spend disposable income but it shouldn't play a part in any investment strategy"

Any form of risk is gambling. Any investment beyond fixed interest / bonds / gilts are gambling as they are based on future values of property / shares etc.


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## Spinner (19 Jun 2003)

*Trackers*



> They are bundled together simply for marketing reasons
> and there is no synergy between them nor is there any
> benefit from buying them as a package.



As I previously stated, I *am not* a fan of Trackers, in general. I am worried about sounding like I am defending them but I can't agree with darag on the above. The elements that he refers to are bundled together to enable the €5k, €50k and even €200k investor partake in this type of investment. The benefit of buying them as a package is that a retail investor can!
I have had dealings with a derivative provider and their minimum lot size is €250k per option. You want 3 underlying indices, min. is €750k. You want a basket of 20 shares, min. is €5m! And they consider themselves a "retail" type house that takes much smaller deals than most of their competitors.
Whether many of the investors should partake, and whether their financial advisers understand them, is a different argument.


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## Madonna (19 Jun 2003)

*Re: Trackers*

Interesting debate fellas.


Mr. Moore says: 





> _Any form of risk is gambling. Any investment beyond fixed interest / bonds / gilts are gambling as they are based on future values of property / shares etc._


I disagree with this statement.  Taking risks in the expectation of higher rewards is investment - if the stockmarkets are priced correctly then investing in stocks and shares should be an investment, on balance you should get rewarded for taking the higher risks.  Taking risks knowing that on balance you will lose is gambling.  Thus everyone knows that the Lotto only pays out a third, so buying a Lotto ticket is clearly not investment but is gambling.
So, are Tracker Bonds gambling or investment?  I agree with Darag that they are gambling.  The very costs of providing the guarantee and the underlying complexity come at a very high price maybe 2.5% per annum.  On balance these products will pay out less, much less, than a straight Term Deposit.  In effect you are gambling the interest foregone.
However I can see a certain appeal.  People who invest in Tracker Bonds are scared stiff of losing any capital.  But they are also afraid of missing out on a surge in markets.  Tracker Bonds provide these people with the comfort zone that if markets bomb out they will say " thank goodness, I didn't go into a straight Tracker Fund" and if markets soar they will say "ah well, 60% of the gravy is not bad, glad I didn't stay on deposit".  Let's face it it is very likely that markets will either soar or bomb out so either way our Tracker Bond punters will be happy bunnies.  If markets simply move sideways they will have little regret at losing the measly amount of interest currently available, which is the worst that can happen to them.


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## Kylie (19 Jun 2003)

*Tracker Bonds - Investing or Gambling.*

_Madonna_ luv, you should stick to the singing.  There is a third category besides investing and gambling and that is insurance.  Insurance is a financial transaction whereby the payee fully realises that on balance she will lose but is prepared to pay that for the comfort of protection against extreme outcomes.

You and _Darag_ have argued that Tracker Bonds are a combination of Investment and a Gamble.  They are in fact a combination of an Investment and Insurance.  This can be looked at in either of two ways:

Investment in the stockmarket with insurance cover against making any losses, OR

Investment on deposit with insurance cover against missing out entirely on a market surge.

Insurance costs money - in strict investment terms both Deposits and straight Stockmarket investment can be expected on balance to be better than Tracker Bonds but each leaves the investor exposed to eventualities where she will be saying "if only..."  Tracker Bonds limit the exposure to the "if only..." syndrome.


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## darag (19 Jun 2003)

*Re: Tracker Bonds - Investing or Gambling.*

Hi all.  Good to see the debate livening up about this.

Alan, I disagree that all exposure to risk is gambling.
The important thing to consider is expected return.  If
it is negative, as it is with the lotto, casino games,
slot machines, the nags (unless you have insider
information) then it's gambling.  With the fundamental
assumption that capitalism works and will continue to
work, then investments in shares, property, etc. (while 
volatile) have a positive expected return.  I think the
assumption is reasonable because betting on capitalism
failing is like placing a bet with a bookie that they
will go broke.

Spinner, my argument is based on the assumption that
buying derivatives is not a reasonable investment for
the personal investor.  So the fact that the banks,
through these products, are giving you access to
instruments which otherwise would not be available to
the small investor is a mute point.

Kylie, I'm not really convinced by your distinction
between gambling and insurance as it applies in this
case.  People and businesses are willing to give up
expected return when they buy insurance but only if it
serves some business purpose.  For example insuring your
own house against burning down is not gambling but
betting that some other unrelated home will burn down is
gambling.  Similarly betting that some market index will
move in some particular way is a gamble for all or most
personal investors.

Basically the option you are buying as part of these
product has negative expected value (assuming the
markets are efficient at pricing them and taking into
account trading costs and the banks' pound of flesh).
Investing isn't about "whatifery", it's about trying to
maximise your expected return within your tolerance for
volatility.  If the expected return is negative then
forget about it.

daRag


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## Alan Moore (19 Jun 2003)

*Tackers aren't so bad.....*

Just a reply to some of the comments

Madonna
"if the stockmarkets are priced correctly then investing in stocks and shares should be an investment"

You'll pardon me for lowering the tone but it reminds me of "if me granny had b**ls". The principal reason for volatility on the stock market is that shares are hardly ever priced correctly. Otherwise you'd see more stable markets. 

Darag

"With the fundamental assumption that capitalism works and will continue to work, then investments in shares, property, etc. (while volatile) have a positive expected return"

I agree totally. This is exactly the premise that most trackers work on. Should the fundamental hold true you'll make more than you would on deposit. Though you ask a lot of clients that have invested in equities over the last few years would they do so again they'd be a lot less sure about relying on this funadamental to invest directly in stocks.

As for the whole question about whether investment is gambling, my own creedo is that if you can lose money you are gambling and investing. Where does one draw the line. Hedge funds / geared products?


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## Spinner (19 Jun 2003)

*He of the moot point.....*



> my argument is based on the assumption that
> buying derivatives is not a reasonable investment for
> the personal investor.



To be sure, to be sure *I'm not a fan of trackers*, but they do deserve to have their minimal positive points dealt with fairly.
Darag, I assume that you believe derivatives are a bad investment for personal investors as they are high risk and it is very possible to lose your full investment? If so, I couldn't agree more.
The point (and I feel, not so moot) is that they aren't buying derivatives, they are buying a product, a small part of which is derivatives, that are fully hedged with a swap, giving them a guarantee.
Seperately, in the current interest rate environment particularly, the cost of this guarantee is far too great, but the market tells us that not too many people agree with me (over €1bn of trackers will be sold in Ireland this year!).


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## Teacher (20 Jun 2003)

*Seperately*

_Spinner_, I just can't say mute on this but that is not how you spell separately.


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## darag (23 Jun 2003)

*Re: Seperately*

Alan.  Like I said before, I'd distinguish gambling
from investing by looking at expected value.  Both
have volatility and risk for sure, but in general when
people talk about gambling, it usually refers to a
situation where you are getting negative expected
value.  I don't consider prize bonds to be a gamble
because the expected return is 2.75% while the lotto
certainly is a gamble because you've an expected loss
of approximately 60%.

Spinner.  The way I view it is like this. Suppose I
had X to invest and had decided that I don't want to
risk my capital.  Therefore I put 85% of it say into
one of those An Post products (for example) which
guarantees roughly 17% return after 5 years.  This
means no matter what,   I will get back my capital
after the 5 years.

Now I ask you what I should do with the other 15%?
Supposing it was possible to buy these derivatives
separately, could you justify an individual investing
in them?  Would they not be better off investing in
something which has a positive expected return?


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## Kylie (23 Jun 2003)

*Are Derivatives worth buying?*

_Darag_ I think we must concede your two key points:

1)  A Tracker Bond can be unbundled into its Deposit and Derivative constituents - the bundling is purely a marketing/psychological device.  Also _Spinner_ is wrong, the Deposit part is dealt with quite separately and does not lead to the Derivative bit being more viable in small packages.  The Derivative could be retailed in its own right separate from the Deposit.

2)  As measured on Expected Return most Derivatives would have possibly negative but certainly much lower values than a pure Post Office Deposit, simply because of the charges.

Would punters buy the naked Derivative if it was marketed and if they were all statisticians?  I would say many would, in fact I wonder why the naked Derivative has not been packaged - it would offer something like 600% of the Index Upside over 5 years but at full risk to capital.  Many would take that - the reason is Greed and the Insurance factor - people are not only scared of losing money they are scared of missing out.  Tracker Bonds address both fears.


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## Spinner (24 Jun 2003)

*Buying naked derivatives*

Kylie,
I like the sound of your idea of marketing naked derivatives - 600% of the return but full risk of capital.
However, I think you misunderstood my bundling point. I was only referring to the fact that bundling allows for your average investor to deal in derivatives. The derivatives are normally <10% of the stake, therefore a €100k investor is investing <€10k in options. 
My point was that you won't get a provider to deal in <€250k in options on their own. Maybe you could market a pooled fund of investors where you would raise €5m for the one option, but I still doubt they would take individual investors of less than €100k?
I also wonder if there are compliance issues? Are options only deemed suitable for professional investors?


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## Kylie (24 Jun 2003)

*Naked Derivatives*

Spinner, I take your point that punters cannot access the raw derivatives market in retail size amounts - that would need a pooled approach, of course.

Compliance issues? - maybe.  Perhaps this is a product for PaddyPower - there, you were right all along Darag.


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## ClubMan (25 Jun 2003)

*Re: Naked Derivatives*

At the risk of dragging this topic off on a tangent, is [broken link removed] product effectively a tracker bond product? Whether or not it is, how do they give an overall capital guarantee if 50% is in _SureCertificates_ giving 22% total return over 6 years while the other 50% is invested in the _EBS Secure Investment_ which simply seems to be the [broken link removed] which normally offers no guarantees as far as I know but in this case offers 100% capital guarantee and unlimited participation in fund growth! Doesn't make sense to me!?

Maybe this snippet from the  about the _Secure Investment_ part of this product is key but I still don't really understand it (which makes me suspect that it *is* for all intents and purposes a tracker bond!  ):

_*How does the Lock-In facility work?*

Annual Lock-in and Active Lock-in facilities relate to the 50% invested in EBS Secure Investment. In the case of Annual Lock-in, if gains are made in any one year, we lock in 90% of the total investment value on the anniversary date. The new total becomes your new minimum investment which is 100% protected.

In the case of Active Lock-in, we have set a series of targets for growth - 15%, 25% 35%, 45%, 55% and 65%. If at any stage during the 5 years and 6 month term of the account your original investment grows by the targeted level, again, 90% of the total investment value locks in as above. This will happen whenever targets are reached and not just on the anniversary of your account.

*What happens when the account matures?*

EBS Secure Investment

At the end of the five year and six month term you will receive the highest of either the market value, highest lock-in value or original capital._

:|


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## Kylie (25 Jun 2003)

*The EBS Mystery*

Very relevant post, _Clubman_.  I downloaded brochure but that gives very little away.  We can deduce from some clues that this is most definitely not simply an investment in the EBS Summit Fund (though that does indeed play a part), specifically:

No access to this half for 5 years and 6 months - if this was simply the Summit Fund there would be no need for such restrictions on access - no access definitely smells like Tracker country.

Lock-ins - now this starts to smack very much of those Liberty Escalator things.  

These are indeed to all intents Trackers where the guarantor can run for cover as soon as the going gets rough - by that I mean they can switch entirely out of the Summit Fund and into cash and when that happens there is no way back.

And BTW the guarantor charges handsomely for this facility but, as with all these scams, the punter never sees the true costs of the guarantees.

If one reads the brochure one would think that the only charge is 1.1% per annum on half the fund i.e. 0.55% per annum on the total.  Trust me, the implicit charges are much heavier than that.

These kinda products are a big challenge for IFSRA.  We need transparency.  We need to know the true underlying charges.  We need to know the likely payout profile.  On this last my guess is that there is 90% chance or more that all you will get is 22% on half the investment and your money back on the other half i.e. 11% in all.


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## ClubMan (25 Jun 2003)

*Re: The EBS Mystery*

Thanks - although I'm still confused. I think I must have a mental block to tracker bond type products. :\  Anybody care to make a stab at an _Indo_ style marks out of ten for _EBS's Perfect Balance_ for the craic?


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## Kylie (25 Jun 2003)

*The Real thing*

Clubbie, why have a stab when you can have the real thing.  EW gave this 8 outa 10 in the last Sindo.

Me?  I think it is slightly better than the rest but that is more out of a basic trust in the EBS that they don't overscrew -but I can't be sure because of the very opaque nature of the Tracker half of this Combination Bond.

In general, I would score Trackers around the 2 outa 10 mark so for this one I'll double up to 4.

On a slight tangent - can anybody please expain to me the current fad for combination type investments?


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## ClubMan (25 Jun 2003)

*Re: The Real thing*

Thanks _Kylie_.


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## darag (26 Jun 2003)

*Re: The Real thing*

Hi Kylie. It looks like I have one convert regarding tracker
bonds.

Regarding the fad for combination products?  Ease of
marketing with built in obfuscation to hide high charges
would be my cynical answer.


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