# Irish Life Clear Tracker Bond - Review



## Brendan Burgess (7 Mar 2011)

*[broken link removed]*



  The Clear Tracker gives a multiple of the return on the [broken link removed] index. 

_Although it is a simple product, I would welcome a double check of my figures. _

*Summary*


|Option 1|Option2
  Period|3 years 6 months|4 years 6 months
  Capital protection|100%|100%
  Multiple of return|80%|115% 
Averaging |6 months|12 months
Effective multiple of return|74%|102%The documentation is very well written and the product is clear. 

*Comparison with direct investment in Euro Stoxx *

*Option 1   Assuming 20% growth in Index over 3 years 6 months*


|Option 1|Euro Stoxx directly
  Invest|100|100
  Add dividend Income|0|111
  Add growth|120|131
  74%  of growth|115| 
Cost of the guarantee: 11% dividend income + 26% of the growth 



  Option 2 - *Assuming 25% growth in Index over 4 years 6 months*


|Option 2|Euro Stoxx directly
  Invest|100|100
  Add dividend Income|0|114
  Add growth|125|139
  102%  of growth|126| 
Cost of the guarantee: 14% dividend income reduced by a sliver of additional growth.


*Alternatives *
  Put your money on deposit and buy an option.

_Notes
Calculation of effective rate of return
_

|Option 1|Option2
  Period|3 years 6 months|4 years 6 months
  Capital protection|100%|100%
  Multiple of return|80%|115% 
Averaging |6 months|12 months
Loss of return|3 months|6 months
Effective return|39/42|48/54
Effective multiple of return|74%|102%


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## Duke of Marmalade (8 Mar 2011)

_Y_our post is a bit confusng.

_ errors now corrected, so comments removed to avoid confusion - Brendan_

The really interesting Disclosure is the in the Tables giving the breakdown of where your money goes.

For the 3 year 6 month Option 1; 81.52% is put on deposit to secure the guarantee; in the 4 year 6 month version the figure is 76.25%.  In each case that is a massive interest rate of 6% per annum.  This is a halcyon period for Tracker customers as they benefit from the high funding costs of the covered institutions.

Take by contrast the Ulster Bank Tracker covered in another thread.  The distributor of this tells us in that thread that 88.12% of the money is put on deposit to secure the 100% guarantee after 3 years 9 months.  That is an interest rate of 3.4% p.a.


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## muppetman111 (8 Mar 2011)

Hi Brendan

This is my first time on AAM and Ive looked at some other posts on these 'tracker bonds'.  

I see you are not a fan of tracker bonds in general, I think you mentioned that in one post, do you mind if I ask is it becuase the way they are advertised or is it because you feel that they have little chance of providing the returns they suggest are available?

In the case of this Irish Life Tracker bond, having reviewed it are you happy/satisfied that this bond could have a greater chance of paying out than some of the other bonds you have looked at/reviewed? Or is it a case you feel that at least the documentation is written in a way that better explains the product?

Thanks


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## Brendan Burgess (8 Mar 2011)

Hi Muppet

The products are generally advertised in a very misleading manner. This puts me off a lot of them.  The Irish Life bond is advertised in a much fairer way.

Having said that... I have got my calculations very wrong and I have corrected them a few times. I have just realised that the 115% of growth is really only 102% of growth after allowing for averaging over the last year. To me this is significant as this bond is not as good as I thought it was after doing my analysis. 

You lose about 16% of the return in exchange for a guarantee? I think that this is too high a price to pay, but that decision is the customer's.


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## muppetman111 (8 Mar 2011)

Thanks Brendan

I suppose you lose something for the safety if thats the best word for the guarantee element


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## LDFerguson (9 Mar 2011)

Hi Brendan, 

I think it's worth noting that your comparison figures are based on assumptions relating not only to the rise in the index but also the level of dividend income and the "shape of the rise".  Dividend income might be higher or lower than your assumption.  The index might not rise in a straight line (or even at all).  If the index rises sharply during the final averaging period, a Clear Tracker investor would lose out by more than your figures.  If it rises slowly, or not at all during the averaging period, a Clear Tracker investor would do better than your figures.  

Cheers, 

Liam


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## Duke of Marmalade (9 Mar 2011)

I prefer to think of Trackers as an alternative to Deposits rather than to Equities.

Brendan's illustrations seem reasonable to me and certainly not over aggressive regarding the growth of the index.  Nonetheless his illustrations produce a return of over 4% p.a. and over 5% p.a. which compares favourably with deposits.

Trackers suit a very common mindset.  This mindset is totally averse to capital loss but much less so to interest loss.  That is a bit illogical but investment is as much about attitude as it is logic.  The mindset is also afraid that it might miss out on a big bounce back in the markets.  It wants it cake and eat it.  Trackers supply this cake.  

The way I would see these offerings is as follows:

1)  Capital guaranteed

2)  About a 25% chance that there will be no return in excess of this

3) On average slightly better than deposits

4)  If there is a big bounce, there will be a reasonable share in that bounce.


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## LDFerguson (9 Mar 2011)

Duke of Marmalade said:


> I prefer to think of Trackers as an alternative to Deposits rather than to Equities.


 
This should be _writ large_ across the front of every tracker bond brochure produced.


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## kaplan (14 Apr 2011)

There are some people who believe structured deposits should be banned: as they are too complex for the average person to understand and have tail risks they will never understand. It seems popularity is driven by overweighting the guarantee and under-weighting the risk that returns (if any) derived from options will probably at best match a good risk free rate. 
@ Brendan - some in the US have shown the better strategy is to use a zero coupon bond to protect capital (including inflation) and use the balance to buy an option - not quite possible here but the gist is that structured investments and deposits generate large fees for producers and little real return for investors.


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