# Trackers looking good



## elephant (1 Oct 2002)

Given the markets what could be better - buying into equituies at low prices with a capital guarantee.
With profits are history - clients dont want unit funds
The experts will have to eat humble pie!#Trackers are the only, game in town!!!


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## Ex With Profit Man (1 Oct 2002)

*Trackers*

I understand that trackers are normally only available for short amounts of time. Does anyone have a list of the better trackers that are available at this point in time? Or alternatively point me in the right direction.


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## US (1 Oct 2002)

*Tracker bonds*

I hate to inject a note of sanity into the discussion, but . . .

If we know that prices are low (i.e. they will go up rather than down) then we don't really need a capital guarantee and the price we should be prepared to pay for one (either in terms of getting only a fraction of the index rise or in terms of a cap on growth, or both) should be limited.

Hence we cannot say that a particular tracker bond is attractive until we know what capital guarantee it offers and what the price of that guarantee is.


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## Ex With Profit Man (1 Oct 2002)

*Trackers*

Unlike the Elephant, while I think that markets may have bottomed out I haven't got the nerve to stake all my hard earned money on it. Don't like with profits as they aren't transparent enough for my liking. At least with a tracker you know what you are getting. I have money I want to put away for at least 5 years and am in the market for same unless someone can convince me that there is a better guaranteed product. Where is the samrt money going?


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## manufan (1 Oct 2002)

*Trackers*

If you're looking for guarantees then the best tracker in the market is Ulster Bank which is offering 20% minimum return over 6 years - that's over 3%pa. The maximum return is 60%.
Bank of Ireland and First Active both have Combination bonds where you're money is split into different terms so its hard to work out the value of these.
An Post has a guaranteed product with no upside potential but a minimum return of just over 4% pa


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## Fairfield (1 Oct 2002)

*Only game in Town?*

Yeah, spot on elephant.

I mean what more could a punter ask for!

1. equity exposure offering 60% or 70% participation in the growth of an index
2. participation in the obvious attractions of the Japanese stockmarket (which most trackers do) where the price of options is cheapest
3. a five year + time frame with 12 month averaging at the end, to PROTECT! investors, (not because it reduces the option price)
and the real hook
4. equity exposure without participation in the dividend

In case my sarcasm has not come across clear enough, I think trackers are very poor investment. There are several reasons why not to invest in one. However, the fact that you do not receive the dividend has to be their greatest failing. 

Given the state of markets at the moment, it is very tempting to opt for the capital guarantee. However investors' often fail to recognise (probably because it is not being highlighted for them) that there is an implicit cost for this guarantee - you don't get the dividend. And right now this cost is very significant. Dividend yields are at multi-year highs given the sell-off on stockmarkets. And if you believe, as I do, that the dividend will represent a significant proportion of the return to an equity investor in future, then you should steer well clear of trackers.

Yep, trackers have it all. Unlike unit funds where the charges are explicit and have to be explained to clients!


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## rainyday (1 Oct 2002)

*Re: Trackers*

Hi Ex With Profit Man

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> At least with a tracker you know what you are getting.<hr></blockquote><!--EZCODE QUOTE END-->

Great - I'm delighted to hear that you've worked out how all the trackers are being charged, i.e. exactly how the institutions are making money from them and how much money their making on each bond.

Given that you 'know what you are getting', would you like to share your knowledge with the rest of us?


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## EWPM (1 Oct 2002)

*Trackers.....*

Hi Rainyday,

Thanks for being so condescending.

..... maybe I'm naive but no doubt I'll be put straight.

My understanding on trackers. 

They take an index or number of indicies on a certain day. Say for example they take the FTSE 100 today at say 4000 and at the end of the term the FTSE is 6000.

The payout is your investment + ( 50% x Participation ) subject possibly to an overall max. 

Am I wrong.

Undouubtedly I have no idea what the provider makes but I think I know what I am getting. No?


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## rainyday (1 Oct 2002)

*Re: Trackers.....*

Hi EWPM - Sorry - no offence intended in my sarcasm.

Maybe I'm just a cynic, but unless/until I can see & understand how & where the provider is making his money, I tend to be a bit wary of such products.


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## Liam D Ferguson (1 Oct 2002)

*Re: Trackers.....*

Hi RainyDay, 

This is an interesting point on which I'd like to hear your views.

Unit-linked fund.  Clear and transparent charges.  You know roughly how much all parties are making in charges (seller, fund manager etc.)  

Tracker Bond.  You don't know how much the provider is making, you only know how much the seller is getting (disclosure requirements.)   But you do know exactly what your return will be from day one.  If markets rise by X%, you will receive Y%.  If markets drop, you will receive some other figure.  While the terms of tracker bonds differ, most of them allow you to know exactly what your return will be.

Is this such a bad thing?  I have no idea what the profit margin is on the building of my house.  But I'm paying a price and I'm getting a house.  I don't know what the manufacturer (or seller) made on my car.  But I paid a price and I got a car.  

Why should tracker bonds be different?

Regards...Liam


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## rainyday (1 Oct 2002)

*Re: Trackers.....*

Hi Liam - I need to understand the business model.

With a car or a house, I've a pretty good idea as to how they make their money, e.g. the motor dealer buys at €x from the distributor and sells at €y to the punter, and pockets €y - €x. Even if I don't know the exact value of €x, I understand how they make their margin.

But with trackers, I just have no idea HOW they make their money.


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## Liam D Ferguson (1 Oct 2002)

*Re: Trackers.....*

If I buy a car for €15,000, I don't really care if the manufacturer is making €14,500 profit and the dealer €400 if I feel that €15,000 represents good value for the car I'm buying. 

With a tracker, you get a contract in writing from the issuer (often a major financial services player such as New Ireland, Irish Life etc.) which tells you that you will get 70% of the averaged return on the tracked index etc.  

Why does it matter to you if Irish Life are in fact taking all your money and putting it on the 3.15 at Sandown as long as they fulfil their side of the contract?


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## Dogbert (2 Oct 2002)

*Trackers*

Or on a deposit account. Do I know what rate the bank is charging another customer to borrow the money I have lent them (ie their margin) ? Do I care ?

No - I evaluate the various rates on offer and select the best for the conditions attaching.


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## US (2 Oct 2002)

*Trackers*

Yes.  A focus on costs and expenses is very fine and healthy, but costs and expenses really matter where they affect your return.  If you are guaranteed a return net of costs and expenses, do you really care what the costs and expenses are?

It's prudent to ask yourself how much you need, want or value the guarantee, and in that context the cost of the guarantee is a relevant consideration.  But in this context the "cost" to you of the guarantee is the difference between the return you will get on this product and the return you would get on a similar but not-guaranteed product.  You can find that out simply by shopping around.


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## rainyday (2 Oct 2002)

*Re: Trackers*

Hi Liam & Dogbert - With most financial contracts, it's effectively impossible to understand & interpret the small print of the actual contract. To be honest, I'd have this nagging doubt that the provider will find a way to wiggle out of the 'headline' commitments. Unless/until I know how they are making money (Note 'How' - not 'How much'), I'll be avoiding these products.

Dogbert - For deposits, I understand that the bank is going to be lending out my money to borrowers at a higher rate, so that's where they are going to make their margin. 

Can either of you educate me & tell me how the providers make their margin on trackers?

Regards - Shane


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## Spinner (2 Oct 2002)

*Trackers*

Hi all,
Looks like this one is creating a bit of a stir, as always. 
Personally, I am on the side of the "I don't care what the manufacturer gets". With-profits are as clear as mud and some actuary will decide at the end of the day how much he feels like paying me!
I believe that direct equities, unit funds and trackers all have a place for different investors or even for different requirements for the same investor.
As usual, there are comments like "60% of the market return", "no dividends" etc.
I know of a product that will pay 100% participation in the EuroStoxx50 over 5 years (12 month averaging). Note, the downside for this level of participation is the product provider can recall the bond on the 3rd anniversary date for an attractive compensation payment (30%). So the investor gets either 30% over 3 years, 9.14%pa or 100% of EuroStoxx50. Unfortunately the bit that most of you don't want to hear is that it can do this as the institution is doing it at a very low margin and therefore there is no scope to pay introducers. 
Also, it is true that averaging reduces the price of the option but ask the many thousands of people who have come out of trackers over the last 2 years if they have a problem with it!


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## flash (2 Oct 2002)

*trackers*

what supplier ?


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## Dogbert (2 Oct 2002)

*Trackers*

Hi Rainyday,

The basic tracker model is as follows.

The institution takes your money, and puts as much as it needs into a term-matched interest paying security with interest payments rolled up till the end of the term (a zero-coupon bond), which forms the basis of the money back guarantee. They deduct their expenses (including the remuneration of distributors, if any) plus their desired profit margin. They invest whatever is left over in an option contract on an equity-based security, typically an index or a basket of indices. That option gives the client his "participation" in the equity market.

So the client gets (1) a guarantee of his money back
at the end of the term, underwritten by either the
provider or a third party, plus (2) a percentage of
the growth in the equity market over the term. What it
says on the tin.

The provider's charges and the distributor's commission are disclosed in full if the tracker is written under a life assurance licence (Irish Life, New Ireland, etc), but not if it's written under a deposit-taking licence (Liberty, RBOS etc). The market for trackers is very competitive, and a product which has higher than normal charges (and hence offers less to the customer) will stand out ... just like a poor value deposit account. So why should I care what margin has been made on it (although unlike Liam's car example, I do know the actual figure, through the disclosure statement), provided it gives me what I want ?

The current low interest rate environment has made it
more difficult for the marketers of trackers, because
more of the customer's money is needed for the "money
back" element, with correspondingly less to spend on
the equity option. This is not inherently bad value
for the customer; it simply means the price of
guarantees has gone up. What it also means though is
that marketers are scrambling to offer attractive
headline rates or gimmicks ("double growth", "up to
150% exposure", etc), which I accept makes it more
difficult to compare one product with another. In
essence though, they're all working with the same assets, and are simply packaging risks in different ways. Once you move much beyond the plain vanilla, there is a need for consumers to be aware of the way the risks are being packaged. I and others here on AAM have been critical of Liberty's Escalator Bond on this basis.

Incidentally, I also agree with US's verdict that
guarantees are probably less appropriate with markets
at their current levels than they were at the market
peak, especially as the guarantees themselves have
become more expensive. (Although it should be noted that low interest rates also make the natural competitor of trackers, the deposit account, less attractive.) But it is clear that consumers have been burned by the market falls, and they now want investment products with guarantees attached.


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## Spinner (2 Oct 2002)

*Trackers*

Hi flash,
As a relatively new user of AAM, I'm not sure if it's ok to plug product. Whilst I do not directly work for the product provider, I have to declare an involvement.
If the moderators allow I will advise of the supplier. 
Note however that it is not being launched through intermediaries per se. However, that is not neccessarily cast in stone but due to the nature of the product it would only pay a low introductory fee. It will be of interest to direct investors, AAs or fee based brokers.
Minimum investment is €25k.


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## darag (2 Oct 2002)

*Re: Trackers*

Hi.

While it is good to challenge knee jerk reactions
about product transparency, I think people have gone
slightly overboard here in defending trackers and
their ilk.

Just because trackers offer a simple to understand
and guaranteed return doesn't mean that we shouldn't
be interested in whether they offer good value to
the investor.  Unlike cars and houses (a spurious
analogy, I think), the underlying value of the
securities which back these products are clearly
quantifiable.  How much are the zeros and options (as
explained by Dogbert) which back your five grand or
whatever actually worth?

Mortgages are simple to understand also but that
doesn't mean the Irish public were not being ripped
off for years before RBOS shook things up a few
years ago.  Similarly the punter got a rotten deal
from deposit accounts despite the transparency of
the returned offered; things seem to have improved
a bit since Northern Rock entered the market.

daRag.


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## KMcD (2 Oct 2002)

*Trackers*

If one is investing for a period of five years, does it not make more sense to invest a proportion of their money in Anglo Irish @24% and the balance in an index tracker? This would eliminate any annual management charge or commission on the deposit portion of your money.


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## Dogbert (2 Oct 2002)

*Trackers - How Much Clearer Could It Be ??*

Hi Darag,

How much clearer do you want it to be ? If you buy one through a life assurance firm, you're told (1) what you'll get, (2) how much the firm is charging you, and (3) how much their distributor is being paid in respect of your business. What more do you want ?

The firm is hardly going to overpay for the option or the zero coupon bond, because that means they'll have a crappy product and will get no business. For the basic tracker model, one with 20% participation won't fly when everyone else is offering 50%. In any event, there's nothing in it for them to do so.

I accept (indeed I said) once you get into the bells and whistles (caps, collars, floors, gearing, etc etc) it does get more difficult to compare products. Maybe that's where the adviser {gasp} can earn his or her corn.


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## darag (3 Oct 2002)

*Re: Trackers - How Much Clearer Could It Be ??*

Hi Dogbert.

Maybe I didn't express it as clearly as I thought.
My point was clarity and value are independent.  
Products might be clear but offer very poor value.

I gave an example of an even clearer and more
simply comparable product - mortgages.  These
attributes (clarity and ease of comparison) did 
not stop the providers from ripping off Irish 
consumers for years.

I am suggesting that it is naive or disingenous to
suggest trackers are behond reproach because
their terms are simple and clear.  

If pressed I might go further and hazzard a guess 
that the trackers are probably poor value based 
on past experience of crappy investment products 
heavily promoted by the Irish financial institutions 
but that would muddy the argument.

daRag.


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## Liam D Ferguson (3 Oct 2002)

*Re: Trackers - How Much Clearer Could It Be ??*

Darag, 

It's not valid to compare mortgages (pre BoS) with tracker bonds.  Mortgages were and are a requirement for most people if they wanted to buy a house.  So if the only available products were offering crap value, you had to get a crap value mortgage if you wanted to buy a house.  

On the other hand, if you think that the potential return on a tracker bond is crap, you don't have to invest in it.  You can leave your money on deposit.


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## rainyday (3 Oct 2002)

*Re: Trackers*

Hi Dogbert - Thanks for the detail. Could you give an idea (ballpark) of what % of the original investment typically goes on deposit & what % goes to buy the option?

I'd imagine that to provide the guarantee, the % on deposit must be quite high?


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## Spinner (4 Oct 2002)

*Trackers - Product provider or DIY?*

Rainyday and KMcD, see below from a previous post of mine.

Also, whilst I am no particular fan of trackers I do not agree with the oft touted, do your own tracker by means of a deposit and buy equities. This can never match the return available in the options market. 
Lets take an example, I know of a product soon to come to the market, that will pay 100% participation in the EuroStoxx50 over 5 years (12 month averaging). Note, the downside for this level of participation is the product provider can recall the bond on the 3rd anniversary date for an attractive compensation payment.
On a notional €100k over 5 years it is reasonable to assume €80k on deposit for the guarantee and then you have €20k to buy equities with the DIY version.
Lets say a 50% increase from current levels over 5 years - the tracker matures @ €150k! On the DIY version your stocks would have to grow by 350% to match it! Allowing for tax difference, 1 yrs CGT allowance and even the dreaded dividends argument (currently 3.5% on EuroStoxx50), you would have to be some stock picker!
I know this is one specific example and maybe I'm picking the whole thing up wrong?


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## Max (4 Oct 2002)

*Provider Product*

Spinner, I don't undestand!

€80K on deposit
€20K in equities
Equities rise by 50%

Why would the provider pay you 50% on the money on deposit ?


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## US (4 Oct 2002)

*Provider Product*

He doesn't, that's the point.

You've 80K on deposit and, with interest, this rises to 100K over the term of the bond.  Meanwhile your 20K in equities has risen by 50% to 30K.  Gross proceeds are therefore 130K, a 30% increase at a time when equity markets have risen by 50%.

That's the DIY version.  In the version offered by the insurance company, the 20K isn't invested in stocks and shares, but in a leveraged option which will provide a multiple of the gain in the index.  In this case the option would have to provide seven times the growth in the index if a 50% rise in index value was to pay you 50K on a 20K option price, which is what it would have to pay you to increase your total proceeds to 150K, which is what they would need to be if you were to market your product as offering 100% of the index growth.


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## Max (4 Oct 2002)

*Options*

US

If I could just tease it out a little more? If I get a capital guarantee at the end of 5 years and 9 months and 100% participation in the growth of a portfolio of 24 stocks(from 15 sectors) up to a maximum of 85%, with a 'lock in' on growth on each stock @85% over the first five years. (Averaging applies over the last 9 months) 

1) What is the option price likely to be?

2) Is it worth a punt(or two)?


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## US (4 Oct 2002)

*Options*

1)  I'm afraid I've no idea.  Besides, you might not be able to buy options on the 24 shares concerned for less than a certain minimum amount, so doing it yourself might not be feasible unless you have a very large amount of money.

2)  Depends entirely on your attitude to risk.


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## Dogbert (7 Oct 2002)

*Trackers*

Hi again all,

Rainyday - it's just a function of the relevant interest rate. If the 5-year zero-coupon bond is around 4% as it is currently, then you've got to put around 80% of the customer's money into the bond, leaving the balance less expenses for the option. The big difference between today's trackers and those of a few years ago is the low interest rates currently, which lead inevitably to relatively low participation rates. However, as I posted previously, this doesn't mean they're inherently less attractive, because the lower interest rates have fed into other returns (most obviously deposits) too. It does make it more difficult to generate the "headline rate" appeal than it used to be.

Darag - the critical difference is competition. The mortgage market wasn't competitive pre-RBOS, so they made a huge difference. The tracker market <!--EZCODE BOLD START-->* is*<!--EZCODE BOLD END--> very competitive (ask any broker), and as Liam pointed out, trackers also compete with other forms of investment, so poor value products wouldn't stand a chance of success.

On the d-i-y versus buy issue, there are arguments on both sides. As an individual punter, you won't be easily able to buy either zeros or options, and you certainly won't get wholesale rates, which investment firms do. So you've got to go the alternative route. You're unlikely in practice to average your investment out, though you could do so (but you'd rack up a lot of commissions if it was a stockmarket product such as an ETF). The interest rate could move against you, though it could equally move in your favour. You might lose your discipline and spend the deposit money, leaving yourself totally in stocks.

On the plus side, you control your assets better in the d-i-y model. You can change your mind, take profits, alter your mix, extend the term, etc. You get dividends from your equity holdings, which you don't on a tracker. Simplistically, if stocks fall or do moderately well, you'll do better in the d-i-y model (because you haven't expended any money on the option), but if stocks do better than moderately well, you'll do better on the tracker (because your equity exposure is geared). You can calculate the breakeven point - eg assume 5 years, 80/20 d-i-y split, 70% tracker participation ... the simplistic breakeven point is a stock return of 40%, though you'll also have got dividends on the d-i-y version. Over 40% and the gearing that Spinner and US have referred to makes the packaged version an (increasingly) better performer.

On balance, though, I suspect most people will (and indeed should) continue to select the pre-packaged option because (a) its much simpler, and (b) it forces you to stick to a strategy. While I realise (b) may be a disadvantage for some people, I think it'll be an advantage for more people. In my experience, the tracker market consists of people who otherwise would leave their money on deposit, <!--EZCODE BOLD START-->* not*<!--EZCODE BOLD END--> people who otherwise would invest in equities (though the current phase may be a bit different, with a huge swathe of investors having lost their appetite for risk), so the most useful comparison for trackers is deposit accounts themselves.

Interested in other views.


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## Paster (8 Oct 2002)

*Tracker Bonds*

TBs are essentially deposits with a bit of a punt, a bit like prize bonds.

The problem is that TB providers try to exact equity type margins of 1.5% per annum compared with deposit margins as low as .25% p.a.

Hence lets saythe long terminterest rate is 4%.

A long term deposit will deliver 3.5%.

A Tracker will deliver on average 2.5% after charges, with a bit of upside potential to balance the downside possibility of just getting your money back.

Not a very convincing proposition but probably as good as Prize Bonds.


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## Dogbert (8 Oct 2002)

*Trackers*

Hi Paster,

Your analogy is okay as far as it goes, but it undervalues the return potential of trackers in two key ways.

Firstly, based on historical evidence, the likelihood of equities outperforming deposits over any decent timeframe, and hence the option element of the tracker paying off, is a lot higher than the likelihood of your winning on the prize bonds.

Secondly, the payoff (if it happens) will not be randomly distributed among the customers. Can't recall the exact payoffs of prize bonds, but presumably some people win big and some people win small and some people don't win at all, even if they bought at the same time. That won't happen with trackers.


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## US (8 Oct 2002)

*Trackers*

<!--EZCODE ITALIC START-->_ "Firstly, based on historical evidence, the likelihood of equities outperforming deposits over any decent timeframe, and hence the option element of the tracker paying off, is a lot higher than the likelihood of your winning on the prize bonds."_<!--EZCODE ITALIC END-->

That depends on the precise terms of the equity link, which should always be carefully analysed.  The investor receives a percentage only of the growth in a specified index.  The index specified may be a capital-only index rather than a total return index.  There may be a cap.  If the link is to a number of indices (or a number of shares) the cap may apply to each index (or share) separately, rather than to the aggregate basket.  There may be averaging over a long period up to maturity.  Each of these measures tends to decrease the likelihood that the equity link will provide any significant growth in the bond value, or indeed any growth at all.  In general, the stronger the capital guarantee, the lower the prospect of significant growth from the equity link.


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## adub (14 Oct 2002)

*Guaranteed Investment Bond*

Sorry if I am coming late to this debate, however I asked my question in a different section of AAM. Here it goes Iwant to invest €10000 and I was told Canada Life G.I.B. was good , as it offers a split between Eurostoxx 50 and a Fixed Interest Bond @ 4.75% p/a.
 Can any of youse guys comment?


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## Investor (18 Oct 2002)

*GIB*

It would seem like a basic product tracking an index with build in stability of Bonds.  I'm sure some will disagree but "in the past" evidence suggests that tracking indices outperform most managed funds.

I would be interested to know what charges are applied.


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## Dogbert (18 Oct 2002)

*Canada GIB*

Charges are 1.75% p.a. of fund assets.

Have only seen a very brief description of this, so don't take this as gospel. It seems to be a bit like a tracker in that your capital is guaranteed after 5 years, and that it combines the "money-back" bond element and the equity exposure.

It scores over some trackers in that you can encash along the way (no guarantees, obviously, and there are exit penalties) and that you can let it run for longer (it's open-ended). But it has the huge weakness that you don't know (as far as I can see, anyway) what your participation rate is (ie how much is in the equity element). This also means that you can't evaluate whether you've been fairly treated when you cash in your chips. It may also have Escalator Bond-type weakness if Canada Life can vary the proportions allocated to the bond and equity elements.

I wouldn't choose it unless I could see under the bonnet more.


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## Amellion (26 Nov 2002)

*Dividends*

A lot of the postings on this thread & media coverage deals with charges/performance v. active funds /which index/averaging etc.

While relevant,the key issue with what are known as Trackers in my view is Dividend.Trackers do not capture dividend and for most of the last decade or so this did not matter much.

I have just come across two interesting papers,the first by a large US asset manager called Wellington.This shows that of a 9.1% total return from US Equities over the last 130 years,4.8% has come from Div.

Another paper by Barclays shows the Div. from UK Equities has averaged 4.5% over the last 30 years.

In what is generally expected to be an era of more modest returns,why are people so willing to pass up the source of the major part of the return delivered from Equities ? 

The Barclays paper "The UK Equity Risk Premium" is available on www.barclaysglopal.com and is worth a read.For those too lazy to do so,it posits that returns from UK Equities will average 8.75% pa over the next decade.Of this Div.( & share buy-backs) are expected to account for 4% of this.


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## US (26 Nov 2002)

*Dividends*

_"While relevant,the key issue with what are known as Trackers in my view is Dividend.Trackers do not capture dividend . . ."_

I think this needs qualifying.

A tracker *fund* (i.e. a managed fund which invests in a pool of shares designed to replicate the performance of a selected stock index) will capture dividends.

A tracker *bond* may or may not capture dividends.  The terms of the bond will link it either to the capital-only version of the index, or the total return version of the index.  You need to read the the terms in some detail to find out which version is linked.  The total return index includes dividends.


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## Amellion (27 Nov 2002)

*trackers*

You are correct in terms of the need to define what is meant.

I am dealing with the animals which are being sold on a large scale to Irish investors,generally under the description "tracker bonds".

A point I didn't make in my post is that the share prices of the Equities in the index/indices being tracked would need to fall by almost 19% over a five year period for the Guarantee to be of any value (with a Div.yield of 3.5%pa.).

I fully understand why people are buying them,but many of those providing advice (& purporting to add value ?!) must know that the sacrifice of the Div. portion of the upside is poor value for the comfort of a Guarantee.


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## US (27 Nov 2002)

*trackers*

_"I fully understand why people are buying them,but many of those providing advice (& purporting to add value ?!) must know that the sacrifice of the Div. portion of the upside is poor value for the comfort of a Guarantee."_

Well, I agree with that.  My point is simply that the investor shouldn't _assume_ that in any given bond the link is to the capital-only index.  He should check.

(I strongly suspect that in most bonds the link _is_ to the capital-only index.  But I may be wrong, and if you are tempted to buy a tracker bond you should certainly investigate the point before making a decision.)


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## Amellion (27 Nov 2002)

*capital only*

In terms of the products being sold to the individual investor,I have yet to see a 'tracker' which provided participation in the Dividend.Apart from anything else,this is a function of the fact that the options market relates to indices in capital terms.

Apologies for the typo in my earlier post-the site on which the paper is available is www.barclaysglobal.com.


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## Amellion (27 Nov 2002)

*guarantee*

By way of clarification,if the Fund carries a guarantee,it is virtually certain to be underpinned by options- i.e.linked to one or more indices in Capital terms(i.e. no Div.).

I have not come across an Index tracking fund(which does participate in Div.) offerring a Guarantee.


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## IsleofMan (27 Dec 2002)

*Early FNBS & EBS Tracker performance.*

Back in the early to mid 90's both the First active and the EBS Building Societyeach issued about 13 trackers. Most of these were linked to the Nikkei. Has anyone got an update as to their eventual performance. Its just that we never hear about the duds!


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## Amellion (30 Dec 2002)

*Nikkei*

Nikkei trackers issued around 5 years ago will be very close to 'even steven',so there will be no bonanza for investors.

As well as those specifically linked to the Nikkei,this index forms part of the potential return on a high proportion of trackers.

This had a lot more to do with the fact that options on the Nikkei were relatively cheap than any belief about future returns & in its own way was scandalous.Shane Ross is the only commentator whom I can recall highlighting this in the media.


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## Nicky (30 Dec 2002)

*Scandal*

Amellion,  and the reason Options on Nikkei were cheap is that the currency was hedged.  The fact is that the Japanese stockmarket has performed quite well but because it is denominated in a currency which continues to strengthen the index itself has been made to look flat.  Ironically, the brochures would actually made a virtue that there was no currency "risk" but it was the very removal of this risk which made the options cheap.:rolleyes


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## Amellion (31 Dec 2002)

*Nikkei options*

Nicky - I think you may be mistaken in terms of the currency angle.The main reason these options were cheaper was that the implied volatility of the Nikkei was lower.If there was any hedging involved,it would have improved the return as selling forward a currency with a lower interest rate would generate a premium.


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## Nicky (31 Dec 2002)

*Currency Hedging*

Hi _Amy_, u like me, nuffin' better to do on a NYE?

As you say, selling a low yielding currency forward generates a premium or increases the margin to the provider.  Trust me, an unhedged option on Nikkei was more expensive than on other more "stable" indices, like Footsie.:rupert


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## Isleof Man (1 Jan 2003)

*Building society trackers that were duds.*

So, are you saying that the building societies chose the Nikkei so that they could make more money for themselves or what? The building societies designed these trackers inhouse, would they have known what they were doing?


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