Anglo Capital Plus Account Issue 3

Happy Girl said:

following this thread also with great interest. Seems v attractive but still awaiting answer from clubman as to what other information I should be trying to get before making my decision.

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The structure of the product does sound attractive but you should probably look more into the underlying indices and see what exactly you are exposed to.

Here is a quick explanation of how a simple 100% capital guaranteed tracker bond works.

Lets say the details are like this.
Bank XYZ offers:
5 year bond
100% capital guarantee at maturity
100% participation in the growth of the EuroStoxx

You invest 10,000 euros in this bond.
Bank XYZ must give you 10,000 euros at maturity so they put just enough money in a deposit account at the 5 year interest rate to give exactly 10,000. Let's say that the amount that needs to be put in the fixed account is 8,000 euros (this would be the case if the 5 year rate was about 4.5%).

Now there are 2000 euros left over. The bank has guaranteed you all of the growth and none of the downside of the EuroStoxx. They have effectively sold you a derivative called a Call Option on the EuroStoxx. Bank XYZ will determine the price of this Call Option, usually by asking an investment bank which is a specialist in making prices for these kinds of derivatives. Lets say the investment bank charges Bank XYZ 1500 euros for the option.

Now Bank XYZ is perfectly positioned to give you exactly what they promised they'd give you at maturity. The 100% capital guarantee is taken care of by the fixed rate account, the growth of the EuroStoxx is taken care of by the Call Option. And they've also in the middle of this managed to pocket 500 euros of your money. This is what the bank calls Margin.

So

10,000 = 8,000 + 1,500 + 500
10,000 = Amount in fixed account + Call Option + Margin

This is the usual way that a tracker bond works.

The Anglo Capital Plus Account works in exactly the same way.

This raises a couple of questions though.

How can they say there are no fees when they are creaming off this margin? In actual fact they may be doing this for zero margin.

So why would they offer this product for no profit? Anglo are a bit of a different bank compared to AIB and BOI, they don't have a big deposit base. They have leant out much more money than they have on deposit. There are regulations which require them to have a certain amount of money in their reserves for every euro they lend. The main way (apart from deposits) that any bank meets these capital requirements is by borrowing on the Interbank market. But it actually works out cheaper for them to borrow from you and me. That's why they'll do this for zero fees, because they don't have to pay the extra cost of funding themselves on the interbank market, and they can keep lending till the cows come home.

There were also some questions on here about how could they possibly offer 100% participation now when they only offered 80% participation 2 years ago. The participation is determined purely by how much money Anglo have to spend on the Call Option (lets assume zero margin). Two years ago interest rates were lower so Anglo would have had to put a larger amount of you cash in the fixed deposit account and so would have had less cash to buy the option. Now with higher rates they don't have to put as much money aside for the capital guarantee, because the money that they do put aside will grow faster. So they have more now to spend on buying the option from the investment bank. Hence higher participation.

Also, it's not correct to compare 100% participation in one index with 80% participation in another index. Let's say Bank ABC offered 60% of the growth of the ISEQ over 3.75 years. You might think that's nowhere near as good as 100% of the growth of the EPRA and IPD basket that Anglo is offering. But the amount of money to buy the Call Options is exactly the same in both cases and so the capital markets are saying that these two trackers have equal expected payoffs.

What I'm trying to say is that the terms of the deal that are offered to you are dictated by the interest rate markets and by derivative markets. Not by someone saying "Property isn't going to do as well as 2 years ago so lets offer them 100% participation instead of 80%".

In my own opinion, the reason you're getting 100% participation (apart from better interest rates) is that the IPD is probably a very low volatility index, and it probably has low correlation to the EPRA. If you were investing in a tracker which was only linked to EPRA you might only get 70 or 80% participation. The presence of IPD makes the option cheaper and hence the participation higher.

Also, very important, check out the averaging in the deal. If it involves averaging throughout the lifetime then it's not as attractive as it sounds. If it only involves averaging in the final 6 months or 3 months then that's more acceptable. Generally the less averaging the better.

In conclusion, I don't think you're being ripped off here. Banks generally do take margin, and how much they should be allowed to take is a question for another day. I think it's perfectly possible though that Anglo are doing this for zero margin. What you need to be asking yourself is; am I happy giving up the guaranteed growth of a fixed rate, for the potential growth of the EPRA and IPD?

Disclaimer: I work for a bank, not Anglo though.

Excellent post Verbatim! Really throws some light on the product for those amateurs among us!

Yes, very good post Verbatim, thanks for taking the time to post in such detail.

Is it still a good investment?

Was interested in this account but the fees are in the way they calculate the return. Correct me if I am wrong but I got the information and the formula is different than the one posted earlier on this thread.
It is 50%((A2-A1) + 50%(B2-B1))
____ ____

further to my last post


A2-A1 and B2-B1 are divided by A1and B1 respectively, 50% of B2-B1/ B1 is taken added to the A2-A1/A1 this is then multiplyed by 50% which means you dont get the full % increase in the indices.

Do you still think this is still agood investment?

verbatim said:

Here is a quick explanation of how a simple 100% capital guaranteed tracker bond works...

Click to expand...

I found this very interesting, I wondered if this would also work for Joe Bloggs, so I applied it to any stock at random - I picked the S&P 500 and have neglected currency risk in this example.

Invest $14,532 in SPDRs (SPY) S&P 500 Index
Gross Expense Ratio 0.0961% - not really relevant to this example I think?

Dec'09 call SPY (currently $145.32) - Closest in the money call is:
145.00 FYNLO.X 19.40 Up 0.40 19.50 19.90 1,500 3,305

$14,532 exposure to SPY,
~$1,990 cost of option (taking worst of spread)
Capital left is $12,542

Interest at US interest rates in trading account, currently 4.84% (BM-0.5%) on $12,542

Apr 2007 to Dec 2007 @4.84% = $454 to $13,016
Jan 2008 to Dec 2008 @4.84% = $630 to $13,646
Jan 2009 to Dec 2009 @4.84% = $661 to $14,307

I am short by $225 - $32 = $193

_________________________________________________
Outcome A: With traditional pure stock purchase

With traditional investment of $14,532. If at outcome, value was $19,532,
gain is $19,532 - $14,532 = $5,000 profit, gives tax of $1,000

I have also neglected the spread on a purchase of $14,532 worth of SPY, so if the spread was
~1% then it would make up for the $193 difference.

Profit, approx $4,000

_______________________________________________
Outcome B: With this capital assured investment form

If at outcome, value was $19,532, gain is $19,532 - $14,500 Strike
= $5,032 - $1,970 option cost, so tax is $612
Tax on interest is approx $400, so total tax $1012 is approximately the same?

Profit, approx $4,000

Obviously with capital assured investments there is still the risk of a loss of interest over this period - approximately $2,000 in this example if the $14,532 was placed in a high-yield deposit account.

Please correct any errors or misplaced assumptions that I have made.

I suppose a question arises then, why do people not always invest in this way?

does that mean just as cheap to buy a capital guarantee option? is so is there anyway as janman said rather than giving Anglo 20k for 3 years and 9 months, could you not buy iShares FTSE/EPRA European Property Index Fund (IPRP) through a discount broker but actually do it with a capital guarantee option?