BCP launches a leveraged Quadruple Growth Bond

For those of you who are not satisfied with quadrupling your losses, you can now magnify them even further, by borrowing to invest in the Quadruple Growth Fund.

The interest rate is fixed at 4.5% and you can borrow up to three times your capital.

The new brochure gives illustrations based on capital of €100,000. The illustrations show potential dramatic losses. If you have €100k and borrow €300k, you can lose up to €90k or 90% of your investment.

There is no note on the brochure that IFSRA has warned of the dangers of borrowing to invest in these trackers.

Brendan

Above

Brendan, this is just bloody shocking. IFSRA is beginning to look like a sick joke.

Quadruple Losses

Saw this mentioned in the Sindo also, which actually said that you're MORE LIKELY to end up with Quadruple Losses.

How can you have Quadruple Losses with a 90% capital guarantee?

If these things go unchallenged, they will simply become accepted as fact.

Benny

IFSRA

It appears awfully like IFSRA has ground to a halt and has already lost its way. Based on media interviews on RTE its main thrust is going to be on consumer information/ education.

But where is the intervention badly sought ? Here is a dramatic example but nothing from IFSRA.

Before IFSRA were we better off? At least then media acted as watchdog because there wasn't any. Now we have a watchdog that looks like one, but up close you can see it's a poodle with no teeth, and it clearly can't bark.

Hi Benny

It is completely misleading to describe this as a Quadruple Growth Bond. It never ever quadruples your growth. I have tried to create artificial scenarios and even still I cannot come up with one, no matter how unlikely, where you will receive quadruple the growth.

However, in one particular setting, it does actually quadruple your losses. If the basket of stocks drops between 0% and 2.5%, your losses will be quadrupled.

In addition, your losses on any individual share will be quadrupled without limit in calculating the overall average, whereas the maximum growth on any individual share which will be quadrupled will be limited to 17.5%.

But if the average losses are say 10%, the total loss will not be quadrupled to 40%. It will be limited to 10%.

Brendan

Quadruple Bond

Hi Brendan,

I don't disagree with anything in your post above.

However, the notion that you are "more likely" to quadruple your losses" (Eoghan Williams in the Sindo) needs to be challenged.

It's little more than inaccurate scaremongereing.

Benny

Re: Quadruple Bond

Pqg, Probability of quadruple growth: 0 (it can never happen)
Pql, Probability of quadruple losses: Some small probability, but definitely greater than 0 (it can happen)

Pql > Pqg

=> you are more likely to quadruple the losses than to quadruple the growth

It'll be difficult to challenge...

Cut to the Chase

OK.

While there are many vaild criticisms of the BCP Quadruple Growth Bond, I happen to like it - provided all the caveats etc are made explicitly clear to any potential investor - as per Brendan's argument.

I just did a valuation for an investor in the 2nd last Quad Growth Bond (started May 2003).

20,000 invested in 8th May 2003 has a value of 25,200 at the end of November - up over 25%.

The ISEQ Overall Index of Irish shares is up 9%. The FTSE is up 12%; the S & P 500 is up 15% (not if invested in from Ireland with the way the dollar has been). .

While 25% is clearly not four times 9, 12 or 15, it's still an attractive proposition to be able to achieve more than the growth in world markets - about twice the growth. I know there's a cap on each share.

My summary:

In a rising market the Quad Bond will do very nicely - as witnessed by the figures above. If markets slide over the next 3 years, the investor will lose 10% of the original investment. This sits comfortably with many.

Does anyone disagree with this summary? And please don't go into another long spiel about the problems with the product - I'm well aware of them.

Benny

Hiya

Hiya Benny baby- you employed by BCP by any chance. Like do you have your own money invested in this stuff?

Re: Quadruple Bond

Hi Benny

The Quad Bond provides a multiple of the growth in a very narrow range - probably somewhere between 0% and 10%.

If the index rises by say 30% over the 3 years, you will be better off in a unit linked fund.

To reach this 30% figure, they must go through a period when the Quad Bond has the advantage.

So even at the figures you are quoting, the Quad Bond isn't a whole lot better than the Index. But the potential for an index investor is so much higher.

Brendan

Eoghan Williams

If he disliked the product so much, why did he give it four stars out of ten ?? I have long ago given up paying any heed to the views of this prat. I recall he gave Irish Life's Scope funds (a decent product, if a bit overpriced) one out of ten ... essentially because the markets had fallen since they created the funds. Then he lambastes trackers because they charge for providing a guarantee. The guy's a joke.

Carla Baby,

I do not work for BCP, but am one of the Authorised Advisers supposedly doesn't understand this product.

Brendan,

I thought you understood this product perfectly, but from your last posting it seems you don't.

If the Index rises by 30% over the three years, you will NOT do better in the index. In the Quadruple Growth Bond, you will receive a receive a return of 60%. How can 30% gross return be better than 60% gross return.

How can you possibly say that the BCP figures presented above are not a whole lot better then the index - they're TWICE as good as the index.

Regards,

Benny

Re: Eoghan Williams

Hi Benny

I was trying to simplify the explanation to make a point.

This Bond has fooled most people, including most authorised advisors. It does not track an index. It tracks a basket of stocks.

It's very difficult to convey the implications of this. But if the index rises by 30%, the 17.5% limit on the growth of any share in the index probably reduces the effective growth to around 10%. In most examples I did, I found it very hard to find a situation where investing in the bond was better than investing in the index. The only realistic exception was where the index falls by over 20%. If this happens, then you are better off in the Quad Growth Bond than in the index.

Brendan

Quad Bond

Brendan,

I've been using the trems "index" and "basket of shares" as the same thing, also for simplicity's sake. It is reasonable enough to assume that the basket of shares we're concerned with will broadly reflect movement in world equity matrkets over the next three years.

If the basket of shares grows by 30% over the three years, an investor in an index will achieve in or around this gross return.

The same investor in the Quad Bond will receive a gross return of 60%. This is the effect of the multiplier. 17.5% X 4 - 10 - 60%.

Do you disagree with this contention?

Similarly, if the basket of shares rises by 10% on average over the three years, the return will be as follows:

10 x 4 = 40 - 10 = 30%

So the index tracking investor will get a gross return of 10%. whereas the Quad Bond investor will achieve 30% gross return.

If the basket of shares grows by more than 60% over the three years, you will have done better in gh index.

You say the only example you can find where the Quad Bond would beat an index is where there's a fall of more than 20%. I've just provided two more examples above.

General rule: The Quad Bond will win out over a index in the event of ANY positive growth in the basket of shares - from 3.33% gross up to 60% gross.

Why 3.33%?

3.33 x 4 - 10 - 3.33%

Whereas 5% X 4 - 10 = double the growth of the index.

Rgds,

Benny

Quad Bond

Brendan,

There's a point your making that I have yet to address - probably because it strengthens your arguement and weakens mine.

It's to do with the 17.5% cap. I agree with you that the cap on each individual share will mean that the average performance will be lower in the BCP bond as opposed to an index.

So the final return is indeed unlikely to be twice the return of the basket.

It may not be far off though. I suspect, although there's clealry no way of knowing, that your 10% valuation is under the mark. So you might get in or around the same as the index, possibly more. And this comes with a 90% capital guarantee, whereas the index is a bottomless pit.

In any event, I'm sticking by the product and look forward to the final outcome in 3 years.

The performance of the fund so far, as outlined in a previous post, shows that it's not all bad news with this product.

Benny
(Name changed by Rd)

Hi Benny

Most people just do not understand the huge impact of this 17.5% cap, which as I must point out again, is a cap on gains only. Losses on individual shares are not capped.

Check out my examples in to see the full impact.

You can be quite sure that the financial engineers who sell the derivatives have done much more sophisticated models and have designed them at a price where BCP and the financial institution win while the customer loses.

So why are previous bonds doing so well?

Benny,

My last explanation of this was very poor. Let me simplify it even further.

Let's say that I invest in a simple ISEQ tracker fund. I will get whatever gains or losses occur over the period of my investment. No guarantees, no baskets, no keeping the dividends. Just a simple fund.

Now you invest in the Benny 5 year Double Growth ISEQ tracker fund. This is the same fund with only two differences. You will get double the growth up to a maximum return of 20%. You must keep it for 5 years and then cash it.

You will be able to point out to me for the first year or two, or maybe even longer, thay your investment is well ahead of mine. The design of this product is such, that you must have a window where you will be ahead of me.

So there is nothing extraordinary about the BCP bond being ahead of a direct investment. It had to happen during this stage of growth. But at the end of the 3.5 year period, who will be ahead? We don't know yet, but you can be quite sure that the financial engineers have stacked the odds in their favour.

Benny, the BCP bond has not closed yet. You should try to get your money and your clients money out of it.

Brendan

Quad Bond

Hi Brendan,

The focus to date has been comparing the BCP bond with an index tracking fund. Whereas the debate with real investors tends to be between the BCP bond and a deposit-style instrument.

This bond will perform not far away from an index tracking fund over the three years. I suspect it will actually out-perform - let's review the Quad Bond 2 in April 2007. The multiplier effect is adequate compensation for the loss of dividends. Crucially it has a 90% capital guarantee.

I personally don't see a very signifcant value in this capital guarantee, but a good number of my clients do. Rightly or wrongly, many will not even consider shifting away from deposits unless there is a capital guarantee.

As a result, I am happy with the product as stands, while accepting your criticisms about the misleading title of the bond, literature etc., and will therefore not be advising clients to reconsider.

I think we're simply going to have to agree to disagree.

Regards,

Benny

Re: Quad Bond

interesting piece on Morning Ireland this morning (I think it was Standard Life, someone might correct me), saying that the cost of capital guarentees are excessive at the moment, and people would be better off in a straightforward equities investment with a 6 to 10 year horizon.

See you in a few years Benny. I'll be definitiely watching the this one with interest.

BTW, I hope you've informed the clients that it is not possible to get quadruple growth. They might still agree with you that it's a good product, but they deserve to know what you know, which is that the title and the literature is misleading.

Do they know that the guides to past peformance in the literature are not even for the same type of product?

Perhaps people don't want the subtleties and just want your opinion, but your opinion should be "This is a good product but not as good as the name might suggest".

-Rd

.

Or for really naive customers: "it doesn't do exactly what it says on the tin".

Quad Bond

Daltonr,

I don't need to be told how to do my job thanks.

Any and all investors into this contract need to be made aware of its positive and negative aspects, as with all investment products. I agree it's title is misleading. Certainly any investors who has come through this office has been presented with a "warts and all" interpretation.

Benny