BCP launches a leveraged Quadruple Growth Bond

Trackers - Here We Go Again

Hi Daltonr,

First of all, let me say I am not a proponent of the BCP Quad Bond, and this reply is more about trackers in general than that Bond in particular.

I am amazed how often this topic comes up on AAM, and how it is never understood. It's great that Nigel Dunne of Standard Life (for it was he) thinks the cost of guarantees in the capital markets is currently too high. I am perplexed as to how he knows whether it is too high for me, or Benny, or Benny's clients, or you, or Brendan, or indeed anyone else for that matter.

The point about trackers is that they are aimed almost exclusively at clients for whom capital guarantees are paramount. Were it not for trackers, most of these people would leave their money on deposit, losing the real value of it to inflation. Trackers (provided the proposition is fair) give them a low-risk way of potentially keeping pace with or beating inflation by a bit.

Over most periods, you'll do better by investing directly in equities. On a purely personal basis, I happen to agree with Nigel Dunne. But to invest directly in equities you have to be prepared to put your capital at risk - occasionally, as the past three years have shown, lots of risk. It's hardly shocking that a higher than normal proportion of investors have become more risk-averse given that recent experience, no matter what Nigel Dunne may think about it.

Re: Trackers - Here We Go Again

I am perplexed as to how he knows whether it is too high for me, or Benny, or Benny's clients, or you, or Brendan, or indeed anyone else for that matter.

Click to expand...

I agree with you. He can't know that.

But I think he was offering an opinion of the value of a product in the same way that we might offer an opinion on whether a particular share was underpriced or overpriced. Obviously there's a range of opinions on the value of anything and one mans bargain is another mans ripoff.

If it's not fair for him to offer this opinion, then we might as well shut down the whole pundit profession. Actually.....hmm.

Incidently the problem I see with the Quad Growth product is not whether it's good or bad value, but whether it's honest or dishonest. Brendan has some issues with the product itself, upper and lower limits etc. I have no issue with those issues, I'd be happy to let them promote it and see who buys it.

I just don't like consumers being misled.

In any case it isn't something that I'd be interested in. But then, I'm not 7 years from retirement and getting jittery.

-Rd

Nigel Dunne

Hi Daltonr,

That's the problem ... he wasn't (as I understand it, anyway - I didn't hear the radio interview, but read a newspaper piece) commenting on the BCP Bond specifically, but on the cost of guarantees generally. Trackers are the main vehicle for passing those guarantees on to clients. As you agree, there's no way Nigel Dunne can know what value anyone else places on a guarantee. The market for guarantees (if you know what I mean) operates like any other market - supply and demand. If lots of people want them, then the price generally goes up. But hey, that's how markets work.

I agree with you about misleading products - that's why I said provided the proposition is fair. If it is fair, then I have no problem with trackers being marketed to suitable customers, who can make their own minds up about the value of the guarantee. In the good old days {sigh} it used to be simple - you got 70% participation or whatever, so it was easy enough to see what you were giving up. I know things are more complex now, but I don't interpret that as meaning the whole tracker market is compromised.

Re: Trackers - Here We Go Again

dynamo, you may be sighing but i don't see how trackers are anything but
a mug's game. the cost of guaranteeing a return is the same as the cost
of putting money on deposit; in both cases your capital is guaranteed
but you suffer the effect of inflation. i do it myself by leaving some
money on deposit in case of a rainy day. in the case of trackers, the
value of your interest goes in to a long-shot gamble. i don't see any
value in putting money into gambling that the stock market will move in
a particular way over a particular period of time. personally i feel i
know more about rugby; as a result i'd feel more comfortable trying to
out-guess paddy power's team of actuarial sports experts over the next
european cup season than trying to out-guess the financial derivatives
markets which are closely monitored by the brainiest people in the
world. attempting to outguess the latter can not be considered to be a
legitimate investment exercise.

Re: Trackers - Here We Go Again

Nigel Dunne's interview on the radio didn't contain anything startling. Be basically said Bonds were expensive. But when interest rates are as low as they currently are you'd expect Bonds to be expensive.

Also, given the fact that a significant number of people seem to think that equities are more likely to move up than down, guarentees are not considered AS IMPORTANT as they might be. The combination of High Cost and Low Importance is what he was referring to. Or at least that's how I interpreted what I heard.

Now, of course there are people who've been burned recently in equities, or whose friends/relatives have been burned, and who are wary about equities. For these people the importance of a guarentee is high, and Nigel Dunne's comments don't apply (as much).

I have no strong opinion one way or the other on trackers. I take each product as it comes, but given my attidude to risk, I don't find them attractive. That's not to say that when I'm 50 I won't be seeking out expensive guarentees. Maybe I will.

I think we agree on one thing. the greatest problem with investment products today is not whether they are good or bad, but whether they can be understaood by the investor.
Whenever I see complicated products I wonder what that complexity is trying to hide, and my usual conclusion is, lower returns for the investor, higher profits for the institution.

If I see dishonesty on top of complexity then I run a mile, I don't care how good someone tells me the deal is.

But I'm a cynical old fool.

-Rd

Latest

Hi all,

Latest valuations I have to hand for the BCP Quad Bond launched in May 2003 shows growth of 36.65% to end Dec 2003 versus the MSCI World Free Index of +23%.

I have been communicating this with clients and needless to say there's been positive feedback across the board.

I wish we had taken bets on this product with its AAM critics.

Regards,

Benny

Re: Trackers - Here We Go Again

Latest valuations I have to hand for the BCP Quad Bond launched in May 2003 shows growth of 36.65% to end Dec 2003 versus the MSCI World Free Index of +23%.

Click to expand...

So what is that 36.65% four times of? It's not four times the index that you mentioned anyway. Surely the "quadruple" issue was the kernel of this discussion and nobody ever said that the product would necessarily make no returns or a loss?

Re: Latest

I wish we had taken bets on this product with its AAM critics.

Click to expand...

I'm still open to bets. Do you want to open negotiations?

-Rd

Re: Trackers - Here We Go Again

hi benny. how exactly do you break this news to your clients?
"hi, you know that 3 1/2 year product you invested in? if it
had been a six months product you would have been up
36%!! also if my aunt had balls...."

the gain is purely theoretical and it is makes no sense to
communicate this notional value to your clients given that
they cannot realise any gain. that's the nature of these
products given how they're constructed using bonds and
derivatives. it's like a bookie telling a punter that they're up
100 quid a mile into a three mile race.

by the way if you are laying odds, what odds would you offer
if i wanted to bet that this bond will underperform a
reasonable fixed term deposit rate - 3% for example?

Re: Latest

darag said:

it's like a bookie telling a punter that they're up
100 quid a mile into a three mile race.

Click to expand...

darag - that's a great comparison. I wish I had thought of it when I was making my submission to IFSRA on the advertising of the product.

If BCP reports these figures to their customers, then the customers should be allowed to cash them in at the quoted values.

Brendan

BCP

You guys really are a pig-headed bunch.

The not-an-inch form of discourse is truly depressing.

Any give? From anyone? Any remote possibility that isn't as bad a deal for the investor than has been made out heretofore?

If it ends up doing well over the nest 3 years I've no doubt there'll still be no give.

So an investor who has a long-term horizon of say 10 years in Quinn Life Index Tracking fund or a basket of 10 leading Irish shares couldn't care less if the investment has grown during the first 8 months or not?

"Hello Mr. Client, your investment is down 36% since last May"

Or

"Hello Mr. Client, your fund is up 36% since last May"

Who is going to be happier?

What does it matter if the fund can be accessed or not?

In the same way the punter mentioned above has no notion of cashing in for 10 years, BCP investors have no notion of cashing in for 3.5. This was made VERY clear at the outset.

Valuations sent our from this office also made it very clear that there's no way of knowing future market directions. It also made clear that the maximum return is 60%, but that having achieved 36% in the first year, it's over half way there.

The 4 times debate has been accepted before & I've no intention of covering this again.

I've little doubt this bond will significantly beat prevailing depodit returns.

I am utterly bored by this conversation & have no intention of looking at it again until I post the final results in three years.

Good luck!

Benny

Re: Latest

hi benny, i don't feel i'm one of "the guys". i'm not involved
in the industry and have a completely amateur interest in
personal finance. however, i also have an amateur have an
interest in gambling and the stock market and i've studied
how these products are constructed by the industry.

i dunno whether you deliberately ignored the point of my
previous message or whether you're too stubborn to even argue against my claim that it is disingenuous to say the
least to quote your "36% gain". it is not a gain by any
interpretation of the word.

if you don't understand the difference between someone
owning units in a fund which are worth 36% more than they
were when they bought them and your "good news" then i'd
suggest you don't understand the fundamental difference
between a forward contract and an index tracker. do you
understand that your clients have effectively bet that some
financial indicator will be at a certain level at a particular
point in time? the fact that the financial indicator is at
a particular level at this point of time has no relevance to
to your clients.

anyway, why not put your money where your mouth is?
i have nothing to do with the industry at all - i'm a consumer
- but i enjoy the odd flutter. i'd be more than happy to bet
you 500 quid if you offer me 3-1 against the fund
under performing a decent deposit return - say 3%? given
that it's already "up 36%", i feel i'm probably being over
generous. you should be delighted to lay these odds.

Re: BCP

Benny sounds like Laser already... :rolleyes

So an investor who has a long-term horizon of say 10 years in Quinn Life Index Tracking fund or a basket of 10 leading Irish shares couldn't care less if the investment has grown during the first 8 months or not?

"Hello Mr. Client, your investment is down 36% since last May"

Or

"Hello Mr. Client, your fund is up 36% since last May"

Who is going to be happier?

Click to expand...

Comparing an open ended, low charges, index tracking fund with a technically convoluted, high charges (and no dividends), fixed term tracker bond is like comparing apples with oranges. I'm also an amateur but even I know that....

Re: Latest

Quinn Life Index Tracking fund ..."Hello Mr. Client, your investment is down 36% since last May"

Click to expand...

This is pure fiction. Almost all equity funds are up over the last year. My QL Celtic fund is up about 12%

Pure Sorcery

it's like a bookie telling a punter that they're up
100 quid a mile into a three mile race.

Click to expand...

Our Founder has already commended the aptness of this analogy. But I think it is even more apt than either its originator or B realise.

You see the very nature of this beast is that with a strong gallop (i.e. bull markets) BCP Quad gets off to a flying start. Think about it. Let's say a week after launch markets have in general risen by say 2% well BCP Quad is almost certain to be up around 8%, well clear of the field (ignoring that it is starting 10% behind the rest, which BCP are wont to do). That's because his two main handicaps don't kick in until the second and third circuits of the marathon.

First handicap - a cap of 17.5%. Very unlikely that this will kick in until well into the race.

Second handicap - individual capping - even if a basket is up say 10% its individual stocks will diverge over time which as B has pointed out will mean an individually capped basket will tend to underperform the index or basket capped in aggregate. Again, think about it, this bit of sorcery can't possibly kick in until well into the race, you have to give the stocks time to diverge.

BCP Quad is currently well out in front (ignoring the 10% headstart he gave the field) but he is certain to blow up in the next two circuits, not to mention the final hill when the averaging will slow him down further on top of his two welter handicaps.

What is so terribly disturbing about this is that the trainers of BCP Quad are openly flouting it's current race position to encourage more punters to plunge in.

The Jockey Club (IFSRA) should be stood down.

Re: Latest

Merlin

Brilliant. Will you be using that in a submission to IFSRA on tracker bonds? If not, I will use it.

Brendan

BCP Quad

Oh Founder,

The BCP angle is all yours.

Almost all your criticisms have been valid and IFSRA's dismissal of them reflects poorly on them.

Just one I would caution you on. The 10% capital at risk is not really a charge - it is part of the overall engineering. To know the charge one would need to know what was paid to the bank after they laid off the deal in the derivatives market. It may well be of the order of 10% - this is one of the problems with Trackers - you just can't tell.

Re: Latest

If I recall correctly either BCP or Liberty are currently running radio advertisements which make great play of the fact that their tracker bonds are showing such and such a level of gains since inception regardless of the caveats raised above with this sort of snapshot treatment of such fixed term investments! :\

Bloody Cheeky Pups

Oh Founder, I saw on another topic that BCP had made an outrageous defence of their promotion in the submission to IFSRA.

I checked and it is true. Let me repeat.

Thay are against backtesting - what? aren't they the worst offenders.

Oh no, what BCP show is how previously designed Trackers from their stable have performed. By definition this isn't backtesting as none of those previous Trackers is quite the same. It is showing how skilfull they are in designing these products - it sort of a CV.

This is cynical nonsense - thay have turned a clearly misrepresentation into a virtue.

If IFSRA buy any of that, they should ditch this consultation mullarkey.