The product may, indeed, be merde……..but only if the odds are poor! If the odds are better than 1 in 5ish, then the odds may not be / are not, poor - especially so given the risk free (or least risk, if you will) alternative. By extension, certainly not reportable?
I do not enjoy the cover of anonymity, so I must be very careful what I say or write, but it’s important to document what we do know about this product and why we believed that we had to take action in the public interest.
Brian Woods came to me after a broker had shown him the product, saying that he was thinking of offering it to his clients. Brian thought it looked good, if the Index was kosher, and even suggested that I might like a piece of the action for my own pension fund. He asked me to have a look at the index.
At that point, Brian’s main beef was with the 1,304/1,304 “successful” back-tests, derived from experience between July 2009 and July 2019. As I joked, they could have shown a success rate of more than 15,000/15,000 by assuming bonds were issued every half-hour rather than every day, which is how the 1,304/1,304 was derived. There were only two independent five-year periods in that time - July 09 to July 14 and July 14 to July 19 - not 1,304, so the past success rate was 2/2. Even a 2/2 success rate is misleading: the last ten years have been good for shares (as commentators on my investment performance keep reminding me – quite rightly).
Neither Brian nor I had ever come across the index against which returns on the product would be determined, but we were impressed by the apparently superior stock-picking expertise of BNP Paribas and the invocation of gurus like Benjamin Graham and Warren Buffett.
We were particularly impressed by simulated past performance since 2001. Over the 18 years 2001 to 2019, the Solactive Index showed an average return of +2.82% pa while the well-recognised EURO STOXX 50 showed an average decline of -1.64% pa over the same period. Who could argue with that?
Warning bells rang when I read the bit in the brochure about selecting stocks that were due to go ex-dividend within the next month. Most ordinary investors – and probably most financial advisers – would not have realised the significance of this statement. I estimated that this, plus the higher dividend yield, meant that the
expected return on the Solactive Index would lag the EURO STOXX by around 3.5% a year - a far cry from the rosy picture in the MMPI brochure and in BNP’s sales literature for the Solactive Index.
My conclusion on expected underperformance of the Solactive Index was supported by analysis of actual returns between 2017 and 2019. Based on figures supplied by BNP Paribas, the Solactive Index underperformed the EURO STOXX 50 by 3.1% a year in the 23 months between July 2017 and June 2019, close to my expected 3.5% annual underperformance.
I realise that I’m putting something in the public domain for the world to read and draw inferences from, but I cannot understand how a prestigious bank like BNP Paribas could have decided to produce a brochure in 2019 extolling the long-term outperformance of the Solactive Index, even though they must have known of its expected future underperformance and of its actual underperformance in the previous two years, both completely contrary to the message implicit in the brochure. I’m not an expert on the legalities of what you can and can’t say legally, but it’s very clear to me what that is. I believe it must be stopped.