"Earn 5% a year even in a falling market"

[Duke of Marmalade]

Remember if it sounds to good to be true it usually is.

That about sums it up.
Whilst it needs a stochastic analysis to properly understand the metrics of this product one can do back of the envelope calculations.
It is reasonable to posit a high chance of it kicking out after 3 years paying +15% and reducing chances of kicking out in subsequent years at +5% p.a. Barclays can be earning very little on their € deposits so, finger in the air, they must anticipate these 5% p.a. pay-outs to cost them, let's say, 20% in total.

And what pays for that? The chance that the product bombs out after 10 years at less than 50%, let's say at an average loss of 60%. So to make the numbers stack up for Barclays that suggests a 1/3rd chance of this bomb-out and not zero chance in 1,949 as suggested by the brochure. And I haven't even allowed for expenses, commission and profit.

 

[Brendan Burgess]

Is this a deposit based product (via Barclays) or a note structure?

From the brochure

TAXATION
The Bond is a listed Note and all
investment returns will be paid gross of
tax. A tax return is required each time a
coupon is paid. The current Irish
legislation surrounding Capital Gains
Tax (CGT) does not allow for a clear
categorisation of such products as being
subject to CGT. Similar products that
have been marketed in Ireland for over a
decade now have been subject to CGT.
Based on this practice and on
independent taxation advice received, it
is our understanding that this product
should be subject to CGT. Revenue law
and practice can change at any time.
BCP are not tax advisers and are not
offering tax advice on this product.
Investors should satisfy themselves
independently of the taxation treatment
of the Bond in relation to reporting
requirements and the implications of
non-disclosure.

 

[Monksfield]

To reply to an earlier question I understand that a very high proportion of BCP's structured products have paid out / avoided blowing up (those with 'soft' capital protection). Now it has to be acknowledged that they have had a fair wind at their backs in terms of markets.

But the decrement feature is nasty. And to my mind the credit risk is under-priced by most people looking at these structures. Where is the counterparty's 10 year credit priced? Where would investors be positioned in the capital structure? About every decade or two, banks manage to get themselves into bother.

 

[Steven Barrett]

Well done lads on getting a write up in Sean Keyes from The Currency on this. Pity papers more mainstream papers don't highlight how bad these products are for investors.

In times of high inflation, zero interest rates and volatile markets, people sitting in cash and looking for some sort of return are easy prey for people peddling this rubbish.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[benbuffett]

I was just looking at these products on their website. The one that offers 10% p.a called the BCP European Defensive ESG Kick-Out Bond 4 looks a lot better than the Target Coupon Bond one. I would be spreading my risk, I have funds in Stocks, ETF's (Not doing so good lately) and some Multi Asset funds in Zurich so I think its worth a small punt or am I complety off the mark?

 

[Duke of Marmalade]

I was just looking at these products on their website. The one that offers 10% p.a called the BCP European Defensive ESG Kick-Out Bond 4 looks a lot better than the Target Coupon Bond one. I would be spreading my risk, I have funds in Stocks, ETF's (Not doing so good lately) and some Multi Asset funds in Zurich so I think its worth a small punt or am I complety off the mark?

The bond closes today!
It does look better.
You will get 10% p.a. for a period which depends on when it kicks out. The most likely outcome is 1 year.
But there is no such thing as a free lunch. To have the chance to get 10% p.a. you must run the risk of losing over 50% of your investment after 10 years if things go wrong.
Maybe you like that sort of “gamble”, it wouldn’t be for me.
The key info you are missing is what is the chance of that loss.
They say they tested this over 1,300 times over the last so many years and it never failed.
That is so misleading as these 1,300 so called tests are simply repeated observations of the same bull market.
The artificial nature of the index with its 5% fixed decrement makes this much more likely to have steep drops than an “ordinary” index.
Ask them what do their nerds really think the forward looking (not back tested) chances of loss are.

 

[benbuffett]

The bond closes today!
It does look better.
You will get 10% p.a. for a period which depends on when it kicks out. The most likely outcome is 1 year.
But there is no such thing as a free lunch. To have the chance to get 10% p.a. you must run the risk of losing over 50% of your investment after 10 years if things go wrong.
Maybe you like that sort of “gamble”, it wouldn’t be for me.
The key info you are missing is what is the chance of that loss.
They say they tested this over 1,300 times over the last so many years and it never failed.
That is so misleading as these 1,300 so called tests are simply repeated observations of the same bull market.
Ask them what do their nerds really think the forward looking (not back tested) chances of loss are.

Thanks Duke, yes I just saw it is closing today so not ideal for me.

I am not a gambler, but a small amout won't hurt. I am building wealth and adding capital on the online platforms and picking some obsure ETF's in the cyber space and emerging markets, but as I said above its not going the best for me lately. This is why I want to lock something away instead of looking at it everyday!

Forward looking?? If they knew that they would be sorted and so would I.

Thanks - Mr Buffett.

 

[Duke of Marmalade]

Forward looking?? If they knew that they would be sorted and so would I.

By forward looking I don’t mean they know the future!
But the market continually puts a price on future outcomes just as PaddyPower bets on Cheltenham. Their nerds hedge this product in the market and know exactly what price they are getting on a 50% fall in this artificial index over 10 years. They certainly don’t run 1,300 back tests, one for each day of the recent bull market. But they think that is good enough for you. You should say, “no thanks I want to know what the market’s assessment is of the forward looking odds.”

 

[benbuffett]

By forward looking I don’t mean they know the future!
But the market continually puts a price on future outcomes just as PaddyPower bets on Cheltenham. Their nerds hedge this product in the market and know exactly what price they are getting on a 50% fall in this artificial index over 10 years. They certainly don’t run 1,300 back tests, one for each day of the recent bull market. But they think that is good enough for you. You should say, “no thanks I want to know what the market’s assessment is of the forward looking odds.”

Yes that makes sense, I didnt think of it that way! Cheers

 

[Steven Barrett]

Thanks Duke, yes I just saw it is closing today so not ideal for me.

I am not a gambler, but a small amout won't hurt. I am building wealth and adding capital on the online platforms and picking some obsure ETF's in the cyber space and emerging markets, but as I said above its not going the best for me lately. This is why I want to lock something away instead of looking at it everyday!

Forward looking?? If they knew that they would be sorted and so would I.

Thanks - Mr Buffett.

They are obscure for a reason, people aren't putting money into them because they are too risky or a bad investment. Otherwise, people would plough money into them.

Building wealth take times and is boring. Stick to quality companies and grow your money over the long term. It's a lot less volatile and has a more certain future.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[noproblem]

has a more certain future.

Maybe the word "certain" could be changed

 

[Gordon Gekko]

The biggest issue with these products is that they’re not aimed at me or Brendan Burgess or Colm Fagan or Steven Barrett or Sarenco.

They’re aimed at Granny Murphy who was used to getting 3-5% on her cash deposits.

 

[Duke of Marmalade]

They’re aimed at Granny Murphy who was used to getting 3-5% on her cash deposits.

And if you will pardon the black humour it is the grandkids who should be more worried about that precipice in 10 years time!

 

[AJAM]

I do think product like this (as long as they are represented accurately and not mis-sold) have a place in the market.
However with the Irish tax regime, dividends are taxed at your marginal rate. For a high rate tax payer that means your 5% dividend is closer to 2.5% after tax. The risk vs reward does not make sense. You're better off in State savings at 1% p.a. guaranteed with no DIRT.

 

[Steven Barrett]

The biggest issue with these products is that they’re not aimed at me or Brendan Burgess or Colm Fagan or Steven Barrett or Sarenco.

They’re aimed at Granny Murphy who was used to getting 3-5% on her cash deposits.

That's where you are wrong my friend. Who do you think sells them?!! There's a nice commission to be made off of these products. Wrap them into a pension or an ARF, and there's a payment for the pension/ARF and another for the structured product. There's a lot of money can be made from taking money off people's hands for them.




Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Gordon Gekko]

That's where you are wrong my friend. Who do you think sells them?!! There's a nice commission to be made off of these products. Wrap them into a pension or an ARF, and there's a payment for the pension/ARF and another for the structured product. There's a lot of money can be made from taking money off people's hands for them.




Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Indeed.

But you’re one of the good guys.

And these aren’t aimed at the good guys.

 

[Duke of Marmalade]

That's where you are wrong my friend. Who do you think sells them?!! There's a nice commission to be made off of these products. Wrap them into a pension or an ARF, and there's a payment for the pension/ARF and another for the structured product. There's a lot of money can be made from taking money off people's hands for them.




Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Good point worth discussing. The adverts on the front page of the IT are aimed at punters mostly.
But I think the majority of brokers (at least want to) believe that they are making a good recommendation for their customers. Many will be (or let themselves be) persuaded by a pseudo scientific assertion that on 1,939 backtests the product produced the 5% p.a. and never, ever failed to do so.
I attach a brochure for a very similar style of product currently on offer in the UK. This is how these products should be presented and I agree with @AJAM that it may appeal to some, provided they know exactly what they are getting into, certainly wouldn't be my cup of tea.

Page 9 of this brochure explains quite well the devious nature of the Fixed Decrement index. Punters won't understand the implications but capable and conscientious advisers should.
But most importantly it has no backtests whatsoever. Not even a reference to how it would have performed in the past.
There are illustrations of various possible scenarios from good to disastrous loss of capital which IMHO are on balance reasonably fair.
Maybe the CBI should outsource consumer protection to the FCA if they do not have the bandwidth for these complex products.

 

[Steven Barrett]

There’s an elephant in the room here. I’m not going to mince my words.

Most brokers are scum.

They’re out to fleece clients and only in it for themselves.

Structured products are grist for their mill.

Please not that I am not referring to any posters here; we are blessed with “the good guys/girls”.

Gordon

Some of the stuff I have seen would make your skin crawl. Clients being charged the absolute maximum amount possible on everything. There are enough people in Ireland who have no idea about charges or personal finance for these people to dupe. Or they exploit the non disclosure requirement on company paid pensions (why hasn't this been amended?!!!) to not disclose the massive fees they are charging people.

 

[Zebedee]

My understanding is that national regulators have the power to ban products. Binary options were banned for retail investors a few years ago. If the excellent analysis that Colm and Brian was brought to their attention, why didn’t they act?

 

[Zebedee]

From CBI website in 2019

Director General (Financial Conduct) Derville Rowland said: “The use of our new national product intervention powers demonstrates our continuing commitment to act decisively and robustly to address investor protection concerns. The Central Bank is banning the sale of binary options to retail investors as we consider them a fundamentally flawed product, which have no place in the investment plans of retail investors. They are no more an investment than betting on a horse.