IFSRA and geared tracker bonds

Re: another solution

Amellion

That's a great way of looking at it. If I am going to risk €4k a year for 5 years, why not put it in a very high risk/return product? It wouldn't have to be a geared tracker, it could be a geared equity fund, if such things exist. Or a technology fund.

Brendan

Re: another solution

Eoghan reviews Permanent TSB's offering in today's SIndo.

Re: another solution

There is also a very interesting article by Niall Brady in today's Sunday Tribune. He has seen some confidential discussion papers circulating around the Society of Actuaries.

Tony Gilhawley estimates that there is a one in three chance that many trackers will return nothing more than the saver's original cash.

Brian Woods or AIB concludes that the expected return from a typical geared tracker( which I believe is the Irish Life and Permanent tracker) is €21,000, while the interest will cost €28,000. So, the expected loss will be €7,000.

As I understand the article, here are the possible outcomes for someone who borrows €100,000 to invest in the Irish Life tracker

30% chance of a nil return on the tracker, so the loss would be the €28,000 interest.

1% chance of hitting the maximum return of 80%, which would give a profit of €33,600 after interest.

The average expected return is €21,000, or a loss of €7,000 after interest.

So you are taking a 30% chance of losing €28,000 in exchange for a 1% chance of making €33,600.

Bill Hannan of Irish Life disputes these figures on the basis that an upward movement in stock prices is more likely than a downward movement.

The product is aimed at "sophisticated" investors. You must be able to show a minimum income of €75,000 and the minimum investment is €100,000. But if you have an income of €75,000 and you have experience in borrowing to invest in the stockmarket and you expect the stockmarkets to rise over the coming years, surely you can tolerate a fall if it happens. These investors would be far better off investing directly in the stockmarket.

Brendan

Stockmarket models

Brendan,

Clearly the model being used by BW does assume a more likely chance of markets rising than falling - otherwise the chances of Nil return would be 50%.

I think BH's argument is that none of these Models ever assume that we may be in a cyclical trough with a bias looking forward for a significant upward correction.

BH does not himself argue that we are due a bounce but merely that some investors may think that way.

But, as you correctly point out, if that's what you believe there are far more tax efficient and cost effective means of enjoying that bounce.

Niall Brady Does it again

Niall Brady has written the epitaph for geared trackers. Great to see these creatures strangled at birth, but its a REAL worry that, once again,consumer protection in Ireland's financial market has been left to the media, and some outspoken industry people prepared to blow whistles.

Brady's piece should accompany every geared tracker sale. IFSRA are a disgrace - but hadn't we been well warned about that too? And if I recall Niall Brady ran up the flag on that one as well.