Kick Out Bonds

Read it last night. A very well written article.

These products are so complex and difficult to understand, there is no way the ordinary investor can understand what they are getting into. As I always say, if you don't understand it, don't invest in it.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Brendan Burgess said:
Rory Gillen has just written an article on the topic:

Structured Investment Products are for Sellers not Investors
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Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion. My adviser tells me Societe Generale were looking for a retraction. The reply was sent to the broker community months ago.

On Kick Outs I'd be interested to hear some feedback on this one I'm looking at. Its the Wealth Options Bluechip kick out 6. A PDF is on their website. Its offering a 10% return on a 15% downside of 4 stocks. Capital at risk if one stock drops by 50% and none of the others are above starting price in 5 years time. All Euro based stocks and analysts bullish on Europe so an investment paying 10% on stocks that can drop by 15% seems very attractive. Any thoughts on this one
 
caljaclew said:
Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion. My adviser tells me Societe Generale were looking for a retraction. The reply was sent to the broker community months ago.
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Have you a link to that reply?
 
My understanding is that 10% is gross. You pay 5% in commissions and fees.
In an ideal situation, you want this to pay out after 12 months, so you're getting a maximum 5% return after fees. In a situation of payout at 12 months, your upside is limited to that.
Downside is not unlimited in certain scenarios.

I'd prefer to be invested directly in the shares. Unlimited upside, and you control when you get out - either if you want the money for something else, to limit your loss if the market turns, or you want to leave for long term growth.

Looking at the fee structure, I can see why a broker would recommend.
 
No that's wrong, 10% is the return if the 4 stocks drop by up to 14.99% accumulating by 2.5% every quarter after year 1 so plenty of kick out options. The fees and broker commission don't impact on the 10% other than if they did not exist the coupon would be higher but then there would be no product. Broker is very upfront re this.
 
caljaclew said:
Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion.
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Is the the same BCP which offered a "Quadruple Growth Bond"? Except that it never quadrupled the growth of anything.

Brendan
 
Can we all agree that there is a relationship between risk and returns? The more investment risk you take, the greater the expected return. Structured bonds seek to defy economics by offering low risk and high returns. When they make these promises, their marketing material tends to be light on the detail of how this is done. It is usually only on request that the small print is issued and even then it is difficult to follow. If you believe that the producers of these products can defy economics and market forces, lock your money away with them for a number of years and get the limited growth potential that they offer. If you don't want any investment risk, leave the money on deposit, where you have access to your money and a fixed rate. If you want the chance to make a few quid, invest in the markets and enjoy ALL the gains of the markets...but be prepared to share in the losses too.

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

Attachments

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SBarrett said:
Can we all agree that there is a relationship between risk and returns?
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Sorry Steven but that is a bit of a cop out. There is such a thing as understanding an investment, being able to correctly price it, recognising when the market has mispriced it.

This cannot be done at all without hard work and a certain level of expertise, and on average the average investor fails at it, but it is what investment should be about.

As a professional investment advisor this is what you should be encouraging your clients to consider. Otherwise why not just put a message to buy ETFs on the answer machine and close the door.

Many investors recognise that they are too lazy or too stupid to understand their investments and importantly that some risk can be diversified away, so that they do not try to understand their underlying investments and simply buy a spread of investments at whatever risk profile they are comfortable with.

Of course understanding the underlying investment is not what structured products are about either.


The concept of buying an option to guarantee capital at a future date and using the rest of the principal to purchase an option is not fundamentally unreasonable. Although in the present time of low interest rates it is more difficult than in a high interest rate environment.

My objection to these structured products is that they are designed primarily to produce income for the sellers and that they are opaque.
 
My fear is that these products are being missold and that at some point an OAP or other vulnerable client will have their capital base permanently devastated when one of them blows up.
 
Cant see a way to attach a PDF. Steven I note you did in one of the posts. Can you advise on the method
 
Gordon Gekko said:
My fear is that these products are being missold and that at some point an OAP or other vulnerable client will have their capital base permanently devastated when one of them blows up.
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Is that not an issue of adviser incompetence/mis-selling rather than a product problem. It does not take one of these investments to wipe out a vulnerable clients capital base and would having protection in a down market not protect against this.
 
caljaclew said:
and would having protection in a down market not protect against this.
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But would you really have protection in a down market. Who knows. Only somebody who has read and fully understood all the terms and conditions, i.e. nobody.
 
cremeegg said:
But would you really have protection in a down market. Who knows. Only somebody who has read and fully understood all the terms and conditions, i.e. nobody.
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I don't really get your point here cremeegg and apologies if I'm missing something. Why would nobody have protection in a down market if the product provides it. I don't see how difficult it is for a person to read a brochure where it says if the market falls by 50% your money is at risk and not understand it. If someone is not willing to read from cover to cover the brochure on where they are investing I think they are idiots.

Going back to why I posted here again was to get some views on the Wealth Options Bond. I understand from the letter I got from my broker that if one stock drops below 50% and none of the others are above the start price my capital is at risk(this was in red writing and bold font along with notice of his 2.5% fee from provider). If one stock is above the start price on the final day my capital is protected. If they drop by up to 14.99% I'm getting 10% back rolling every year for 5 years to a potential 50% if it takes that long for them to be above 85% of there starting price.

Am I missing anything in my understanding of the bond or has the broker not told me something.
 
caljaclew said:
I understand from the letter I got from my broker that if one stock drops below 50% and none of the others are above the start price my capital is at risk.
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What does "at risk" mean, does it mean wiped out, or do you get some part of it back, if so what part?

caljaclew said:
I understand from the letter I got from my broker that if .... one stock is above the start price on the final day my capital is protected.
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Does "protected" mean fully guaranteed ?


caljaclew said:
If they drop by up to 14.99% I'm getting 10% back rolling every year for 5 years to a potential 50% if it takes that long for them to be above 85% of there starting price.
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Is this operative only if one stock drops below 50%, or anyway? What does "they" mean ? all 4 stocks, or 3 based on one falling 50%, or something else.

More than any of the above I don't understand the economic logic of the investment strategy except to entice in investors. And for that reason I wouldn't invest in it.

If you don't understand the economic logic the I suggest that you shouldn't invest in it either.

If you do understand the economic logic, please explain it to me.
 

I have exposure to property, US Stocks, FTSE and emerging markets. I've no bond exposure which is something I'm addressing also. I wanted European Exposure as my reading is there is scope for growth here but I'm mindful of a pull back in equity markets. Broker offered me a passive Eurostoxx index tracker at 0.75% amc and this investment as possible options. My logic (whether it qualifies as economic logic in your eyes or not is to be determined) is that I can have the best of both worlds here. If Europe goes up these big blue chips will hopefully rise with them and I get my 10%. If it and the stocks plateau or dip by up to 15% I can make a return of 10% and it would have to be a major correction for a loss of capital. If that major correction occurred with index tracker I'm out of pocket ! Here I'm out of pocket only on a 50% drop in a big blue chip and no performance from 3 others. Again if I'm missing something please tell me.
 
Does the ordinary punter have the ability to assess the credit risk of the underlying bank?

I note that these products have gone from JP Morgan credit (safest bank in the world) to Soc Gen and similar.

These are complex products and I struggle to see how retail investors can be expected to understand them.

And they yield huge sales commissions; a lethal combo.
 
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