Trackers looking good

Trackers

If one is investing for a period of five years, does it not make more sense to invest a proportion of their money in Anglo Irish @24% and the balance in an index tracker? This would eliminate any annual management charge or commission on the deposit portion of your money.

Trackers - How Much Clearer Could It Be ??

Hi Darag,

How much clearer do you want it to be ? If you buy one through a life assurance firm, you're told (1) what you'll get, (2) how much the firm is charging you, and (3) how much their distributor is being paid in respect of your business. What more do you want ?

The firm is hardly going to overpay for the option or the zero coupon bond, because that means they'll have a crappy product and will get no business. For the basic tracker model, one with 20% participation won't fly when everyone else is offering 50%. In any event, there's nothing in it for them to do so.

I accept (indeed I said) once you get into the bells and whistles (caps, collars, floors, gearing, etc etc) it does get more difficult to compare products. Maybe that's where the adviser {gasp} can earn his or her corn.

Re: Trackers - How Much Clearer Could It Be ??

Hi Dogbert.

Maybe I didn't express it as clearly as I thought.
My point was clarity and value are independent.
Products might be clear but offer very poor value.

I gave an example of an even clearer and more
simply comparable product - mortgages. These
attributes (clarity and ease of comparison) did
not stop the providers from ripping off Irish
consumers for years.

I am suggesting that it is naive or disingenous to
suggest trackers are behond reproach because
their terms are simple and clear.

If pressed I might go further and hazzard a guess
that the trackers are probably poor value based
on past experience of crappy investment products
heavily promoted by the Irish financial institutions
but that would muddy the argument.

daRag.

Re: Trackers - How Much Clearer Could It Be ??

Darag,

It's not valid to compare mortgages (pre BoS) with tracker bonds. Mortgages were and are a requirement for most people if they wanted to buy a house. So if the only available products were offering crap value, you had to get a crap value mortgage if you wanted to buy a house.

On the other hand, if you think that the potential return on a tracker bond is crap, you don't have to invest in it. You can leave your money on deposit.

Re: Trackers

Hi Dogbert - Thanks for the detail. Could you give an idea (ballpark) of what % of the original investment typically goes on deposit & what % goes to buy the option?

I'd imagine that to provide the guarantee, the % on deposit must be quite high?

Trackers - Product provider or DIY?

Rainyday and KMcD, see below from a previous post of mine.

Also, whilst I am no particular fan of trackers I do not agree with the oft touted, do your own tracker by means of a deposit and buy equities. This can never match the return available in the options market.
Lets take an example, I know of a product soon to come to the market, that will pay 100% participation in the EuroStoxx50 over 5 years (12 month averaging). Note, the downside for this level of participation is the product provider can recall the bond on the 3rd anniversary date for an attractive compensation payment.
On a notional €100k over 5 years it is reasonable to assume €80k on deposit for the guarantee and then you have €20k to buy equities with the DIY version.
Lets say a 50% increase from current levels over 5 years - the tracker matures @ €150k! On the DIY version your stocks would have to grow by 350% to match it! Allowing for tax difference, 1 yrs CGT allowance and even the dreaded dividends argument (currently 3.5% on EuroStoxx50), you would have to be some stock picker!
I know this is one specific example and maybe I'm picking the whole thing up wrong?

Provider Product

Spinner, I don't undestand!

€80K on deposit
€20K in equities
Equities rise by 50%

Why would the provider pay you 50% on the money on deposit ?

Provider Product

He doesn't, that's the point.

You've 80K on deposit and, with interest, this rises to 100K over the term of the bond. Meanwhile your 20K in equities has risen by 50% to 30K. Gross proceeds are therefore 130K, a 30% increase at a time when equity markets have risen by 50%.

That's the DIY version. In the version offered by the insurance company, the 20K isn't invested in stocks and shares, but in a leveraged option which will provide a multiple of the gain in the index. In this case the option would have to provide seven times the growth in the index if a 50% rise in index value was to pay you 50K on a 20K option price, which is what it would have to pay you to increase your total proceeds to 150K, which is what they would need to be if you were to market your product as offering 100% of the index growth.

Options

US

If I could just tease it out a little more? If I get a capital guarantee at the end of 5 years and 9 months and 100% participation in the growth of a portfolio of 24 stocks(from 15 sectors) up to a maximum of 85%, with a 'lock in' on growth on each stock @85% over the first five years. (Averaging applies over the last 9 months)

1) What is the option price likely to be?

2) Is it worth a punt(or two)?

Options

1) I'm afraid I've no idea. Besides, you might not be able to buy options on the 24 shares concerned for less than a certain minimum amount, so doing it yourself might not be feasible unless you have a very large amount of money.

2) Depends entirely on your attitude to risk.

Trackers

Hi again all,

Rainyday - it's just a function of the relevant interest rate. If the 5-year zero-coupon bond is around 4% as it is currently, then you've got to put around 80% of the customer's money into the bond, leaving the balance less expenses for the option. The big difference between today's trackers and those of a few years ago is the low interest rates currently, which lead inevitably to relatively low participation rates. However, as I posted previously, this doesn't mean they're inherently less attractive, because the lower interest rates have fed into other returns (most obviously deposits) too. It does make it more difficult to generate the "headline rate" appeal than it used to be.

Darag - the critical difference is competition. The mortgage market wasn't competitive pre-RBOS, so they made a huge difference. The tracker market <!--EZCODE BOLD START--> is<!--EZCODE BOLD END--> very competitive (ask any broker), and as Liam pointed out, trackers also compete with other forms of investment, so poor value products wouldn't stand a chance of success.

On the d-i-y versus buy issue, there are arguments on both sides. As an individual punter, you won't be easily able to buy either zeros or options, and you certainly won't get wholesale rates, which investment firms do. So you've got to go the alternative route. You're unlikely in practice to average your investment out, though you could do so (but you'd rack up a lot of commissions if it was a stockmarket product such as an ETF). The interest rate could move against you, though it could equally move in your favour. You might lose your discipline and spend the deposit money, leaving yourself totally in stocks.

On the plus side, you control your assets better in the d-i-y model. You can change your mind, take profits, alter your mix, extend the term, etc. You get dividends from your equity holdings, which you don't on a tracker. Simplistically, if stocks fall or do moderately well, you'll do better in the d-i-y model (because you haven't expended any money on the option), but if stocks do better than moderately well, you'll do better on the tracker (because your equity exposure is geared). You can calculate the breakeven point - eg assume 5 years, 80/20 d-i-y split, 70% tracker participation ... the simplistic breakeven point is a stock return of 40%, though you'll also have got dividends on the d-i-y version. Over 40% and the gearing that Spinner and US have referred to makes the packaged version an (increasingly) better performer.

On balance, though, I suspect most people will (and indeed should) continue to select the pre-packaged option because (a) its much simpler, and (b) it forces you to stick to a strategy. While I realise (b) may be a disadvantage for some people, I think it'll be an advantage for more people. In my experience, the tracker market consists of people who otherwise would leave their money on deposit, <!--EZCODE BOLD START--> not<!--EZCODE BOLD END--> people who otherwise would invest in equities (though the current phase may be a bit different, with a huge swathe of investors having lost their appetite for risk), so the most useful comparison for trackers is deposit accounts themselves.

Interested in other views.

Tracker Bonds

TBs are essentially deposits with a bit of a punt, a bit like prize bonds.

The problem is that TB providers try to exact equity type margins of 1.5% per annum compared with deposit margins as low as .25% p.a.

Hence lets saythe long terminterest rate is 4%.

A long term deposit will deliver 3.5%.

A Tracker will deliver on average 2.5% after charges, with a bit of upside potential to balance the downside possibility of just getting your money back.

Not a very convincing proposition but probably as good as Prize Bonds.

Trackers

Hi Paster,

Your analogy is okay as far as it goes, but it undervalues the return potential of trackers in two key ways.

Firstly, based on historical evidence, the likelihood of equities outperforming deposits over any decent timeframe, and hence the option element of the tracker paying off, is a lot higher than the likelihood of your winning on the prize bonds.

Secondly, the payoff (if it happens) will not be randomly distributed among the customers. Can't recall the exact payoffs of prize bonds, but presumably some people win big and some people win small and some people don't win at all, even if they bought at the same time. That won't happen with trackers.

Trackers

<!--EZCODE ITALIC START--> "Firstly, based on historical evidence, the likelihood of equities outperforming deposits over any decent timeframe, and hence the option element of the tracker paying off, is a lot higher than the likelihood of your winning on the prize bonds."<!--EZCODE ITALIC END-->

That depends on the precise terms of the equity link, which should always be carefully analysed. The investor receives a percentage only of the growth in a specified index. The index specified may be a capital-only index rather than a total return index. There may be a cap. If the link is to a number of indices (or a number of shares) the cap may apply to each index (or share) separately, rather than to the aggregate basket. There may be averaging over a long period up to maturity. Each of these measures tends to decrease the likelihood that the equity link will provide any significant growth in the bond value, or indeed any growth at all. In general, the stronger the capital guarantee, the lower the prospect of significant growth from the equity link.

Guaranteed Investment Bond

Sorry if I am coming late to this debate, however I asked my question in a different section of AAM. Here it goes Iwant to invest €10000 and I was told Canada Life G.I.B. was good , as it offers a split between Eurostoxx 50 and a Fixed Interest Bond @ 4.75% p/a.
Can any of youse guys comment?

GIB

It would seem like a basic product tracking an index with build in stability of Bonds. I'm sure some will disagree but "in the past" evidence suggests that tracking indices outperform most managed funds.

I would be interested to know what charges are applied.

Canada GIB

Charges are 1.75% p.a. of fund assets.

Have only seen a very brief description of this, so don't take this as gospel. It seems to be a bit like a tracker in that your capital is guaranteed after 5 years, and that it combines the "money-back" bond element and the equity exposure.

It scores over some trackers in that you can encash along the way (no guarantees, obviously, and there are exit penalties) and that you can let it run for longer (it's open-ended). But it has the huge weakness that you don't know (as far as I can see, anyway) what your participation rate is (ie how much is in the equity element). This also means that you can't evaluate whether you've been fairly treated when you cash in your chips. It may also have Escalator Bond-type weakness if Canada Life can vary the proportions allocated to the bond and equity elements.

I wouldn't choose it unless I could see under the bonnet more.

Dividends

A lot of the postings on this thread & media coverage deals with charges/performance v. active funds /which index/averaging etc.

While relevant,the key issue with what are known as Trackers in my view is Dividend.Trackers do not capture dividend and for most of the last decade or so this did not matter much.

I have just come across two interesting papers,the first by a large US asset manager called Wellington.This shows that of a 9.1% total return from US Equities over the last 130 years,4.8% has come from Div.

Another paper by Barclays shows the Div. from UK Equities has averaged 4.5% over the last 30 years.

In what is generally expected to be an era of more modest returns,why are people so willing to pass up the source of the major part of the return delivered from Equities ?

The Barclays paper "The UK Equity Risk Premium" is available on www.barclaysglopal.com and is worth a read.For those too lazy to do so,it posits that returns from UK Equities will average 8.75% pa over the next decade.Of this Div.( & share buy-backs) are expected to account for 4% of this.

Dividends

"While relevant,the key issue with what are known as Trackers in my view is Dividend.Trackers do not capture dividend . . ."

I think this needs qualifying.

A tracker fund (i.e. a managed fund which invests in a pool of shares designed to replicate the performance of a selected stock index) will capture dividends.

A tracker bond may or may not capture dividends. The terms of the bond will link it either to the capital-only version of the index, or the total return version of the index. You need to read the the terms in some detail to find out which version is linked. The total return index includes dividends.

trackers

You are correct in terms of the need to define what is meant.

I am dealing with the animals which are being sold on a large scale to Irish investors,generally under the description "tracker bonds".

A point I didn't make in my post is that the share prices of the Equities in the index/indices being tracked would need to fall by almost 19% over a five year period for the Guarantee to be of any value (with a Div.yield of 3.5%pa.).

I fully understand why people are buying them,but many of those providing advice (& purporting to add value ?!) must know that the sacrifice of the Div. portion of the upside is poor value for the comfort of a Guarantee.