zurich Super cap fund

[Duke of Marmalade]

We're not talking about enhancing the return, we're talking about protecting the customer from capital losses in the event of significant increases to bond yields. That's why the swaptions are there. They're an insurance. The premium is the loss of upside in the event of further interest rate falls, the benefit is avoiding serious capital losses if interest rates go up.

The Swaptions are there as insurance against large drops in the value of the fund. But the punters have this insurance in their contract anyway so this is only protecting the company from the guarantee being called. Insurance costs money. It is in fact a hidden charge.

 

[DerKaiser]

The Swaptions are there as insurance against large drops in the value of the fund. But the punters have this insurance in their contract anyway.

Only at specified points i.e. chosen retirement date on pensions or 10 years in on investments. So if, for example, you've been 15 years in the fund and want to switch out, the use of swaptions to control of investment volatility ensures that you don't have to worry about any sudden fund drops in the months or years before you switch.

so this is only protecting the company from the guarantee being called..

It is true that anything that protects the customers from large losses reduces the possibility of the guarantee costing the company lots of money.

Insurance costs money. It is in fact a hidden charge.

Downside protection does cost money, the cost is the loss of upside gain if bonds make significant capital gains. This is not hidden. The control of volatility is a stated aim of the fund.

 

[Duke of Marmalade]

Only at specified points i.e. chosen retirement date on pensions or 10 years in on investments. So if, for example, you've been 15 years in the fund and want to switch out, the use of swaptions to control of investment volatility ensures that you don't have to worry about any sudden fund drops in the months or years before you switch.


It is true that anything that protects the customers from large losses reduces the possibility of the guarantee costing the company lots of money.


Downside protection does cost money, the cost is the loss of upside gain if bonds make significant capital gains. This is not hidden. The control of volatility is a stated aim of the fund.

It is more normal and transparent for the company to charge, say, 50bp for the guarantee and buy the swaptions for its own account.

Swaptions are just like insurance. They pay out on the trigger of the downside risk but on all other occasions, and not just those where there is an equivalent upside, the premium is lost.

 

[DerKaiser]

It is more normal and transparent for the company to charge, say, 50bp for the guarantee and buy the swaptions for its own account.

The guarantee, available at certain points such as the retirement date, is actually free to the customer as it was priced in the 70s/80s when such guarantees were viewed as worthless.

Payouts at all other dates are dependent upon fund performance. The aim of the fund is to have limited volatility to deliver stable fund returns and this is achieved by holding equity collars in conjunction with the equity holdings and swaptions in conjunction with the bond holdings.

I think you're mixing up the separate situations in which swaptions can be used (a) by companies to hedge guarantees the provide to customers and (b) in policyholder funds to help reduce volatility of investment returns

 

[Duke of Marmalade]

The guarantee, available at certain points such as the retirement date, is actually free to the customer as it was priced in the 70s/80s when such guarantees were viewed as worthless.

Payouts at all other dates are dependent upon fund performance. The aim of the fund is to have limited volatility to deliver stable fund returns and this is achieved by holding equity collars in conjunction with the equity holdings and swaptions in conjunction with the bond holdings.

I think you're mixing up the separate situations in which swaptions can be used (a) by companies to hedge guarantees the provide to customers and (b) in policyholder funds to help reduce volatility of investment returns

Swaptions do not reduce volatility in investment returns. They cut off the downside risk at the expense of a loss of expected return overall. I am not referring to policies issued in the 70s/80s, I am referring to policies issued today. They may value their guarantee but they should be aware that they are paying for it in reduced overall expected returns. The guarantee today is not at all free, but its costs are far from transparent.

 

[DerKaiser]

Swaptions do not reduce volatility in investment returns. They cut off the downside risk .

Those two points are not internally consistent

at the expense of a loss of expected return overall..

Why? Swaptions are liquid assets. Trading costs do not vary much from bonds.

I am referring to policies issued today. They may value their guarantee but they should be aware that they are paying for it in reduced overall expected returns. The guarantee today is not at all free, but its costs are far from transparent.

The most recent versions have a money back on retirement (on pensions) or after 10 years (on investments) guarantee, far less generous than in the past. This guarantee, as well as commissions and expenses, would have been priced into management charge, bid offer spread, etc.

The overall charges are transparent and the benefits are transparent. If you are saying that the customer does not know what proportion of their charges are to cover each of commissions, expenses, guarantees and profit margin, then you are right. I suspect the pricing of individual elements would be commercially sensitive though and not alone would the company not be obliged to divulge this, but it would actually be imprudent to do so!

 

[Duke of Marmalade]

Those two points are not internally consistent


Why? Swaptions are liquid assets. Trading costs do not vary much from bonds.


The most recent versions have a money back on retirement (on pensions) or after 10 years (on investments) guarantee, far less generous than in the past. This guarantee, as well as commissions and expenses, would have been priced into management charge, bid offer spread, etc.

The overall charges are transparent and the benefits are transparent. If you are saying that the customer does not know what proportion of their charges are to cover each of commissions, expenses, guarantees and profit margin, then you are right. I suspect the pricing of individual elements would be commercially sensitive though and not alone would the company not be obliged to divulge this, but it would actually be imprudent to do so!

I am sure this has got so boring for other contributors that we are alone here and nobody is listening. Anyway I still think it is fun.

Swaptions are wasting assets like all insurance. We hope they waste away entirely and the insurance does not kick in. Thus we give up a bit of the growth in the outcomes which do not trigger the insurance for the comfort of that safety net. I think we both agree that the insurance does not come with no downside, you implied that it was only a deduction from scenarios which are showing strong capital gains, I am simply pointing out that there is the same deduction for all scenarios which do not actually trigger the insurance.

Yes, swaptions reduce volatility somewhat just as insurance somewhat dampens the volatility of earnings for a corporation. But if the dampening of volatility is in any way significant you finish up with the equivalent of cash. Just as if a corporation sought insurance against any volatility in its earnings it too would finish up looking like a deposit.

I am not asking for the granular disclosure you suggest. But I am confronting any impression which may be being conveyed, inadvertently or not, that swaptions are win-win. IMHO a fund with 78% in sovereign bonds is quite conservative enough, given the 75bp fee drag, without strangling it altogether with swaptions.

 

[DerKaiser]

True, no one else listening I suspect!

You are right that there's no free lunch anywhere - guarantees cost money. Also you cannot create a fund with the risk profile of cash but the return of riskier bond portfolios.

On the face of it, sovereign bonds are very conservative. A fund like this, however, could lose 10-20% value over a period of time in which these sovereign bond yields returned to historic norms.

 

[Duke of Marmalade]

True, no one else listening I suspect!

You are right that there's no free lunch anywhere - guarantees cost money. Also you cannot create a fund with the risk profile of cash but the return of riskier bond portfolios.

On the face of it, sovereign bonds are very conservative. A fund like this, however, could lose 10-20% value over a period of time in which these sovereign bond yields returned to historic norms.

Okay Derkaiser I think on that note we can spare AAM contributors any further boredom, enjoyed

BTW if you want to "come out" and disclose your true identity on a one to one basis PM me and I will reciprocate or if you don't trust me I will trust you to reciprocate if you ask me to go first

I feel sure we must know each other.

 

[DerKaiser]

BTW if you want to "come out" and disclose your true identity

Never!!!

 

[LDFerguson]

You're both mistaken. I was listening intently.

Oh and by the way, DerKaiser's identity is