Tracker bond linked to S&P

ccraig

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I have been approached about an investment into the S&P 500, a 2-4 year investment with a guaranteed fixed return, well in excess of current interest rates, once the index doesnt fall by more than 30% at maturity in which case investment continues

If investment falls by i.e 27% or rises by 50% there is still the fixed high interest return per year. If it falls below 30% capital could be at risk.

Has anyone come across anything like this and either way what is your opinion?

Very reluctant to commit to this sort of thing at the moment however Id be interest in opinions on the subject
 
The fact that there is downside in the event of a 30% decline in the S&P 500 means that this investment cannot be compared to a 'Fixed Interest' investment and my guess is that you would not sleep easy if it is a 'Fixed Income' you are really after. I tend to have a negative view on alot of these 'structured products' in that they are loaded with costs that you do not see. The upside/downside risk is not fully clear to me from what you have posted - do you get the 50% rise in the S&P 500 as well as the Fixed Interest or is the Fixed Interest only guaranteed so long as the S&P 500 returns remain in the -30% to +50% range on a 2-4 year view?
 
Thanks for the reply

Its been confirmed that their is a fixed rate of return of 9% per year for every year the index is at least above -30%. That return is capped so if the index is up 50% the return is still 9%

Worst case scenario: Everything is not at risk until Year 4 anniversary( in which case if the index would have to have fallen by greater than 30%) and the level at which it is down is the amount by which you final value has fallen from the opening value.


Therefore the index can fall by 30% and still recover on 1 st anniversary and you get you 9% in Yr 1 & Yr 2 and all your capital.

There are no broker commissions but there are Fee which are mentioned in the briefing document of 3.9%

This is built into structure and is not deducted off your investment or taken from growth. Eg you get 9% on you investment


no currency impact – just track index on anniversary.
 
If you buy this product you are investing in foreign developed market equities. So, if you do this, you have made a decision to: (a) invest in equities and (b) take on exposure to currency risk and well as market risk.
The first thing you should consider is how this product fits in with your overall asset allocation strategy, i.e. how much of your portfolio do you intend to allocate to equities; of that how much to developed markets; and of that how much to equities denominated in a foreign currency. Then see if this product fits into that strategy.

Or maybe you don’t have an asset allocation strategy, and your question basically is “If I invest in this product will it make me rich?”

To evaluate this product you need to know something about how the S&P performs, e.g. what is the probability the S&P will fall below 30% or will rise above 50%. Statistics on this are easily available, e.g. on page 274 of Ken Fisher’s book ‘The Only Three Questions that Count’, where you can find the S&P annual returns and the frequency that these returns have occurred since 1926. Mr Fisher provides the returns up to 2006 so it might be prudent to update his figures to take into account S&P returns since then.
You also need to have some idea on how the USD/EUR exchange rates vary, as this will also affect your return.
[Disclaimer: The above is comment / observation and is not a recommendation to follow any particular investment strategy or to buy / not buy any particular fund.]
 
Thanks PMU

Assumption a is correct, b is incorrect, It is shielded from fx exposure, should have made that clear.

I dont have an asset allocation strategy and with due respect dont have time to be leafing through fisher at the moment.

Assuming I am up on fisher and am aware there is potential upside/downside Im interested in opinion from anyone who has experience or thoughts on the S&P at the moment
 
I dont have an asset allocation strategy and with due respect dont have time to be leafing through fisher at the moment.
If you don't have the time to check up the relevant figures on the S&P you probably shouldn't be investing in it.
 
I will certainly put in the time once I have gathered some opinion on the matter and would be happy to debate it with you then.

If you have some opinion on the matter instead , I would welcome it.
 
I will certainly put in the time once I have gathered some opinion on the matter and would be happy to debate it with you then.

If you have some opinion on the matter instead , I would welcome it.

I would agree with the above poster. Just buy an ETF linked to the S&P500. Forget these products, assuming that you want to invest in equities. Here you can work out the cagr and std dev of the S&P500 for any period over the past 100 years, that should be plenty information to work out if the risk profile suits you. And I'd steer away from any equity investment if your investment period is 2-4 years.
 
ccraig, have you checked does the -30% refer to the level of the S&P as you enter the trade or is it -30% deviation from the level of the S&P on each anniversary?

These type of structures always look straightforward, but we all need to be very clear on exactly what the pay off is dependant on.
re S&P, personal view is that September is the worst month historically for equities and that you might be able to get a better entry level for this product later in the year. On a 2-4 year view I would be reasonably positive on the S&P. For these type odf structures I generally recommend capping your upside to improve your probability of getting a payout. Good luck
 
Diarmuid.
Thanks for the link. Outside of 2008 there doesnt seem to have been an annual fall since 1937 of more than 30% with it rebounding the next year.

I imagine increased leverage would make market swings a lot more volatile and again assume that there has never been the level of derivatives on the market as there are now so which probably introduces more uncertainty into the market than it has previously experienced (only opinion), however while its a spread on us stocks, there would be some comfort in that i.e not solely it/banks.

Rory/northstar
These are some of the particulars. Again I am looking at a distance and with skepticism but am interested in your opinion as have a better insight into this than I do.

Key features are as follows: Ø Potential gross interest of 9% each year
Ø Deposit based investment
Ø Capital protection at maturity unless index is below 70% of opening level
Ø Performance linked to S& P 500 Index ( no currency impact)
Ø Potential for early maturity
Minimum term of 2 year and maximum of 4 years

Potential for early maturity
Potential for early maturity
- minimum term of 2 years and maximum term 4 yearsview is that it will mature early* at 2nd anniversary

High potential payout even if Index suffers a fall of up to 30%
Designed to recover any interest not accrued in 1st 2nd or 3rd year**
Capital repaid in full as long as Index at or above 70% of opening level at
maturity.

* Subject to the index being at or above the opening level at the second anniversary date.
**Subject to the Index being at or above the opening level at an Auto-Call

a) If S&P at or above 70% of the Opening level
9%gross interest accrues at the maturity date & a capital payout* occurs
b) If S&P below 70% of Opening Level: Bond continues
No interest accrues for the perioddate or the maturity date,
whichever applies.

Potential payout at the 2nd or 3rd anniversary
a) If S&P at or above Opening Level: Bond ends early
18% (yr 2) or 27% (yr 3) gross interest and 100%* of capital investment repaid
(If interest did not accrue in year 1 or 2, it is also payable)
b) If S&P at or above 70% of the Opening level but still below the Opening
Level: Bond continues
9% gross interest accrues at the maturity date & a capital payout** occurs
c) If S&P below 70% of Opening Level: Bond continues
No interest accrues for the period

Potential payout at the maturity date
a) If S&P at or above Opening Level: Bond matures
36% gross interest and 100%* of capital investment repaid
(If interest did not accrue in year 1, 2 or 3, it is also payable)
b) If S&P at or above 70% of the Opening level but still below the Opening
Level: Bond matures
9% gross interest and 100%* of capital investment repaid
c) If S&P below 70% of Opening Level: Bond matures
No interest accrues for this period
Capital is reduced 1 for 1 in line with the fall in the Index
 
ccraig,
Let me firstly declare an interest.The product you mention looks very similar to one developed by my organisation. Though not personally involved in the product, my contribution is as follows:

- The product is not intended to give pure equity exposure at all and if that is the client's need then, you should heed the advice of others on the site and invest directly in the stock market.

- Clients generally use these products to provide the potential for an enhanced yield on their portfolio or part of their portfolio - they would also allocate a proportion to equities, bonds and other alternative assets directly.

- Whilst there is a risk that you can loose some capital, the probability of that happening is relatively low, as your starting level is going to be relatively low. As you can see, even if the index does pull back in the Autumn, you are still getting in at a relatively low level now. There has already been some increased volatility in the S&P over the last few days. In order for you to make 9% each year, the index just needs to be within 70% of its starting level. Whilst not impossible, it is unlikely that that the March 09 low will be breached, in my view. The table below should give you some comfort around short term market movements post the investment date.

S&P % increase/decrease S&P + S&P - March 09 low
@11/8/09 % increase % decrease

994 30% 1292 696 676
994 20% 1192 795 676
994 10% 1093 894 676




- You should also note that these products can only be engineered to give a high level of income when volatility is relatively high and therefore it is unlikely that you would get terms like this again over the next few months i.e. you may see products like this but the coupons will be lower than 8-9% p.a.

Products such as these can have a role to play as part of a portfolio. Effectively this product is offering the potential of a return 3 times current deposit rates, with a level of capital protection (though not total capital protection). For investors looking to hedge their bets, it has a role to play, particularly as part of a diversified portfolio.

Conan
 
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Conan
I have to say that historic charts induce optimism however past performance does not necessarily have any bearing on future performance and that the US is in a different place now that it has been in past recessions.

The banks looked showed just as attractive a trend i.e anglo until the whole thing exploded. How can you judge whether there is fair value in the s&p500 with earnings falling in the US.

There still seems to be considerable opinion out there that the index is overvalued,

There doesnt seem to be a lot going on in the US to support any massive recovery
 
Ccraig,

My own personal view is that I dislike products that offer high income assuming the market stays above a certain level, in this case -30%. You still take the risk and without the upside. That said, a well spread portfolio can handle it. I think you should get a financial adviser to talk it though with you. Of course, finding an independent financial adviser is not easy - I think there is one who contributes to this site and maybe if you ask he will email you.

Rory
 
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