Trackers
Hi Rainyday,
The basic tracker model is as follows.
The institution takes your money, and puts as much as it needs into a term-matched interest paying security with interest payments rolled up till the end of the term (a zero-coupon bond), which forms the basis of the money back guarantee. They deduct their expenses (including the remuneration of distributors, if any) plus their desired profit margin. They invest whatever is left over in an option contract on an equity-based security, typically an index or a basket of indices. That option gives the client his "participation" in the equity market.
So the client gets (1) a guarantee of his money back
at the end of the term, underwritten by either the
provider or a third party, plus (2) a percentage of
the growth in the equity market over the term. What it
says on the tin.
The provider's charges and the distributor's commission are disclosed in full if the tracker is written under a life assurance licence (Irish Life, New Ireland, etc), but not if it's written under a deposit-taking licence (Liberty, RBOS etc). The market for trackers is very competitive, and a product which has higher than normal charges (and hence offers less to the customer) will stand out ... just like a poor value deposit account. So why should I care what margin has been made on it (although unlike Liam's car example, I do know the actual figure, through the disclosure statement), provided it gives me what I want ?
The current low interest rate environment has made it
more difficult for the marketers of trackers, because
more of the customer's money is needed for the "money
back" element, with correspondingly less to spend on
the equity option. This is not inherently bad value
for the customer; it simply means the price of
guarantees has gone up. What it also means though is
that marketers are scrambling to offer attractive
headline rates or gimmicks ("double growth", "up to
150% exposure", etc), which I accept makes it more
difficult to compare one product with another. In
essence though, they're all working with the same assets, and are simply packaging risks in different ways. Once you move much beyond the plain vanilla, there is a need for consumers to be aware of the way the risks are being packaged. I and others here on AAM have been critical of Liberty's Escalator Bond on this basis.
Incidentally, I also agree with US's verdict that
guarantees are probably less appropriate with markets
at their current levels than they were at the market
peak, especially as the guarantees themselves have
become more expensive. (Although it should be noted that low interest rates also make the natural competitor of trackers, the deposit account, less attractive.) But it is clear that consumers have been burned by the market falls, and they now want investment products with guarantees attached.