Wealth Options Global Absolute Return Bond

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Monksfield

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If the Dolmen product is a testament to financial engineering where does that leave the [broken link removed] product? I gather that this has sold very well and it leaves me wondering what real analysis can have gone into the 'reasons why' letters given to investors by IFAs. If they really undertood the product they would never recommend it.


GARS is a small mountain of derivatives and managed to a volatility level of 6-8%. With BNP's help a volatility control mechanism targetting a level of 5% has been put in place. This is financial engineering gone mad.


Furthermore there are four parties involved before the product gets to the IFA - Wealth Options,Standard Life,BNP and Ulster Bank. The disclosed fee of 4.75% (of which 3% goes to the IFA) would not look like nearly enough to feed all the mouths if the deposit and options are priced at 'arms length'.


Someone willing to take a 5 year risk on Ulster Bank could earn an atractive return holding RBS' 5 year senior bonds which they can get a price on daily and sell in minutes. When I looked at this last the yield to redemption on the RBS bonds was better than the return GARS would deliver even if it achieved its performance objective.


Averaging in the final year is a standard feature of tracker/structured products normally because it makes the option cheaper. It can work in the investor's favour but is most unlikely to do so with a volatility control mechanism wrapped aroud an absolute return fund.


Perhaps a themed inspection looking at the 'reasons why' letters in relation to trackers/structured products might make IFAs think long and hard about recommending over-engineered and frankly bad products such as this?
 
Hi Monksfield

Your profile of the Wealth Options Global Absolute Return Bond provides a very different picture from the picture portrayed on its website:


Key Features:

  • 100% Capital Protection at maturity
  • 100% participation in the positive performance of the BNP Paribas SLI Enhanced Absolute Return Index
  • No Cap on Maximum Potential Returns
  • No annual management fee
Would you have the time to do a simple guide to this product? It is very popular and if it's as bad as you say, customers and their advisors obviously don't understand it.



It seems to invest in the BNP Standard Life Enhanced Absolute Return Index.


Can I invest in this index directly or is it just an index?

If I invest in the Wealth Options Global Absolute Return Bond , surely Wealth Options and the IFA will have to get fees along the way as well?
 
Conor Pope recommended the fund for consideration by retiring public servants in [broken link removed]

Wealth Options has a five-year Global Absolute Return Bond, which is linked to the Standard Life Investments Global Absolute Return Strategies Fund with the stated aim of providing “positive investment returns in all market conditions over the medium to long term”. It also has a multi-asset global bond.
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I see that Wealth Options produced a poster for brokers to display in their window promoting the merits of the Global Absolute Return Bond.

They then ran a competition for their brokers called "Display and Win" where the brokers took photos of the poster in their window and were entered for a €500 prize.

Monksfield, I think you should produce a poster

"Why I would not recommend the Wealth Options Global Absolute Return Bond"
 
I dont have time to do a more detailed post now. I would be very surprised to hear that it is possible to invest directly in that index.

How well equipped Conor Pope is to opine on something as complex as this I have no idea. Unlike IFAs he has no duty of care to investors in the fund .
 
Wealth Options GARS

Brendan

in relation to some of your specific points:

(a) 100% guarantee

yes - available on many of these products

(b) 100% participation in the BNP Enhanced SLI Absolute Return index-

yes

(c)no cap on potential returns

yes,but ....the performance objective (gross) of GARS is 6 month Euribor +5%. This is quite an ambitious target for a fund run within volatility of 6-8%. With the volatility control mechanism operated by BNP targetting 5% and averaging over the last 12 months this index will almost certainly deliver a lower return than GARS itself .

(d) no annual management fee

yes,but.....does anyone seriously believe that the only revenue being earned between all the parties is 1.75%? While I am certainly not accusing Wealth Options of mis-representing the situation they only have to disclose the explicit charges. I would think that getting 5 year money in at the price paid was commercially advantageous to Ulster Bank and that BNP would have booked profit on writing the option.

The IFA gets 3% out of the 4.75% of explicit charges.

As for doing an alternative poster I would not waste my time. Most IFAs dont want to hear criticism of this kind. It suits them to combine the excitement of GARS with a guarantee using the magic of financial enginering. How it happens or whether it represents value for the customer seems secondary to selling something in hard times.

The transaction could not hang together at all if UB was not forced to pay up for longer term funding but that could be exploited buying a perfectly liquid corporate bond. This is the crux issue in terms of 'reasons why' - a slight probability of outperformance ( adulterated GARS over 5 year re to RBS senior bond) is being traded off for giving up liquidity.

It is probably an outstanding piece of financial engineering and product development from the perspective of sales (great for WO and in the short term for IFAs) but in my opinion it is not something which IFAs should be recommending.

A 'reasons why' letter which says "the customer wanted a guarantee so I gave him one" will hardly satisfy the regulator and questions of how well the IFA understood what it was linked to and the structure of the product are likely to expose the lack of analysis.

I wonder are those questions likely to be asked?
 
GARBage

Awful product. Totally misleading disclosure.

Volatility control of 5% means the Cash Bonus is of very little worth, on a Black Scholes formula less than 50% of the 15.25% value disclosed in the brochure.

As with all Ulster Bank Tracker Bonds it totally avoids the requirements of the Consumer Protection Code to disclose all costs. The only costs disclosed here are the 4% intermediation costs. The actual costs including Ulster Bank's are way in excess of 10%.

The return on the deposit portion is okay but only if a deposit guarantee applies. They have not returned my call on a query regarding the level if any of deposit guarantee which applies.

For those of a sneaky inclination, have a punt. If it works out, fine. If it fails, there is so much flaunting of the Consumer Protection Code here you should be able to sue for your money back plus interest:p

This kind of parasite product will give GARS a bad name. GARS itself seems to be quite a suitable fund for direct investment.
 
I thought it unusual that the brochure did not refer to the Deposit Guarantee Scheme. It is probably because they have said that it is suitable for ARFs the exact legal position of which is not well defined - AFAIK ARFs are outside the DGS.
 
To clarify GARS fund targets cash +5% over rolling 3 year periods with a volatility range of 4% to 8%. The fund has achieved this over the last 6 plus years.
You can compare the BNP enhanced absolute return fund versus GARS if you have access to Bloomberg. Needless to say GARS is outperforming it.
The biggest risk for investors today is counterparty risk and most CPPI products carry a high degree of this.
Would I lock monies away for 5 years in this world? Not a chance. Key for me is diversification and liquidity. Then I look at risk and return.
 
More thoughts on why this is a poor proposition. Let us compare it with GARS itself.

1) It seems that after 5 years you will get the exact same return on this bond as if you invested directly in GARS. I am presuming here that when the brochure states that the customer does not benefit from the underlying income that they are misunderstanding their own product:( GARS return without its income would be truly awful.

Except:

2) If GARS is negative after 5 years you get your money back. The nature of GARS is that there is virtually no chance of it being below water in 5 years, it is effectively a glorified cash fund. So the capital protection, unlike with conventional Trackers, is next to worthless.

3) You are averaged out over the last 18 months. Even for a volatile underlying this is OTT, for GARS it serves almost entirely to reduce the ultimate return with the minimum of advantage from the protection against last minute falls.

4) And of course you have no access to your investment for 5 years. This is the price one has to pay, say, for a Eurostoxx Tracker but at least it can be justified by the fact that Eurostoxx should be regarded on this timescale anyway. GARS is a completely different kettle of fish, as I say it is in effect a glorified cash fund. Locking into GARS for 5 years is really silly.

Other points:

Why oh why volatility control this animal? GARS volatility is between 4% and 6%, volatility control serves very little purpose except of course to sound oh so sophisticated. The brochure waxes with diagrams on how vol control increases your exposure in rising markets and reduces it in falling markets. This is a very dubious proposition for conventional assets, for GARS it has no basis whatsoever. How do the compliance people in these outfits pass these brochures? Oh I know, they don't understand it and are blinded by the geniuses in the back office.

And I repeat the disclosure of charges in this brochure is totally misleading and completely disregards the requirements of the CPC.:mad: Monksfield makes the point. The following mouths get fed from this beast:

Dolmen 1%.
The intermediary 3% , these two are the extent of the disclosure
Ulster Bank, I would expect that UB get at least as much again as the above two
Standard Life the charges on GARS are not inconsiderable. The investor is indirectly paying these. This is unlike conventional underlyings which are typically indexes of share prices i.e. with no management charges.
Paribas for providing the totally unnecessary volatility control.
 
@Duke

Afraid I disagree strongly with the statement that GARS is a glorified cash fund. It was up 19% in 2009 and shows a correlation with global equities of around 0.55.

It could quite easily lose money in a given year especially as being managed against a 3 year time horizon - one of its strengths.
 
Monksfield said:
@Duke

Afraid I disagree strongly with the statement that GARS is a glorified cash fund. It was up 19% in 2009 and shows a correlation with global equities of around 0.55.

It could quite easily lose money in a given year especially as being managed against a 3 year time horizon - one of its strengths.
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That's an impressive return indeed. Nonetheless Standard Life benchmarks it against cash, hence my description. It also states that in aggregate it will never have more than 40% invested in equities. That looks cautious to me and they themselves put it in the low volatility category. Hence totally unsuitable for Tracker style product and I stand by my comments.

Though I repeat that 19% looks mighty impressive for a fund that could never be more than 40% in equities:cool:
 
1) GARS (UK fund gross of fees) has returned 8.2% pa over the last 5 years to the end of August 2012. This is definitely more than cash over the last 5 years! I very much doubt that this bond will deliver a return like this over 5 years! More like your money back. But what will inflation be over the next 5 years? The investor could end up with a negative real return!

2) GARS is not a glorified cash fund! Fact.

3) GARS volatility range is 4% to 8%.

4) GARS benchmark is cash as it is an absolute return fund which is looking to get a positive return in all market conditions. Hence you need a benchmark that will always be positive and is priced daily. The fund uses 6m Euribor.

5) GARS can not hold more than 40% of its risk budget in equities (or any asset class) which is different than 40% of exposure in equities. This is to make sure the fund has diversification.

6) I think the reason why there has been a growth in guaranteed absolute return funds is that the odds are the investor will at least get their monies back while all parties get paid. As you have pointed out there is no AMC on these products however all the underlying parties get well paid. I make it 6 mouths that get feed - the fund manager, BNP, the guarantor (Ulster), the product provider (Wealth Options), the platform (Irish Life) and the broker. This fee will definitely reduce the potential of making money for the investor.
If I was investing in a CPPI fund I'd like to invest in something very high risk as I'm guaranteed to get my money back so I'm looking to max potential upsides. Obviously this is very expensive and risky for the product providers to do this at this point in the cycle.
 
Okay, I stand ejected, GARS is not a glorified cash fund.:eek:

But other criticisms of this particular GARBage stand:

5 year capital protection almost worthless, because of low volatility in first place.

Straight investment in GARS without the 5 year lock in much better.

18 month averaging confers practically nil policyholder benefit but denies 9 months return.

Volatility control totally unnecessary given that it is low volatility to begin with, there is no early access (main reason for volatility control is to smooth ups and downs), 18 month averaging means there is no exposure to final volatility. Volatility control is an unnecessary cost providing no benefits.

Brochure is offensive in promoting the inherent investment magic of volatility control.

Far too many mouths to feed.

Disclosure is totally misleading on charges and is in brazen contempt of the CPC.

And if it does not enjoy a deposit guarantee, I am not hearing anything on that yet, I wouldn't touch it with a 40 foot pole.:mad:
 
Another mouth?

@Offiah

When did Irish Life become involved in or with Wealth Options GARS ?

There is no mention of them in the brochure I have.

I thought there were more than enough mouths to feed here already !

@Duke

My brochure has 12 month averaging but you may be looking at a more recent tranche of the product in which it moved to 18 months.
 
Yep 18 months in the latest offering Monkie, I'm looking at the link in your OP, Version 7 of the GARB.

Thinking about it again and without withdrawing any of my criticisms, one appears to be getting 100% of GARS and with no "explicit" entry charge as would apply to direct investment in GARS. Though I presume after 5 years there is no penalty and therefore no explicit entry charge on GARS itself. So on a five year view direct investment almost bound to be superior with only a very small chance of it being below its initial value. Can't see any reasonj whatsoever to chose GARB over GARS and plenty of reasons not to.

The 18 month averaging is obviously a major contributor to the costs of this product. The other major contributor are the charges within GARS itself. The various parties in the food chain will be taking a share of these charges.
 
Because of the volatility control mechanism, the averaging and the charges there is little or no chance of performance coming in anywhere near that of GARS itself. In turn GARS will be doing well to match the performance of the (liquid) senior bonds of RBS which are essentially the same credit risk.

Because of the guarantee you might be willing to sacrifice quite a bit of the performance but in buying GARS itself you have something liquid (probably early surrender penalties) but realiseable in a couple of days.

I would have thought that liquidity as a concept is now better appreciated and that you would want to be well rewarded for giving it up.
 
Monksfield said:
Because of the volatility control mechanism, the averaging and the charges there is little or no chance of performance coming in anywhere near that of GARS itself.
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I have rather let this volatility control mechanism slip under my radar.

You said in OP that GARS targets volatility in 6% to 8% range. That means that a 5% volatility control mechanism will be exposed to GARS in the range 5/8 (62%) to 5/6 (83%). But its worse, it seems to me that it is entirely inappropriate for GARS. Let me explain. GARS itself manages its exposure to risky assets. Its apparent good performance so far must be down to being risky at the right time. Volatility control will reduce its exposure to GARS at exactly those times when the managers think the risks are worth taking.

And there's me thinking volatility control was harmless - it is another mechanism for squeezing charges out of this product and as Monkie says should seriously detract from performance compared to GARS itself.:(
 
Correction

Duke is correct in saying that the volatility range applied to GARS by Standard Life is 4-8% rather than the 6-8% I quoted. I think I may have used data on actual volatility from a previous report which took in a period when market volatility was particularly high.

This makes wrapping it with another volatility control mechanism targetting volatility of 5% even more ludicrous.
 
I have been able to calculate the Volatility Controlled GARS back to 1/1/2008. The results are as I might have expected. On average the VolCon was 89% invested in GARS and over the period came in at 7% less than natural GARS.
 
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