Kick Out Bonds

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Riggers#

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Hi, I would be grateful if I could get some investment advice on Kick Out Bonds which was recommended by financial adviser. I have 280k cash sitting in a bank, which I don't need for next 10 years. I received recommendation on four investment products to invest 70k in each over a term of 5 years. The financial products are two kick out bonds with one linked to EuroST00x 50 index over 5 yr term. The other kick out bond is linked to the performance of three stocks over 5 yr term. The other two bonds have 90% capital protection on maturity which are linked to the performance of 3 stocks and the other is 3 investment funds. Question I am asking does this make good investment sense. My goals is to have enough money to live on when I retire in my early/middle sixties. I have no mortgage or debts. Paying into DC company pension plan worth 60k and PRB 40k.
 
This article says it all
https://www.ft.com/content/1912d062-f1ba-11df-bb5a-00144feab49a

These bonds are expensive for you and lucrative for the producer and the seller of the bonds. Investors usually get their money back at the end of the term (provided there's a capital guarantee) and not much else.

If one of the bonds is based on the performance of just 3 stocks, you are taking a massive chance in the success of those companies.

These bonds are marketed as equity type returns with deposit type risk. Decades of academic research has shown us that such a thing does not exist. So either academia have got it wrong or someone is telling lies...

You'd be better off leaving your money on deposit.


Steven
www.bluewaterfp.ie
 
Thanks steven for your reply, I would like to have some advice on 280 k cash which is just sitting in my current a/c. Would it make sense to put 60k lumpsum into a pension AVC. 100k into PO state savings for 5 or 10 yrs. 120k into maps or shares. . I do have emergency cash fund of 30k.
I am 53 years old planning to retire @ 63 or 65.
 
I would move the 280K into an instant access account until you decide what to do....having it in current account is madness! Imagine the stress if card was skimmed.
 
As Sarenco said, it is impossible to advise based without know what you need your money to do for you. What do you intend doing when you retire in 10 years time? How much do you need your money to be worth then? How much can the market fall for you to be having sleepless nights? Or maybe you don't need to do anything with your money?




Steven
www.bluewaterfp.ie
 
Tried to post earlier but it seems my post breached guidelines. I will try and summarize my experience of kick out bonds etc in a different way so as not to breach guidelines again. I've had good experience with them. I currently have personal investments comprising

1) Passive Index Trackers that pay out on an up to 35% downside
2) Fixed income of 4% per annum for 5 years. Capital at risk if 3 main indexes(diff from above) drop below 40% in 5 years. 20% paid regardless of performance
3) Gold Tracking indexes that pays on up to 40% downside.
4) One broad based sector specific index that is going to pay out generously in a month after one year unless world falls off a cliff.

One of the big advantages I think I have is that my tax on these is CGT apart from the income bond so my CGT allowance gets utilized. Also and importantly there is no annual management charge and I've read enough on here about fees to know how important that is. I've also have a lot of down side protection coupled with the ability to make money in falling markets for the inevitable correction that's coming. I've have seen crap kick out investments but I'd be interested to hear the downsides that I'm missing on what I have in my investments above.
 
caljaclew said:
Tried to post earlier but it seems my post breached guidelines. I will try and summarize my experience of kick out bonds etc in a different way so as not to breach guidelines again. I've had good experience with them. I currently have personal investments comprising

1) Passive Index Trackers that pay out on an up to 35% downside
2) Fixed income of 4% per annum for 5 years. Capital at risk if 3 main indexes(diff from above) drop below 40% in 5 years. 20% paid regardless of performance
3) Gold Tracking indexes that pays on up to 40% downside.
4) One broad based sector specific index that is going to pay out generously in a month after one year unless world falls off a cliff.

One of the big advantages I think I have is that my tax on these is CGT apart from the income bond so my CGT allowance gets utilized. Also and importantly there is no annual management charge and I've read enough on here about fees to know how important that is. I've also have a lot of down side protection coupled with the ability to make money in falling markets for the inevitable correction that's coming. I've have seen crap kick out investments but I'd be interested to hear the downsides that I'm missing on what I have in my investments above.
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On tax, don't let the tail wag the dog. Having CGT on a bad investment isn't better than paying 41% on a good one.

No annual management fee is because the charges tend to be deducted up front!

Tracker bonds are extremely complex products and each are designed differently so I couldn't comment on each one you have without reading the prospectus. Most involve deducting fees and commissions from your investment amount, buying a put/ call option and lumping the rest on deposit for the rest of the term. If the stock price is higher at maturity, the exercise the call and you make a return. If the value is lower, the deposit return gives you your money back.


Steven
www.bluewaterfp.ie
 
Hi Steven,

The fee that was paid to the advisor and provider on each of these was between 4 to 4.5% with a roughly 50/50 split and this was made very clear up front. I have no problem with that and when I queried the impact of these fees on the investment the advisor told that if she and the producer were not getting paid firstly there would be no product and if for example she was not taking a fee the coupon payable could be circa 10-15% higher depending on the investment.

I had 100% allocation of my funds into the investment. I understood how they worked and its as you described above with the put/call option and the deposit portion. I guess one difference from what you described is that the indexes behind my investments did not have to rise to generate a return.

How I looked at this was I wanted to invest personal cash in UK and European indexes. I could do it with one of the life companies and pay 1% on the way in, a minimum of 1% in annual fees and 41% on the way out. If indexes went up, I'm getting the corresponding rise in my return. If it went down I'm losing corresponding amount.

Instead I went the kick out route, didn't pay 1% on entry, have no annual fee and if by October 17 the indexes are within 90% of its start price I get a return of 16% taxed at 33% after my CGT allowance(both look in the clear at moment). I know you say don't let the tail wag the dog but you cant ignore its advantages either.

I value the advice I read on here and am wondering if I'm missing something with the above and my approach.
 
Hi caljaclew,
Can I suggest you list the specific bonds you invested in so posters can look at the actual offerring documents - which should help with more specific replies?
 
caljaclew said:
One of the big advantages I think I have is that my tax on these is CGT apart from the income bond so my CGT allowance gets utilized.
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I would ask Revenue whether these are CGT. Here is an extract from a particular kick-out bond:
kick-out bond said:
Your investment is held in the form of a Senior Bond. Based on our understanding of current legislation, regulations and practice, we expect the returns may be subject to CGT.
WARNING: This is based on our understanding but does not constitute tax advice and investors should not place any reliance on it.
Click to expand...

If it was just a matter of structuring investments as a "senior bond" then all investments would be so structured. Another tell tale sign is that this very beneficial tax treatment is not cited in the list of 8 key features. I don't think the promoters are very convinced thmselves.
 
That's interesting Duke. I will follow up on this.
North Star the last bond I mentioned is the Blackbee Market Tracker(started Oct 15). I know the gold one is with them as well and I'll dig out the full titles of the others when I'm at home
 
SBarrett said:
Tracker bonds ...involve deducting fees and commissions from your investment amount, buying a put/ call option and lumping the rest on deposit for the rest of the term. If the stock price is higher at maturity, the exercise the call and you make a return. If the value is lower, the deposit return gives you your money back.
Click to expand...

With the current low interest rates the amount required to be left on deposit to guarantee the capital in 5 years must quiet high, nearly 95%. That leaves 5% for fees and buying the option.

What type of option is likely to be bought ? I would suggest a very speculative one, with a small chance of a high return.
 
cremeegg that is absolutely spot on. In fact there is scarcely enough to pay the fees and also meet the guarantee. I presume that these days these products involve putting some capital at risk.
 
Hi Duke, I understand there is a risk to some capital but my thinking was there is also risk in the typical fund approach. In this approach if 'markets' go up I'm getting a return. If they go down I can also make a return and unless it's a huge drop my capital is protected. If I go fund based my capital is at as much risk as if there is an event that wipes 35-40% of a main market index. Again no levy on the way in and no AMC make me think I'm doing the right thing here. I'm still waiting for a reply on CGT query.

In a benign scenario of my market tracker above if I do this via funds and kick outs and markets drop by for example 8% in the fund approach I'm down 8% plus AMC plus levy. In kick out approach I'm up 16%. If markets drop 30% I get 100% capital back in kick out but -30% in fund. If markets drop 50% in kick out that's how much I lose against what funds would have dropped under those circumstances.

I see concern here from solid posters/advisers and am wondering what I'm missing?
 
caljaclew can you post exact details of your product and I will give it my forensic treatment. As you describe it that seems too good to be true and indeed it must be too good to be true. The reality is that these are all priced on financial models which work off the same risk/reward dynamics. If you take no risk on a five year product you will earn about .5% p.a. these days. If you take full market risk it is estimated that on average you might earn 4% p.a. and after the higher charges on these products that's an expectation of about 3% p.a. but probably ranging between -5% p.a. and +8% p.a.

Now the product you describe is somewhere in between and so it's expectation has to be somewhere in between.

There are no silver bullets, there are no instruments which give risk based returns but with reduced or little risk.

I am not against structured products, at least when interest rates were high. People were in essence investing (risking) their interest in the stockmarket and psychologically for many risking interest is much more palatable than risking capital, although the purists would argue that there is no difference.

The problem, as cremeegg alluded to, is that these days there is no interest (after charges) to risk.
 
caljaclew said:
I see concern here from solid posters/advisers and am wondering what I'm missing?
Click to expand...

I think it's just a complete failure to understand the nature of these products.

I have looked at quite a few over the years. It often took a long time to find the catch, but there was always a catch. I know brokers who recommended the BCP Quadruple Growth Funds in good faith, only to be horrified that their clients got no growth at all, never mind the four times the stock market growth.

Duke says he is not opposed to them. I am because few consumers could possibly understand their complexities. And those who do would never invest in them.

Brendan
 
cremeegg said:
With the current low interest rates the amount required to be left on deposit to guarantee the capital in 5 years must quiet high, nearly 95%. That leaves 5% for fees and buying the option.

What type of option is likely to be bought ? I would suggest a very speculative one, with a small chance of a high return.
Click to expand...

As Duke said, it appears that most structured bonds don't have 100% capital guarantee anymore. The kick out option is the new thing now too. It is the company providing the option that provides the annual coupon, getting a large amount of money up front and reckoning they can make more money out of it than the coupon they are paying out.

I pay very little attention to these type of products these days. I decided a long time ago if my clients can't understand where their money is invested, it's not the right investment for them. These type of bonds are extremely complex and the even the small print doesn't make it wholly clear how they work. Which is a far cry from the 1 or 2 pagers that they give to clients to try to hook them in in the first place.


Steven
www.bluewaterfp.ie
 
Brendan Burgess said:
Duke says he is not opposed to them. I am because few consumers could possibly understand their complexities. And those who do would never invest in them.

Brendan
Click to expand...
Ah Boss let me explain:oops: The original of the species was a very simple proposition. Typically 130% of the growth in FTSE over 5 years and capital guaranteed. Simplicity itself! And as it happened these were hopelessly priced by the producers as they underestimated volatility and therefore their hedging programs produced big losses - the punters were on to a good thing! When the market settled down it was more like 100% growth in FTSE was on offer. I know, I know, FTSE did not have dividends reinvested. Nonetheless, these were good alternatives to deposits. As I said, punters were risking their interest but not their capital on the stockmarket. Investment has a lot to do with psychology and this proposition was attractive to many. But I can't see how anything meaningful along these lines can be produced in the current interest rate environment without putting some capital at risk.

Maybe you do not regard these simplified versions as "structured" products. If by structured products we mean the sort of nonsense that we saw with Quadruple bonds, for example, then I wholeheartedly agree. These were designed to look too good to be true, and unfortunately many people fell for them. I suspect that the products described by caljaclew may fall into this category.
 
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