Be wary of "100% Capital Guarantee Inducements", Study AAM Best Buy thread.

O

oldtimer

Registered User
Messages
849
With SSIA's now matured many investors will be looking at 100% capital guarantee products.

Other threads have outlined the poor return on these and I fully endorse these sentiments.

Five years ago I thought they looked the answer to investing - no loss of capital while participation in investments with the potential for great gains. Well mine are now matured or about to mature and so far I would have fared better if simply putting the money on deposit.

I took out 3 trackers with Northern Rock and a 3 year investment with Ulster Bank. Two of the trackers have matured at 3% per annum while the Ulster bank investment did what was guaranteed - just got back my capital.

At the moment i have an EBS secure Investment Account due to mature in Sept 08. Last year it returned 2.9%. gross.

So to newcomers to lump sums - my advice is do not be fooled by the ''100% capital guarantee and potential for good returns.'' Study carefully the ''Best Buys'' thread on AAM. Such knowledge was not available to me 5 years ago.
 
Re: "be Wary Of 100% Capital Guarantee Inducements

oldtimer said:
Two of the trackers have matured at 3% per annum while the Ulster bank investment did what was guaranteed - just got back my capital.
Click to expand...

I'm afraid oldtimer the news is a bit more depressing than that. As always you need to consider the real return on your investments. The value of the CPI for mid - December 2006 was 115.7 ( mid - December 2001 = 100 ), in other words the cumulative rate of inflation over the last five years was 15.7%. €100 euro invested in your Ulster bank investment five years ago had a purchasing power in Dec. 2006 of € 86.43 i.e you could purchase €13.57 less worth of goods and services than you could five years previously ! Your two tracker investments just about kept pace with inflation if you didn't have tax implications from the nominal gains.
 
Re: "be Wary Of 100% Capital Guarantee Inducements

I heartily agree.

There is a view out there that offering a bond with a 100% guarantee ticks all the boxes and "thats all right then". The truth can be that your chances of getting decent upside are worse than winning the Lotto. This is what punters dont realise (and the vendors do!). Unfortunately the Consumer Protection Code did not cover off this issue (although it made good strides in the right direct).

The fact is that when you take out a 100% guarantee product you should be "expecting" to get a cash return plus a little bit. You might hit the jackpot but more likely you get your cash back minus inflation.
 
Re: "be Wary Of 100% Capital Guarantee Inducements

You can't have it every which way. You mention that you should be 'expecting to get a cash return plus a little bit'. Unfortunately you can't get that without risking something. You either stick your money into a deposit account and be happy with low interest returns, or you risk some of it and end up with higher or lower than that. In your case, you risked some of it and, as it happened, you got lower than cash returns. No doubt in other periods, people got higher than cash returns.

The reality is you can't have a capital guarantee AND the prospect of excellent returns. I think it's misleading to suggest that the prospect of 'decent upside' is in the lotto odds territory, but perhaps the point is if you do want 'decent upside' then you are going to have to take on a bigger risk than you did. What you traded off was the prospect of slightly better than cash returns against the safety of a deposit return. However as you didn't want to risk any of your original capital, then you were never going to get any very significant returns. I think the problem with some of the capital guarantee products is that sometimes people think they are the holy grail - prospect of great returns, but no risk to your capital. That just is not possible. It may also be that sellers are promising far too much from the product. That might seem to have been the case here. I would be concerned that you ever thought you 'might hit the jackpot' from this product. The lotto is the product for that.
 
Re: "be Wary Of 100% Capital Guarantee Inducements

Assuming that your trackers were linked to equities then you can't really complain. Equity indices were still falling in 2002 and only turned round in March 2003. People who started 5 year products from March 2003 onwards should do well providing there isn't a drastic sell off from here. And investors who have had shorter dated trackers maturing recently will have done very well, so they won't share your views.
 
I have come across a recent capital guaranteed bond that my father took out around Sepember/October 2002, which for reasons I will not go into, had to be encashed. He invested €100,000 which was capital guaranteed together with yearly bonuses to keep a real value intact. He was advised to keep it for 5- 10 years due to the nature of it but he has recently received back, in April 2007, €160,000 (which I belive is a value of about €180,00 less exit tax of 23%). The broker/company advised my father that this value represented an extra terminal bonus as the stockmarkets had outperformed the yearly bonuses put on. This would seem to me a very healthy return considering the nature of the product. I will not mention the product unless needed as this is not an advertisement, rather a different view to some items above.
 
Leprechaun - go ahead, name it. With returns like that I need to know. In Sept/Oct 2002 I searched everywhere for the best places to invest. Want to know how I missed this one.
 
saw in indo today Pramit ghose from bloxham was very anti capital guarenteed 5 year products as only down time was 1969-74 for the iseq and average annual was double digit (up to 20%) since 1956.
While past performance is no guide this is a good argument for avoiding capital guarenteed products in my book.
 
Hi Oldtimer,

I have PM'd you with the details as I would prefer another opinion. I received paperwork confirming all of these details. It appears very good to me however I do not deal directly in the investment arena...
 
You must log in or register to reply here.
Back
Top