"Earn 5% a year even in a falling market"

Potentially bad outcome

The index falls below 70% before the first anniversary and stays below it for the duration. I will get no annual payment.

If it falls below 50% by the end of year 10, my investment will fall by the same amount.

So I could invest €100k today, get no return, and get back €40k after 10 years.

Best possible outcome
If the index is above 90% at the end of year 3, I will get my money back and 5% nominal a year.
 
The early repayment "opportunity".

This is not an opportunity for me. This is an opportunity for the issuer.

If this "opportunity" did not exist, and the underlying index did well, I would get a return of 5% a year for 10 years.
But if it looks as if the index is going to do well, then they have an out.

Brendan
 
The best outcome for an investor is the following combination:
1) By the end of year three it has fallen to between 70% and 90%. I will get my coupon and it won't be matured.
2) For subsequent years including the tenth year, it stays between 70% and 90% of the initial value, so that I get my annual coupon and my full investment returned.

In those circumstances I will get a 4% Compound Annual Return.
 
That is right. The only real loss the punter can suffer is if after 10 years it is below 50%. But with that welter burden of 5% p.a. decrement the chances of this, whilst small, are not negligible. My model indicates a 4% chance of a 60% loss. That is what the punter is staking for the likelihood of fairly modest upside.
I have 2 difficulties with that. The first is more one of principle: is this a valid customer proposition? - small risk of mega loss for the likelihood of modest gains. It is an asymmetry very much counter to the usual retail propositions.
But my main objection is that the totally faulty backtesting is suggesting that the punter is taking no risk whatsoever. Not to lose on 1,949 occasions out of 1,949 equates to a completely negligible risk even for those well versed in statistics. The risk is in fact 4% or 80 occasions on 2,000 proper forward looking simulations. These are not simulations as claimed, they are backtests of an unprecedented prolonged bull market.

The 4% risk of mega loss should be highlighted and indeed the KID which is required by regulation to be based on proper forward looking stochastic projections gives a very negative outlook for the product - but who looks or even begins to understand the KID?
This is a fundamental flaw in consumer protection regulation. The KID gives a reasonably fair view of the prospects for those actuaries that pretend to understand it but the marketing sweeps that all away and allows the CBI to point to the KID as being compliant.
 
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So if someone read the Irish Times ad, and bothers to read the brochure, they will see this:


This sounds to be like a risk-free investment even if it does say:



Brendan
 
This is just plain wrong.


An investor is taking on direct equity risk. A 4% risk of a major loss of capital and no annual return.

There are not high levels of capital protection.

Investors are not getting exposure to equity based returns.
 
Indeed Boss and it shows that all those statutory warnings are as useful as the pictures on cigarette packs for smokers.
In fact they are counter productive as they give the impression of customer protection being to the fore when the marketing dismisses them as the mere statutory disclosures which you would find in your average packet of paracetamol.
 

A great summary which I have added to the initial post to save people reading the thread.
 
Remember if it sounds to good to be true it usually is.And please BCP spare a thought for the ordinary simple common sense highly successful investor in the street who has no clue and is lucky that he does not understand what this is about and only understands simple bricks and mortar and perhaps blue chip companies.K.I.S.S.[m y humble opinion]
 
Is this a deposit based product (via Barclays) or a note structure?

i.e. are the returns subject to DIRT or CGT?

And if it’s a deposit based product, is the investor’s credit risk with all singing all dancing Barclays or Barclays Uganda LLC.com as these things tend to be?
 
Good questions. It is structured as a Note and as the brochure says these have been marketed for over a decade as being subject to CGT and their advisors argue that this should still be the case. But, and this is new, the brochure advises that the situation is now unclear with the Revenue - wow!
Of course pension investors do not have this concern.
 
Gordon Gekko said:
And if it’s a deposit based product, is the investor’s credit risk with all singing all dancing Barclays or Barclays Uganda LLC.com as these things tend to be?
Click to expand...

From the flyer

Barclays Bank Ireland plc is the Issuer of the Bond,
which is a subsidiary of Barclays plc. In the event Barclays
Bank Ireland plc fails to meet its liabilities, you could lose
some or all of your money
 
Duke of Marmalade said:
A summary of the results are as follows:
...
"Mature" with 150% paid out in total: 4%
Mature with money back only (but possibly some earlier 5% dividends): 5%
Mature at a loss averaging -58%: 4%
Click to expand...
These figures came from a model which assumed the average return on the stocks is 7% p.a. (before 5% p.a. decrement).
I note that the Society of Actuaries specify a maximum return of 4.5% p.a. may be assumed on equities.
Running the simulations on this reduced assumption gives the following comparable results:
"Mature" with 150% paid out in total: 5%
Mature with money back only (but possibly some earlier 5% dividends): 6%
Mature at a loss averaging -70%: 7%

Comment: A 7% chance of losing 70% of initial investment is far from a negligible risk, despite the "backtesting" supposedly indicating that on c.2,000 observations there was no loss whatsoever.
 
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