Brendan Burgess
Founder
- Messages
- 54,788
From the front page of the Irish Times today
"Earn 5% a year even in a falling market"
- Thread starter Brendan Burgess
- Start date
Brendan Burgess
Founder
- Messages
- 54,788
(After discussing this backwards and forwards in later posts, this is how this terrible product works.)
Product summary
This is a weird product where the customers takes on a small but real risk of a huge loss over 10 years in exchange for a small return over three or four years.
Say you invest when the index is at 100.
If the stock market does well and the index rises, you will get 5% a year for three years and then they will mature the bond. In other words, if the stock market does well, they won't have to pay you 5% a year for 10 years.
If the stock market does badly and drops to 70 at any time, they will stop paying the 5%. If it recovers to 70, they will resume the 5% and pay you the missed annual payments.
If the index recovers to 90 at any time, they cash the investment. You get your money back.
If the stock market does badly and does not recover above 70, but stays above 50, before the ten years is up, you will get your initial investment back.
If the stockmarket ends the 10 years below 50, then your capital will be cut accordingly. For example, if the index falls to 40, you will get no dividends and 40% of your initial investment back.
The index is very unusual
The underlying index will rise every year by reinvested dividends which are about 2.5% a year.
But... they also knock the index back by 5% a year to allow for dividends.
So, if the underlying market remains constant over ten years, the index will fall by about 25% anyway.
So, it does not take much of a drop to fall below the 70% trigger point after which the annual 5% will not be paid.
And it doesn't take much more of a drop to fall below the 50% level at which your capital is reduced.
Brendan
Product summary
This is a weird product where the customers takes on a small but real risk of a huge loss over 10 years in exchange for a small return over three or four years.
Say you invest when the index is at 100.
If the stock market does well and the index rises, you will get 5% a year for three years and then they will mature the bond. In other words, if the stock market does well, they won't have to pay you 5% a year for 10 years.
If the stock market does badly and drops to 70 at any time, they will stop paying the 5%. If it recovers to 70, they will resume the 5% and pay you the missed annual payments.
If the index recovers to 90 at any time, they cash the investment. You get your money back.
If the stock market does badly and does not recover above 70, but stays above 50, before the ten years is up, you will get your initial investment back.
If the stockmarket ends the 10 years below 50, then your capital will be cut accordingly. For example, if the index falls to 40, you will get no dividends and 40% of your initial investment back.
The index is very unusual
The underlying index will rise every year by reinvested dividends which are about 2.5% a year.
But... they also knock the index back by 5% a year to allow for dividends.
So, if the underlying market remains constant over ten years, the index will fall by about 25% anyway.
So, it does not take much of a drop to fall below the 70% trigger point after which the annual 5% will not be paid.
And it doesn't take much more of a drop to fall below the 50% level at which your capital is reduced.
Brendan
Last edited:
Brendan Burgess
Founder
- Messages
- 54,788
This would be a very uncomfortable product to own. You would always be on edge.
On the one hand, you would want it to be below 90%, so that it remains open and you continue to get your 5% annual coupon.
But you don't want it to dip below 70%, as you won't get your coupon any longer.
And if it's around 70% in the final years, you will be on edge, as a drop below 50, will see you losing a big chunk of capital.
Brendan
On the one hand, you would want it to be below 90%, so that it remains open and you continue to get your 5% annual coupon.
But you don't want it to dip below 70%, as you won't get your coupon any longer.
And if it's around 70% in the final years, you will be on edge, as a drop below 50, will see you losing a big chunk of capital.
Brendan
Last edited:
Duke of Marmalade
Registered User
- Messages
- 4,687
No. the decrement is taken daily and would precisely cancel any underlying 5% growth. Earlier versions had 3.5% decrement. It was supposed to proxi a deduction for dividends as the underlying index is NTR (Net (of witholding tax) Total Return). I think 5% seems on the high side for dividends on these ESG stocks.
Again in English please.
BCP have been flogging "capital guaranteed" products etc. for a few decades now, so they've clearly got a customer base.
Has anyone ever done a review of how their offerings subsequently performed?
I've never put much time into any of their products, as my starting point tended to be that they were committing most of your investment to either an associated derivative provided by an investment bank, or their fees, leaving very little opportunity for upside (for the investor).
Has anyone ever done a review of how their offerings subsequently performed?
I've never put much time into any of their products, as my starting point tended to be that they were committing most of your investment to either an associated derivative provided by an investment bank, or their fees, leaving very little opportunity for upside (for the investor).
This 'decrement' product is not even capital guaranteed, see ad.
It seem to be some new snake oil that has been developed as capital guarantee products are no longer profitable enough for the suppliers.
I see that a decrement index is 'A decrement is an overlay applied to an underlying index.'
Decrement Application
Subtracting from return is the most popular type of decrement application, and it can be combined with both fixed-percentage decrement and fixed- point decrement. Oh goody. See here https://www.spglobal.com/spdji/en/documents/education/education-a-guide-to-sp-decrement-indices.pdf
The actual index referred to in the ad is the 'S&P ESG Select equal weight 50 decrement index' factsheet here https://www.spglobal.com/spdji/en/i...eight-50-point-decrement-index-series-3/#data
I cannot see what the actual decrement applied is, or even if it is applied by S&P as part of the index or by BCP, or if the definition of the decrement can be changed during the life of the product.
Am I correct in saying that a decrement index is and index after shrinking the return on some real life index.
Decrement Application
Subtracting from return is the most popular type of decrement application, and it can be combined with both fixed-percentage decrement and fixed- point decrement. Oh goody. See here https://www.spglobal.com/spdji/en/documents/education/education-a-guide-to-sp-decrement-indices.pdf
The actual index referred to in the ad is the 'S&P ESG Select equal weight 50 decrement index' factsheet here https://www.spglobal.com/spdji/en/i...eight-50-point-decrement-index-series-3/#data
I cannot see what the actual decrement applied is, or even if it is applied by S&P as part of the index or by BCP, or if the definition of the decrement can be changed during the life of the product.
Am I correct in saying that a decrement index is and index after shrinking the return on some real life index.
Gordon Gekko
Registered User
- Messages
- 7,936
In general, structured products are a joke. Rory Gillen has written some good stuff on them.
I mean, people here are pretty financially literate, and I find myself having to read-up on these products and actually think about them properly.
And this is for something that tends to be flogged to the general public on the front page of the Irish Times!
The investors are potentially like lambs to the slaughter, only rising markets keep bailing them out.
“Picking up dimes in front of steamroller” springs to mind.
As it has become harder to earn guaranteed or close to guaranteed returns, these products have become more and more nuanced and more complex.
It’s now getting to the stage where there’ll be a product based on the North Korean Share Index, but denominated in Turkish Lira, where you’ll get a guaranteed 5% a year for five years, unless Ronaldo scores 30 goals this season, Brendan Burgess wakes up on his left side more than 27 Tuesday mornings during 2022, and Tiger Woods wins a tournament outside of North America before 13 March 2024.
And yet these are marketed to retail clients (i.e. everyone including grannies) for relatively small amounts of money. What in God’s name are the Central Bank doing or thinking?
I mean, people here are pretty financially literate, and I find myself having to read-up on these products and actually think about them properly.
And this is for something that tends to be flogged to the general public on the front page of the Irish Times!
The investors are potentially like lambs to the slaughter, only rising markets keep bailing them out.
“Picking up dimes in front of steamroller” springs to mind.
As it has become harder to earn guaranteed or close to guaranteed returns, these products have become more and more nuanced and more complex.
It’s now getting to the stage where there’ll be a product based on the North Korean Share Index, but denominated in Turkish Lira, where you’ll get a guaranteed 5% a year for five years, unless Ronaldo scores 30 goals this season, Brendan Burgess wakes up on his left side more than 27 Tuesday mornings during 2022, and Tiger Woods wins a tournament outside of North America before 13 March 2024.
And yet these are marketed to retail clients (i.e. everyone including grannies) for relatively small amounts of money. What in God’s name are the Central Bank doing or thinking?
Brendan Burgess
Founder
- Messages
- 54,788
It seems that if this index falls by more than 30% you will lose this amount of money.
But even if the underlying index does not change over the ten years, a 5% compounded excrement would result in a 40% fall?
So the underlying index stays the same, but you lose 40% of your money.
But you get a 5% annual yield.
Brendan
But even if the underlying index does not change over the ten years, a 5% compounded excrement would result in a 40% fall?
So the underlying index stays the same, but you lose 40% of your money.
But you get a 5% annual yield.
Brendan
Probably busy growing vegetables on their window ledges, like a certain Minister, that I won't name (ie fiddling, while Rome burns)
Its very clear to me that the Central Bank has little interest in consumer protection, and we'd be far better off putting the responsibility for overall consumer protection, elsewhere.
Duke of Marmalade
Registered User
- Messages
- 4,687
Boss, I think it's 50% and remember the basic index is Total Return which has dividends reinvested which is not the case for household names like FTSE 100 or Stoxx 50. These excrements originally were meant to proxy the dividends of NTR indexes but at 5% that looks a tad rich. (I know GG has already cracked the sh1t joke or did you mean it, you sly devil?)
Duke of Marmalade
Registered User
- Messages
- 4,687
The Boss' question was that if you took the excrement at the end of the year then you would need to have grown 5.26% to stand still as (1.0526 * .95 =1) . But by taking the decrement (joke over) daily this doesn't happen - can't explain why in English but the math works.
Brendan Burgess
Founder
- Messages
- 54,788
I checked out their website. It's too complicated for me to understand. But it seems that under a favourable scenario, you will get an annual return of 3%
Bizarrely, it seems to decline the longer you hold it.
You are risking 70% of your investment to get a return of 35%.
This is not what I would have expected from the Irish Times advert.
Brendan
Bizarrely, it seems to decline the longer you hold it.
You are risking 70% of your investment to get a return of 35%.
This is not what I would have expected from the Irish Times advert.
Brendan
Duke of Marmalade
Registered User
- Messages
- 4,687
Yes. It is basically the primary index - 5%. The primary index here is a NTR index which is not the usual household variety (FTSE 100 etc. are capital only), so there is sort of a conscience salvo in decing 5% to make it more familiar to the housewives. Used to be 3.5% (I think) on this S&P ESG thing but now on series 4 it is 5%. I guess the dec is like any drug, you start off on moderate doses but then have to increase your fix.
Duke of Marmalade
Registered User
- Messages
- 4,687
Boss this KID is very hard to understand, but I guess most KIDs are and I intend the double meaning. PRIIPS was one of the few good reasons for Brexit.
I don't understand the reducing return in the Moderate scenario either. The ** refer you to a clarification that the figures are not actually for 10 years but that they assume the product kicks out early.
hat is one criticism I have of this product - it is described as being recommended for10 years. Well firstly it is quite unlikely to make the 10 years and secondly it if it does that is bad news for it means the index has performed badly and you will be lucky to even get your money back.
I will be following up soon with a more detailed (stochastic) analysis of the product.
Gordon Gekko
Registered User
- Messages
- 7,936
And this is being marketed to Joe Public via the front page of the Irish Times…
Duke of Marmalade
Registered User
- Messages
- 4,687
Half right Boss. 5% p.a. taken daily knocks out 5.12% annual growth.
Pinoy adventure
Registered User
- Messages
- 1,279
So not worth a punt ??
Even with somebody else’s money
Even with somebody else’s money
Brendan Burgess
Founder
- Messages
- 54,788
The index is some artificial index that may rise or fall. It is reduced by 5% every year. So to stay still, it has to increase by 5%.
1) At the end of year 1, if the index is above 70% of its initial value, I will get 5%. If it's below 70%, I will get nothing.
2) At the end of year 2, if the index is above 70% of its initial value, I will get 5%.
3) At the end of year 3, if the index is above 70% of its initial value, I will get 5%.
4) At the end of year 3, or any subsequent year, if the index is above 90%, the bond will mature, and my money will be refunded.
So my maximum return is 5% per annum which is paid on the initial investment, so the compound return is 4.1%
But whenever the index is below 70% of its initial value, I will get no coupon.
If the index subsequently returns to 70% of its initial value, I will get the missed coupons.
If the index is at or above 50% of its initial value after 10 years, I will get my initial money back.
If the index is below 50%, my initial investment will be reduced accordingly. So if the index falls 60%, then my investment will fall 60% i.e. I will get only 40% of my money back and I will probably not have got the 5% a year either.
From the brochure:
1) At the end of year 1, if the index is above 70% of its initial value, I will get 5%. If it's below 70%, I will get nothing.
2) At the end of year 2, if the index is above 70% of its initial value, I will get 5%.
3) At the end of year 3, if the index is above 70% of its initial value, I will get 5%.
4) At the end of year 3, or any subsequent year, if the index is above 90%, the bond will mature, and my money will be refunded.
So my maximum return is 5% per annum which is paid on the initial investment, so the compound return is 4.1%
But whenever the index is below 70% of its initial value, I will get no coupon.
If the index subsequently returns to 70% of its initial value, I will get the missed coupons.
If the index is at or above 50% of its initial value after 10 years, I will get my initial money back.
If the index is below 50%, my initial investment will be reduced accordingly. So if the index falls 60%, then my investment will fall 60% i.e. I will get only 40% of my money back and I will probably not have got the 5% a year either.
From the brochure:
Last edited: