Incredible underperformance of a structured product

D

Duke of Marmalade

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I have been out of the game for some time now but according to Colm this beauty has swung round by over 13% p.a. versus its benchmark in the wrong direction. And not just over a year or two but between 15 years of what Colm calls "simulated" performance and 4 years of actual performance. That seems incredible from my experience.
It seems a pretty complicated beast even as structured products go and Colm goes into more background as follows. (Colm gives a rather more colourful metaphor for the product construction in his LinkedIn post, which I recommend that you treat yourself to )
 
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I would have thought that if the brochure or any marketing literature holds out that the return was linked to the EuroStoxx 50 (as opposed to a hugely bastardised version of it) the parties who promoted it are well in the firing line. This would be particularly so for any investment advisors who had not properly understood and explained to clients just how different the SEDV index is from EurStoxx50.

The use of this type of 'adjusted' index which has an inbuilt and substantial downward pull on outcomes should not be permitted by the Central Bank. Consumers simply cannot understand how hugely they load the dice against them, and that is even where the back-testing is fair. If the Central Bank had the detail of this product explained to them before it was launched, shame on them.
 
Monksfield said:
I would have thought that if the brochure or any marketing literature holds out that the return was linked to the EuroStoxx 50 (as opposed to a hugely bastardised version of it) the parties who promoted it are well in the firing line.
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Hi @Monksfield I agree. As I wrote on LinkedIn this morning, though, in reply to others who took a similar harsh line on brokers who sold the product, I can see how people were tempted by an index which outperformed its benchmark by a phenomenal 4.5% a year over 18 years, especially when they saw that it was devised by a world-leading bank, which they would be inclined to trust. I definitely would not expect it to underperform the same benchmark by over 9% a year for the next four years.
What I can't understand is how the media and regulators seem unconcerned about this revelation.
If I was the official in Brussels or wherever responsible for supervising the bank in question, I would call in its bosses and ask them to tell the reasons for the incredible outperformance relative to its benchmark (defined as such by the bank itself) when there was nothing riding on it, then for it to underperform even more incredibly when millions in ordinary savers' money was riding on it. If they couldn't give satisfactory answers, I would threaten to revoke their licence, on the basis that they couldn't be trusted. Trust is at the heart of banking.
 
Fortune said:
Why would anyone want that?
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Good question. Here is the answer provided by the sponsor of the Index.
 
Brilliant Boss! This sentence is uncanny.
“Are you sure, Colm? That’s a drag of almost 20% over five years. Putting it another way, are you saying that, if the EURO STOXX 50 Index increases by 20% over the next five years, the Solactive Index could still show a loss?”
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In investing, "you get what you don't pay for".

Anything that is complicated has high fees.
Anything with high fees will have poor performance after fees.

Stay away from high fees and complex products.
 
Brendan Burgess said:
Fair play to you Colm.

You actually predicted this
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Thanks Brendan, but it's depressing that here we are, over four years later, and still nothing has been done about that index. I can't believe that one of the world's leading banks can devise an index that beats its benchmark by 4.5% a year on average for 18 years, when no-one made money from the outperformance, then it underperformed it by an incredible** 9.1% a year for over four years, when lots of people lost, or look like losing, lots of money, yet no-one is holding them to account. Where are the media, the regulators, even the courts, to force them to explain the contrasting results? Of course, some of the other points made in the discussion, such as @AJAM 's comment about high fees and complex products, matter, but they pale in comparison.

** The level of underperformance is so huge, I thought I may have made an arithmetical error, so I checked my numbers again and again, and asked Brian Woods to check them. We couldn't find a mistake. I also asked (through LinkedIn) for someone from BNP Paribas to provide the correct figure if I was wrong, I heard nothing.
 
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