Growth Based Notes

[T S Magnum]

Sorry if this is old news but they are new to me and seem interesting. This gives an example. Past data suggests ~5% return pa, with only around 1% of investments incurring a loss.

Any experience on here? Is there anything I'm missing?

[sidicks]

T S Magnum said:

Sorry if this is old news but they are new to me and seem interesting. This gives an example. Past data suggests ~5% return pa, with only around 1% of investments incurring a loss.

Any experience on here? Is there anything I'm missing?

These things tend to be quite profitable for the banks constructing them, but if the profile suits you then fine.

It does feel as though you are getting equity risk and fixed income returns, however and my preference would be for a diversified equity basket.

[T S Magnum]

To give context, a wealth management firm had originally recommended a protected smart fund but this hasn't performed well in the last 12 months. They are suggesting a switch to a note.

[Derek Chevalier]

sidicks said:

These things tend to be quite profitable for the banks constructing them

Agreed

[Derek Chevalier]

T S Magnum said:

To give context, a wealth management firm had originally recommended a protected smart fund but this hasn't performed well in the last 12 months. They are suggesting a switch to a note.

What objective are you attempting to fulfil by holding the smart fund/note?

[TooLateForAName]

I can't see why this would be a good investment. As Sidicks says it isnt a great rate of return - it has a cap on your gains. It really looks to me as if you're providing capital for them to make money on.

If the underlying indices go up then the investment closes and you get 3.5% (even if the index goes up 20%).

If any one of the indices falls significantly then you get the loss applied to your whole investment?

Your only +ve is that if the indices fall over 6 years then you get your capital back -assuming they dont go bust.

[T S Magnum]

Thanks for the responses.

The intention is for relatively safe investment, without expecting particularly spectacular returns but better than savings / ISAs. This was also the intention with the protected smart fund but that gave low return followed by larger losses.

My wife and I are both graded as cautious investors (4 and 5 respectively on the scale).

[Derek Chevalier]

T S Magnum said:

Thanks for the responses.

The intention is for relatively safe investment, without expecting particularly spectacular returns but better than savings / ISAs. This was also the intention with the protected smart fund but that gave low return followed by larger losses.

My wife and I are both graded as cautious investors (4 and 5 respectively on the scale).

What is the risk scale out of?

Taking the link you gave as an example

"Should investors need to sell their investment before maturity, the trading price will likely mean they get back less than they invested. "

note is for a 6 year term and I'm assuming you are happy to have the money tied up for this time? When you say relatively safe investment are you concerned about the valuation on a daily basis (you might need access to it at any time), or happy to lock it up for 6 years and only worry about the valuation 6 years from now?

[NickCQ]

T S Magnum said:

To give context, a wealth management firm had originally recommended a protected smart fund but this hasn't performed well in the last 12 months. They are suggesting a switch to a note.

What’s the wealth manager incentivised on? Do they get fees when you switch products or when your products perform well?

It’s frustrating that the original fund hasn’t performed well LTM (I imagine the recent US retrenchment hasn’t helped), but I would resist the temptation to sell at what may be a low point.

It depends what your investment horizon is - the recent wobble in equity markets may of course be the precursor to a greater drop... Predicting the market is a mug’s game

[btdk5]

TooLateForAName said:

I can't see why this would be a good investment. As Sidicks says it isnt a great rate of return - it has a cap on your gains. It really looks to me as if you're providing capital for them to make money on.

If the underlying indices go up then the investment closes and you get 3.5% (even if the index goes up 20%).

If any one of the indices falls significantly then you get the loss applied to your whole investment?

Your only +ve is that if the indices fall over 6 years then you get your capital back -assuming they dont go bust.

It makes a good investment as you can make 7% annually (the 3.5% is a semi annual coupon) in mildly falling markets - whether you can do better elsewhere with little thought is up to you.

If markets are at their current levels or higher then you get kicked out of the investment, get your capital back and get your coupon. Markets would have to fall more than 40% for you to be in real trouble. As you probably would be with anything else.

It your looking for a boost to income with a level of capital protection and understand the product then whats the issue with it?

[TooLateForAName]

Am I misunderstanding the interest? I take that to be 3.5 % p/a but paid in 2 installments, so 1.75% every 6 months.

investopedia said:

Most bonds pay interest semi-annually, which means you receive two payments each year. So with a $1,000 bond that has a 10% semi-annual coupon, you would receive $50 (5% *$1,000) twice per year for the next 10 years.

[Derek Chevalier]

btdk5 said:

It your looking for a boost to income with a level of capital protection and understand the product then whats the issue with it?

There's probably a better way of doing it

[NickCQ]

TooLateForAName said:

Am I misunderstanding the interest? I take that to be 3.5 % p/a but paid in 2 installments, so 1.75% every 6 months.

investopedia said:

Most bonds pay interest semi-annually, which means you receive two payments each year. So with a $1,000 bond that has a 10% semi-annual coupon, you would receive $50 (5% *$1,000) twice per year for the next 10 years.

By the looks of it you have to wait to call or maturity to receive the aggregate coupon amounts. With a bond they are paid quarterly or semi-annually.
Therefore, the effective coupon will be lower than 3.5% because it doesn't accrue and you lose the 'interest on interest'. Plus the time value of course.

[sidicks]

TooLateForAName said:

Am I misunderstanding the interest? I take that to be 3.5 % p/a but paid in 2 installments, so 1.75% every 6 months.

investopedia said:

Most bonds pay interest semi-annually, which means you receive two payments each year. So with a $1,000 bond that has a 10% semi-annual coupon, you would receive $50 (5% *$1,000) twice per year for the next 10 years.

I think you are misunderstanding - I think he is correct when stating it's 3.5% each half-year.
If you look at the backtested performance, they get to 6.8% or something which is basically the (1+3.5%)^2-1 return, less a few bad scenarios, where the full coupon wasn't pair or capital was depleted.

Edited by sidicks on Monday 9th April 20:16

[T S Magnum]

Thanks all. To answer some points:

Currently the investment manager works off an admin fee from myself. I am double-checking nothing will change and will ask about any commission.

• What is the risk scale out of?

We were profiled on a scale 1 to 10 (or maybe 0 to 10). 1 or 0 being not keen on any risk, stick to savings accounts etc. and 10 being roulette everything on black, or similar.

• I'm assuming you are happy to have the money tied up for this time?

Yes, this pot is allocated for a future house purchase. Good to keep it out of reach. Stops it turning into another car.

• When you say relatively safe investment are you concerned about the valuation on a daily basis (you might need access to it at any time), or happy to lock it up for 6 years and only worry about the valuation 6 years from now?

Only worried about at maturity. Don't plan to use it before ~2025.

• It’s frustrating that the original fund hasn’t performed well LTM... Predicting the market is a mug’s game.

LTM is the last twelve months? Yes, I understand a drop in the last year isn't an automatic reason to pull out. I have other investments in other funds that have also suffered and plan to leave them alone for now. With this particular fund the investment manager feels it's level of protection will overly restrict return in a flat / weak market.

• If your looking for a boost to income with a level of capital protection and understand the product then whats the issue with it?

No issue as such, just asking if anyone has experience and if there are any pitfalls I've missed.

[btdk5]

Derek Chevalier said:

btdk5 said:

It your looking for a boost to income with a level of capital protection and understand the product then whats the issue with it?

There's probably a better way of doing it

Do you have any examples to share with the group great sage?

[btdk5]

T S Magnum said:

Thanks all. To answer some points:


No issue as such, just asking if anyone has experience and if there are any pitfalls I've missed.

Do you bank with investec or is someone else recommending this to you? They should have explained the product in quite a bit of detail before sending it over as you're about to commit to a derivative trade based on a basket of equities, so it has a few added complications.

I work for a wealth management firm and we also construct these products. Although ours are based on the ftse 100, s&p 500 and the euro stoxx 50. 3 markets, which the average investor will have some understanding of. Do you know how the chinese and australian markets perform that the investec note is measured by? Thats definitely worth having a look at first.

Secondly as someone mentioned, you wont benefit from any upside in anyone of these markets. If you are bullish all these markets then you 'could' be better placed by just tracking them.

Where this works well is if you have, say a diversified portfolio and use this product to work alongside it as a hedge to stuttering or, as mentioned, mildly falling markets. In which case you would get the 3.5% semi annually and your capital would have an element of protection. Although please see Nickcq's point. Whilst you get the 3.5% semi annually, this is rolled up and everything is paid on exit. You could have 5 good years and still lose the lot.

As others have mentioned though, these are 'difficult to value' on the secondary market. Essentially meaning if you need to sell out early you're going to get a little screwed.

[NickCQ]

btdk5 said:

Although please see Nickcq's point. Whilst you get the 3.5% semi annually, this is rolled up and everything is paid on exit. You could have 5 good years and still lose the lot.

Cheers for confirming. I have seen this feature on products offered to retail investors in the past and to me it seems misleading.
Effectively you can market a higher headline coupon, but it's not comparable to other investments paying that coupon because it's back-ended.

[T S Magnum]

• Do you bank with investec or is someone else recommending this to you? They should have explained the product in quite a bit of detail before sending it over as you're about to commit to a derivative trade based on a basket of equities, so it has a few added complications.

Yes, the wealth management provider has been talking the product through with me.

• Secondly as someone mentioned, you wont benefit from any upside in anyone of these markets. If you are bullish all these markets then you 'could' be better placed by just tracking them.

We are not driven by maximising returns above all else, being cautious investors.

• Where this works well is if you have, say a diversified portfolio and use this product to work alongside it as a hedge to stuttering or, as mentioned, mildly falling markets.

Agree, that was the thinking. We have a portfolio of other funds.

Losing all the gains at the end of 6 years would be disappointing of course but the stats show this happened in only one percent of 2,500 cases.

• As others have mentioned though, these are 'difficult to value' on the secondary market. Essentially meaning if you need to sell out early you're going to get a little screwed.

No need to sell this out early, if that meant a sizable hit. Cash, cars, or (in the worst scenario) property could go first.

Thanks again for the input.