Saturday, May 26, 2007

Swing Fund

A customer invested $25,000 in the Swing Fund (managed by a local bank) in early 2002. After waiting for 5 years, the customer received a return of $25,528. The gain is $528 (i.e 2.1% for 5 years, or 0.4% per year).

The formula used to compute this return is:

(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.

Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.

The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.

During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. Where does the difference go?

What is the logic of formula (b)? I cannot understand its logic. It seems to me (and I stand corrected), that it is designed to take advantage of the naive customers.

I cannot understand how the regulators can allow the financial institutions to market this type of complicated product to unsavvy customers. We need stronger protection for consumers.

1 comment:

. said...

Ntuc Income had a 5 year Dynamic Guaranteed Fund in 2001, because many are risk adverse, wants to invest and yet want to protect principle.

This DGF has since matured and the fund manager SGAM did not manage it to what it featured the fund to be as dynamic as what it should be.

Mr Tan has the foresight then to see through this and introduced Combined Funds, and at the same time allowed those with DGF to switch out.

Those who did, made good profits since 2004, more than 40%.

- Thomas Phua

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