Tan Kin Lian's Blog: Poor return on capital guaranteed products

Tuesday, July 10, 2007

Poor return on capital guaranteed products

Dear Mr Tan

It seems that most of the capital guaranteed product has given a poor return to their investors. Why is this the case?

--------------------------------------------

REPLY:

Due to the low interest rate, a risk free product earns about 3% per annum. To give a capital guarantee, the product issuer (ie bank) has to invest about 85% of the capital to provide the principal at the end of 5 years.

Of the remaining 15%, the marketing expenses and fees taken by the banks probably amount to 10%. This leaves only 5% to be invested in options or stock indices to give the return.

There is very little return that you can expect from an investment of about 5%. Sometimes, the option expired without any return. Sometimes, it gives a modest return, maybe 10% or 15% in total for 5 year. The chance of getting a high return (more than 15%) is small.

7 comments:

Anonymous said...: Exactly like Mr Tan described.

It is naive to think that you get principal guarantee and yet get upside. The best upside is at most 15%(as in the example); which is what you get from buying singapore government bonds.

It is possible to trade the interest costs for perhaps slightly higher return. But the fee structure would be higher.

If you want to pay nothing, be prepared to get nothing.

Think about it this way: if it is such a good deal, why should someone offer it to you? The product manufacturer would take all his money, borrow some more and invest it himself.

There is no free lunch, to think otherwise is living in dreamland.; July 10, 2007 8:12 PM
Anonymous said...: Hi,
I do not understand why you all have so much compains about structured products. It serves different needs and ofcourse it comes with a cost. Just ask those people who bought structured products who expired on 12 Sep 2001, during Asian Financial Crisis, or SARS period whether the products serve their needs and whether the low returns are acceptable. Structured product has its economic value.

Meng; July 10, 2007 9:02 PM
Khiat Han Hwee Adrian said...: Structured Deposits looks silly when the ecomony is booming but fantastic if the market underwent a bear phase during the tenor.

A professional adviser will list out options available according to clients needs, explain and guide them in their choice. Its ok if the client decide on structured Deposits after knowing the differences.

Unfortunately, the so call "Financial Advisers" in the banks are largely product paddlers selling what the banks tell them to. They will not tell them what are available to them and what the opportunity cost are.; July 11, 2007 12:52 AM
Anonymous said...: So are the insurance agents. They sell whatever products the company manufactures.. They are pushers and pushers are worse than peddlers because they scheme and exploit the customers.; July 11, 2007 10:35 AM
Thomas Phua's Blog said...: When Mr Tan was CEO of NTUC INCOME, a capital guaranteed DYNAMIC GUARANTEED FUND policy managed by SGAM was introduced.

SGAM has made the plan so convincing, that many will simply take such a plan.

After SARS and Sept 11, the funds are no performing what it present itself to be as dynamic as it seems.

Mr Tan took a decision to allow switching out of such closed end fund, which is normally involve penalty, but penalty was waived.

Some still hope to protect principle, those who took the advice and switched to Combined Funds are now at least 45% better off.

Those who wait till maturity, curse and swear.

- Thomas Phua; July 11, 2007 1:19 PM
Anonymous said...: Hi,
I dont buy structured products - I only buy stocks and index funds. But I still think that structured products have their economic values.

a. if you compared one who held a structured product that MATURED at Sep 11 or SAR and one who held and sold stock at Sep 11 and SAR, the later will curse and swear.

b. if you compare one who held a structured product and one that put money in fixed deposit(current low interest rate market) or fixed money market fund, the latter is much worst off in the current bull market

c. if you compare one who buy a structured product now and one that buys a 5 years singapore bond at (current rate )2.5%, there is a high chance that the buyer will beat the bond rate, in the current bull market.

If the buyer needs to liquidate the product before it matures, the penalty he pays may be less than then the loss of the latter who sell the bond in the market, when the bond yield turns high and bond price drops.

d....

There are economic values of structured products. This is just my view.

Meng; July 11, 2007 9:30 PM
Anonymous said...: Refer to Thomas Phua's note above.

I am one of those who stuck with the plan and I did curse and swear. But investment is like that - you may make some judgement calls and some may not work out the way you want, but learn from them.

Financial products such as structured deposits serve different needs and is part of risk management.

In a bear market, people lapped up structured products like honey and in a bull market, they are dropped like hot lead.

I have benefitted from some structured products, while their gains are not as spectacular as stocks, options, warrants, or deriatives, but they are part of the entire financial portfolio and provide certain balance.

To be fair, one bad experience should not make a "standard" to say everything associated to that item/product is bad. If I drove a Mercedes and it burst into flames while I was driving on the highway, can I say all Mercedes cars are of inferior quality?; July 12, 2007 11:40 AM