Structured products...

Sillychuckie

What are peoples views on structured products?
I was looking at this:
http://ukmarkets.rbs.com/EN/Showpage.aspx?pageID=10&ISIN=GB00B8MMZ482

To me, an RBS default seems low risk (govt backed).
A ftse < 2946 also low risk (even the worst of the credit crisis kept it well above that).

So it looks like an almost guaranteed 10.55% (probably only for 1 year though), but perhaps longer if the FTSE dips a bit. Thats pretty good no (given the risk level)?
Spread is 0.1%.

Thinking I might diversify some of my short dated corp bonds and move a bit more cash into this sort of thing.

Any thoughts? I think HSBC do something similar if you don't like RBS.
SC.

Missold_2

I invested in a plan that worked the same way back in July 2008. (Different UK product provider, with Lehman as the bond issuer with a respectable S&P credit rating) Nobody thought Lehman would go bust, but it did, two months later, and I lost the lot.

These products are often targeted at risk-averse savers who think the chances of losing their capital is low. Some are marketed as 'capital protected' but are still vulnerable to counterparty risk. Take a look at case studies at the missoldinvestments action group web site

If you want to use one of these products, make sure you understand all the risks, and that your portfolio is well-diversified.

dunstonh

To me, an RBS default seems low risk (govt backed).

I would disagree. Mainly as it is not RBS retail banking that is providing the counterparty risk. At the moment, our research provider wont include Lloyds or RBS as counterparty risk on SCARPs as suitable products due to elevated risks. You need to remember that the Govt could decide to let the subsidiary companies that effectively underwrites these go under without letting the retail banking side fail.

That probably explains why the RBS backed one has a higher headline figure than the those backed up by the stronger counterparties.

Sillychuckie

OK, thanks. I didn't realise that RBS could be chunked up in such a way to let these fail, but keep the retail side going.
Also, I guess there is also the risk that the FTSE hovers around about the same level and then this thing doesn't return anything anyway.

I tend not to go for individual bonds (default risk), and rather funds of them... so I'll apply the same logic here, and stay clear.
Thanks for your comments - it did seem a bit too good to be true.

SC