Savings

bowlhead99

Freecall wrote: »

I always find these structured products to be extremely complex. When you dig down and try to understand them they just seem to be even more baffling. They may have a simple marketing description but the beast you are ultimately investing in is often somewhat obscure.

As I never (repeat - never) invest in something I don't understand, I would not be interested.

I guess that there may be some niche market where the do make sense but I can't quite fathom what it is.

That's the catch with structured products. To work out what a good deal they might be, you have to forensically analyse them against the other products that are out there.

In one sense there you could argue that it is a straightforward non-complex solution. Subject to small print that we haven't seen, there are only two main outcomes, and the FTSE index number is published every day in all the press so as you get further down the line of holding it, you can see which one it is closer to paying out. As a holder of the product you know what the trigger points are. You're unlikely to lose money other than in real terms. So it sounds 'safe'.

Of course, just because the FTSE index number is published every day, the average punter looking for a fixed return product is probably not au fait with how to judge the risk of where the FTSE goes next and what his real chances are of achieving one of the outcomes and whether it's more efficient to buy an alternative product instead. As the average punter wouldn't be in the market to construct his own directly comparable product (i.e. using options and derivatives) you have to trust it's been done effectively by the product provider and their fees for doing this are not transparent.

So, while you can easily see the two returns you might get, you can't see whether they are good... Even if you can see that 5% per year compound inside an ISA is higher than any fixed cash ISA and 2.5% total inside an ISA is worse than nearly all marketed cash ISAs. This isn't a 'fixed return product' because the return isn't fixed. It depends on stock market variables which are very hard for the average investor to model and determine which return they are actually likely to receive.

As markets can be volatile, presumably even 5.9 years from now you might not know whether your £1000 was going to turn into 1025 or 1340 within the next month. So if you were banking on it being 1340, it could be a shock to lose a quarter of it overnight when the FTSE drops 0.1% in the last month? When you view it from that angle it ceases to be 'safe'. Far better to presume it is a bad product that will be returning only 2.5% in a whole 6 years, for a loss in real terms, and then maybe it will pay a surprise boost in the last month and suddenly add a third onto the expected terrible return, and make you happy.

paddyrg

I take a simplistic view - if the institution wasn't hoping to beat the 'straight' market with your money, they wouldn't offer the product ;-)

averageish

Honestly, if you had not said Santander, I'd think this was a scam.

Contrary to our fictional friend in Wall Street, Gordon Gekko, greed, is rarely good when it comes to investing.

This is effectively a binary bet over a long term. Do they charge fee's of any sort, such as 1.5% per year management fee's and so on?

I can almost certainly say that you would be better off investing the money into a low cost (0.2% AMC or below) tracker inside an S&S ISA.

bowlhead99

averageish wrote: »

I can almost certainly say that you would be better off investing the money into a low cost (0.2% AMC or below) tracker inside an S&S ISA.

I'm sorry, but you can't. Structured products are designed to change the range of returns that an investment delivers using derivatives/ hedges/ insurances in an attempt to guarantee a return or to shift the various outcomes from investing into a range that the investor considers acceptable.

Clearly, this has a cost, in terms of sacrificing some of the potential returns, but the purpose of the derivatives/ insurances is to hedge against downside risk. A pure tracker, whether at 1% AMC or 0.08% AMC, has no such protection.

So, when the FTSE 100 bobbles around a bit for a couple more years, maybe even breaks 7000, and then dips down to revisit the 3500-4000 range again, your tracker tracks it right down too. Assuming you are just putting away the money for 6 years like this product, and not seeking to take an income to spend, the tracker will be holding accumulated dividends and they will lose half their value too, just like the capital. So, losing a third or more of your money over the 6 years is entirely feasible.

This product is looking to give you a bare minimum return over a range of negative or low positive returns of the index total return. But that return (presuming the solvency of the counterparties involved) is at least positive. The return of the FTSE in a single year can be 50% negative and so losing a third of your money over a multi year timescale is quite feasible.

So, if someone was interested in accessing a portion of stock market returns but was not looking to lose money, your advice to buy a low cost tracker would be terrible. You cannot "almost certainly" say that you'll get a better result from the tracker. I'm reminded of the quote from Anchorman: "60% of the time, it WORKS EVERY TIME!"

In the long long term, sure, holding a simple tracker - without spending money on buying protection (structuring it to protect losses or target a particular return) - is likely to be fine, because markets generally recover if you leave them long enough. It is very widely accepted that 5-6 years is not at all long enough because it is not even the length on one economic cycle let alone two or three which would allow the returns to 'average out'.

As a side note, we like to think that developed markets like FTSE and S&P are going to be broadly positive over time but that doesn't always work even if you do leave it for a quarter century (Nikkei 25 years ago: 35000, Nikkei 2 years ago: 9000). Nobody actually knows how the next decade will shake out for us, whether you are looking at the UK stockmarket or any other one market in the developed or developing world.