|We've never seen a structured product
that we would consider buying for ourselves. But if you must
do it, read on..........
What are they?
These go under a number of names: "Guaranteed Products",
"Guaranteed Bonds", "Guaranteed Equity Bonds",
"High Income Bonds", "Structured Bonds" among
them. These are products that are varied in their detail but usually
involve a fixed term deposit with returns of both income and capital
subject to (often complex) formulae.
Many of these bonds
are high risk. The word
"bond" has a comforting ring to it but these products
can be Venus Fly-traps. For example, the delightfully-named "precipice
bonds" offer higher returns in exchange for accelerated
capital risk (things appear to be fine until you fall off the precipice).
They can only be sold through
IFAs and have a limited investment window (maybe one or two months
from launch). This helps to protect unsuitable
products from independent analysis until
it's too late.
What to watch out for
- These are high-commission
products. Are you sure your IFA is giving you advice and not
selling you a product?
- They offer 'participation in equities'. Remember
that this never includes receipt of the dividends that genuine
participation would provide. This loses
you close to 3.5% per annum
(which is the dividend yield in current - 2008 -markets).
- Ignore headline
returns. In one product that
we saw, returns of "up to 60% over five years" turned
out to offer a chance of about one in a million of making the
- Examine how the closing index is measured. One
product that offered "participation in growth over three
years" turned out to average the index over the whole three
years - in effect only giving 1.5 years.
- Be honest: do you really understand the extent
to which you are insulated from the risks of the complex derivatives
carried by the strange overseas corporation (based in Dublin or
Luxembourg) which is 'guaranteeing' your return? Notice that the
big-name providers are always very careful not to guarantee the
returns directly. These things could go
bust! [Update February 2005:....and now one
has. See sidebar]
- Understand the biological
biases that might be (mis)-guiding you to chose this product
- Have you evaluated hidden
- Read and understand the small
The FSA periodically comes out with advice against subsets of these
bonds. They warned against precipice bonds, but not in strong enough
terms that actaully stopped people buying them. They also warned
against another variant called "High Income Bonds". These
offered high guaranteed income by putting your capital at risk,
a pointless exercise which might be described as "anti-insurance".
Both these types of bond are still available, under different names.