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Investing in the “flavour of the month”? (part 2)

Investing in the flavour of the month?

Last month I wrote about the latest “flavour of the month” investment product – multi-asset funds.

Most popular investment product in the 2000s

From around 2000 to around 2007 – the most purchased retail investment product was “capital guaranteed” products or “capital protected” products.

They may be called a “fund”, “structured deposit”, etc

Capital guaranteed

They were very popular because in the early versions of such products – the capital was guaranteed.

In other words, one could not lose one’s initial invested capital or at most a pre selected 5 or 10 per cent maximum loss on the capital, on maturity after 5 to 7 years.

There was also the potential for capital gains and often a projected annual interest rate which was higher than the bank fixed deposit rate.

The “perfect” investment?

Sounds like the perfect investment right! Cannot lose money, can make money and have annual payouts too.

So, how did it work? Normally about 70 to 80 per cent of the capital was used to buy bonds which “guaranteed” the capital on maturity.

The balance 30 or 20 per cent of the capital was typically invested in high risk “options” to attempt to provide the upside of capital gains on maturity.

As more people bought and more institutions recommended the purchase of such products – the demand for options increased their premiums and prices, such that some funds eventually had no more money (the 20 to 30 per cent) to invest for the upside.

Most investors lost money

As it turned out – most investors ended up with annualised returns on maturity that were less then the average bank 12 month fixed deposit rate.
In the later versions of such products – they were “capital protected” – meaning that the risk of the bonds which provided the “capital protection” defaulting was passed on to investors.

Lessons from history

Such products started in the offshore markets in the mid 1990s – went to some countries in Europe – ended up as duds and faded away – before making their way to Singapore.

If it sounds like an investment that has everything going for it – no risk, potential for capital gains and interest income to boot – it probably may not be a good investment for most of you.

 
Leong Sze Hian
Leong Sze Hian

Leong Sze Hian is the Past President of the Society of Financial Service Professionals, an alumnus of Harvard University, has authored 4 books, quoted over 1500 times in the media , has been host of a money radio show, a daily newspaper column, Wharton Fellow, SEACeM Fellow, acting managing editor and columnist for theonlinecitizen, columnist for Malaysiakini, a Member on the CIFA International Advisory Board, executive producer of the movie Ilo Ilo (40 international awards), treasurer of Maruah, and invited to speak more than 100 times in more than 25 countries on 5 continents. He has served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia. He has 3 Masters, 2 Bachelor's degrees and 13 professional qualifications.