Many investors underestimate the risks of loss compared to the gains promised by the banks.
“An objective fixed gain of 10% per year” on the one hand, a higher bid of the other with “a goal to gain 15% in the first year, subject to conditions and in consideration of a risk of loss of capital”. The investments “in formulas” or “structured products” in the financial jargon (familiarly called investments “to promises”) are about as impossible to compare as phone subscriptions as they are packed with option, all different. On one hand, the hope of a fixed-gain holds the attention, but it is conditional. The capital is also protected, but also under conditions. On the other hand, there are so many risks to win nothing than lose a lot.
formulas random
The investment promises reassure psychologically, so that they are more than random. With these products, we know, or we believe we know what we will have. Our brain is attracted by the certainties to which he attaches more attention than their backhand. Result, there is less to assess what we will not have, or what we risk losing, by a psychological machinery that has studied Daniel Khaneman, Nobel prize in economics in 2002. However, the possibility of gain, which has attracted the attention of investors has little likelihood.
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Very profitable for banks and their distributors, the latest structured products are presented as an “alternative to an investment in dynamic risky-type actions”), except that they are almost the reverse. In purchasing these products, the investors play a role as insurer of the banks in the event of a crash : they collect premiums as long as the markets rise and face the highest losses in the event of reversal, as in 2002 and 2008.
An example : “Target France October 2018”, the offering promises sold up to the end of the month by Adequity, mark of the Society in general. It promises a gain of 10% per year when the market index “SBF Top 80 EW Decrement 50 points more than its level at the end of October 2018, at each anniversary, at the end of October. If this level has not been beaten to a birthday at the end of ten years, and the index has lost less than 15%, it will still be 10% per year, which is equivalent to 7,16% annualized, before fees and tax, because they will be paid after ten years without interest capitalization. If the index has lost more than 15% and less than 50%, there was zero gain and zero loss in ten years, except, of course, the costs of life insurance it is purchased in this framework, and the loss of purchasing power linked to inflation. Finally, if the index loses more than 50%, it is for the apple of the investor : he suffers the whole loss.
To understand the fairness of the bet, it can be read on the side of the seller, which would give this : “lend me your money to buy the 80 first French shares, if the index has risen to the anniversary of our contract, I will repay you with a coupon of 10%, but I keep the capital gains of the shares and their dividends for me; we consign it each year ; as long as the index does not rise, I cash out dividends on a capital borrowed at 0%, and if it collapses at least 50% I’m not lost, since it is you, the investor, take the risk”.
When the lights are green, everything is fine, but…
Certainly, until here everything goes well. If the CAC 40 index do rebaisse not by the end of December, it will align almost eight years of consecutive increases (including the downturn of 0.5% in 2014), since the last sharp drop related to the euro crisis in 2011 and 2012. Suddenly, the track record of these investments is flattering. Many are repaid quickly, with gains more than respectable compared to the life insurance without risk, which facilitates their promotion.
Yet, even in markets in good shape, it is a bit of a toss-up depending on the level and the period in which one buys. The underwriters of the offering “Adequity performance-April 2015” experience. This investment promised an annual coupon of 6% with repayment as soon as the Euro Stoxx 50 exceeds its initial level of 3616 points found the 30/4/2015, to one of his birthdays until his ten-year term. For the past three and a half years, the Euro Stoxx 50 rose several times above this level, flirting with 3700 points on November 1, 2017, but never on his birthday on the 30th of April…
The underwriters have not, therefore, yet nothing gained nor lost. Their capital is sterilized until the room settles, the good or the bad side. If they had invested at the same date in the tracker Euro Stoxx 50 Lyxor, a other investment of the Company general following the index of the top 50 european shares, without protection, they would have a lower potential value of 8.7% 20/9/2018, but they would have received 12.5% of revenues accumulated through dividends from may 2015, before taxes, but management fees are included.
dividends are the sinews of war for these products, because they fund the gains promised, adjusted according to the duration of the placement and the level of protection. “Most of the coupons are high, less protection in case of a decrease,” warns Clement Lemaire, director of development of Irbis Finance, a company that designs products, structured tailor-made. For an investment to ten years based on the Euro Stoxx 50, for example, one could mount a product with 6.5% coupon and capital protection untilà 40% drop, or coupons reduced to 3%, close to 3.4% of the dividends of the Euro Stoxx 50, with a capital protection up to 60% of the drop.
Beware of imitation
It is necessary to monitor the indices chosen for these products, which are often bad copies, mimicking the performance of stock indices well-known, but with a ball to feet. You sell indexes MSCI Euro 50 Select 4,75% Decrement, Euro iStoxx70 Equal Weight Decrement 5% or Euro iStoxx EWC 50, as having a “quasi correlation with the Euro Stoxx 50”. It is ersatz indices less efficient, because of the “decrement”, or decrease in French, filouterie invented for the cause.
Take the index Euro iStoxx 50 Decrement 5%. It copies the Euro Stoxx 50 Gross Return, that is to say, the index of the top 50 european values, including dividends, but decreasing to 5% per year, well above the 3.4% dividend of the true index Euro Stoxx 50 GR. Result, the index Euro iStoxx 50 decrement is down 4.17% over ten years, the 20/9/2018, while the real index, Euro Stoxx 50, without dividends, is in increase of 5.41%. The 10% variance can wipe out the capital protection. An investment with capital protection up to a 50% decline of the index Euro iStoxx 50 Decrement, will be protected up to a 40% decrease in the real index Euro Stoxx 50.
The lost illusions of investments to promise nurtured a mass claims in past crashes, when the purchasers have discovered their setbacks. “Many investors have been by these products formula that were presented as alternatives more cost-effective than their secure investments, as they were neither cost-effective nor safe, as demonstrated by the harm caused by the fund Advantage of the postal Bank, Ecureuil Europe and Doubl’O savings banks, or BNP Warranty Jet 3, to cite a few examples,” says Me Hélène Feron-Poloni.
With his partner, mr. Nicolas Lecoq-Vallon, they have obtained the condemnation of banks and insurers to compensate victims of these mirrors with the larks, in particular, by a judgment of the Court of cassation on 24 June 2008 against the funds Doubl’O of the Squirrel. And the management company of the group Banques populaires Caisses d’epargne, Natixis AM’s name “Ostrum”, has yet been sentenced last year to 35 million euro fine, for embezzling $ 15.6 million in the funds in form of its customers, 15.8 million of management fees that are not indicated and 16.1 million euros is exceeded.
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The swiss manufacturer of structured products EFG International, which was renamed Leonteq, is also in the sights of lawyers Lecoq-Vallon & Feron-Poloni, for having sold to investors a investment formula of the type “who wins, loses”. Like many, he promised a gain by enticing the event of an increase, or a loss in the event of a major decline. Problem, policyholders have lost then they would have had to win since the courses indicated in the contract were false ! The levels selected for the reference shares for this product, 19/10/2012, are more than two and a half times higher than their real classes on that day ! Result, whereas the increases of these titles have had to trigger the promised gain, Leonteq has transformed into losses abyssal. Very dirty even.