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Should you buy structured products?

Structured products with capital protection are gaining increasing popularity from the Russian investors. Today, every bank that serves wealthy clients, show you the stack of brochures telling about the possibilities such financial instruments. Their sales increasing: in 2008 he was in Russia $ 1 billion, and in 2009 could reach $ 1.5 billion

After last year's financial meltdown markets, undermined interest in risky investments, the fashion for structured products is understandable. But think that a magic tool offer bankers, removing him as a magician of the cylinder: the lack of risk with the possible high return. Do such things happen?

At the heart of any product with a warranty capital is generally based on a discount bond or deposit, which should provide a guaranteed refund amount. To these are added risk tools such as index futures or options. Suppose you want to invest $ 100,000 in a product with minimal risk, but with the ability to participate in the growth of Russian market. The Bank offers a deposit with a rate of 5%. Your task - to calculate how much money should be placed on deposit to a year it was $ 100,000. It's $ 95,238 and the balance - What can the risk. You can buy, such as options, or focused on the Russian market index ETF like the Market Vectors Russia under the control of American Van Eck Global. You will get a simple structural product.

fact that banks offer, of course, is somewhat more complicated. Therefore, investors are often unable to assess the real "Composition" and the cost of products. And it gives bankers the opportunity to earn relatively high fees.

This is easily seen, using evaluation function of the structural notes (another name for structured products) in the information system Bloomberg. Holding up the parameters of the notes - maturity, coupon size, index, etc. - in the appropriate fields on the screen, you can assess its real value.

For example, Russia is now possible to buy large bank note on gold, denominated in euros. By its terms, if within five years of gold traded above $ 1,169 an ounce, the annual coupon on the note is 5% if the following - 3%. If at the end of the fifth year of gold would be above this price, the note is paid off at par, if not - to 90% of par. In other words, minimum payout, which can get an investor, is 105% of nominal, and maximum - 125%. According to the Bloomberg, the net value of such notes - 98.45% of face value, while the investor is will cost 100% of nominal.

seems, the commission 1,55% of the nominal value is small? But you do not buy the shares, where the commission is of the turnover and value growth is unlimited. This product is more correct to compare with a bond that will bring you five years from 5% to 25% per annum. It is with this income is necessary to compare fees. They are, therefore, be from 6.3% to 31% of income.

But in addition to fees, the investor will be other costs. Typically, all products with capital guarantee have a limit on participation in market growth. For example, the investor receives only the first 20% of the growth index, and everything else wins the pot.

Do you have at least a private investor, earned more than 10% per annum by investing in structured products? I do not. I have long concluded: Seller notes do not assume any risk gets immodest fee, and if the investor has guessed which way the market is moving, then the seller to pocket profits.

But this is not all. Structured products may have risks, which at first glance not obvious or difficult to understand and evaluate. In any structured product, even with capital protection, there is a possibility of partial or complete loss of investment due to bankruptcy of the bank issued it. Think of Lehman Brothers. Losses in this market, no one voiced, but trust me - it's hundreds of millions of dollars. Loss of one of my friends who bought the notes of Lehman Brothers, designed to increase the gold with a guarantee protection of capital, seem to drop in the ocean.

What has changed over the year since the crisis began? Banks are selling their customers all the same products, arguing that their reliability at the level of deposits, and the yield is likely to be higher. But miracles do not happen. Increased profitability of structured products, even if you can get it can not be achieved any other way but to increase risk.