Analysis of Structured Bank Products   "If you can't understand it, don't buy it" -- Warren Buffett

Most recent offerings are listed first.

Distributor:             DBS, POSB

Type of Product:     Capital Guaranteed Fund

Name of Product:   "Celebration Capital Guaranteed Fund"

The Bold Claim: "Fixed payout of 5.5 %, 6 months after the inception date." (Product brochure.)

What's wrong:  (i) The payout information is correct.  Many customer, however, may believe that a "5.5 % fixed payout after 6 months" means a "5.5 % 6-month return" (which is 11 % per year).  This is not correct.  To make this large payout in a short time (6 months), the fund dips into the its capital. It means the fund is giving back part of your own investment and calling it a "payout". 

(ii) As with all structured products, the return is linked to products and events which are very difficult to forecast.  In this case, "the fund is linked to 6 Asia-Pacific market indices" and their performance over a period of 4 years and 11 months.  

(iii) As with all structured products, returns vary from a minimum to a maximum.  Because this is a capital guaranteed fund and the minimum return is zero. Bank sales staff may imply the maximum return is likely to be realised.  In fact, they don't know and the prospectus does not give enough information to determine it.  

(iv) The issuer's charge is embedded in the returns.  It cannot be determined from the information in the prospectus OR from any other source.  It is not possible to know how much the issuer is charging you.  Of course, this has a direct effect on the likelihood of your achieving the minimum vs. the maximum return.

(v) As with all structured products, the maximum return is capped. After year 2, the bank may buy back your investment by paying you a 5 per cent bonus.  The brochure and the sales staff give the impression that you are fortunate if you receive this bonus.  In fact, the opposite is true.  You will receive it only if the fund does exceptionally well.  But if that happens, the issuer buys you out, thereby limiting your gain and taking the excess for itself.   

Distributors:           ABN-AMRO, Maybank, OCBC, Phillip, UOB Kay Hian

Type of Product:     Structured Product

Name of Product:   "Mini Bonds"

The Bold Claim: "Total returns over 5 1/2 years of 22 %."  (ST, April 19 2006.)

What's wrong: (i) Returns are 4 % per year x 5.5 years = 22 %.  These are the maximum returns. There is no capital protection.  Default risk, however, is very low since the product is linked to the credit rating of six very large and creditworthy companies.  Sales staff focus on the low default risk and make no mention of a second risk which is much higher: Interest rate risk. 

(ii) If interest rates fall, the issuer has the right to call (buy back) the mini bonds after one year.  In this case, you would receive your principal plus 4 per cent interest.  The problem is if interest rates have dropped, you would be limited to reinvesting your proceeds at the prevailing (lower) interest rate. 

(iii)  For the rare customer who brings up this point, the sales staff counter it by saying that for recent offerings of similar products in Hong Kong, the bonds were not called.  Of course, the HK dollar is pegged to the US dollar and US interest rates have been rising for the past 2 years. The interest rate environment is about to change. US Central Bank rate increases are due to pause soon.

(iv) The mini bonds' lock-in period is 5 1/2 years.  You lose if interest rates rise during this period.  Should you wish to sell the bonds to take advantage of higher rates, you would have to sell them back to the issuer (since the mini bonds are not traded).  The issuer would probably buy them back at less than par value.  It means you would suffer a loss of principal.

Distributor:             DBS, POSB

Type of Product:     Structured Product

Name of Product:   "DBS High Notes 2"

The Bold Claim: "A potential return of 21.5 per cent over 5 years."  (ST, 19 April 2006.)

What's wrong:  (i) Return for years 1 to 5 are 3.5 % + 3.5 % + 3.5 % + 5 % + 5 % = 21.5 %.  These are the maximum yearly returns. 

(ii) The ad does not tell the minimum returns and, as with all structured products, the prospectus does not give enough information to know which is more likely -- the min or max return.  Bank sales staff often imply that the maximum return is more likely.  In fact, there is no way to know this.

(iii) As with all structured products, the maximum return is limited.  The cap is 14 per cent over 3.5 years, which comes to 4 per cent per year.  The ad and sales staff give the impression that you are fortunate if you receive this early payout.  In fact, the opposite is true.  You will receive an early payout only if the fund does exceptionally well.  If that happens, the issuer will buy you out, thereby limiting your gain. The remainder of the exceptional gain (often the bulk of it) goes to the issuer.

(iv) As with all structured products, the return is linked to products and events which are nearly impossible to forecast.  In this case, "The performance of DBS High Notes 2 is linked to a basket of 8 international and regional banks, each with a minimum rating of A- by Standard and Poors".

Distributor:             DBS, POSB

Type of Product:     Structured Product

Name of Product:   "Delights Account"

The Bold Claim: "5.5 % fixed payout after 3 months." (Product brochure.)

What's wrong:  (i) The payout information is correct.  Many customer, however, may believe that a "5.5 % fixed payout after 3 months" means a "5.5 % 3-month return" (which is 22 % per year).  It does not.   To make this large payout in a short time (3 months), the fund dips into the its capital . It means the fund is giving back part of your own investment and calling it a "payout". 

(ii) As with all structured products, the return is linked to products and events which are very difficult to forecast.  In this case, it is "linked to the movement of 18 shares" over a period of 4 years and 11 months.  

(iii) As with all structured products, returns vary from a minimum to maximum.  Bank sales staff may imply the maximum return is more likely.  This is not correct.  The prospectus does not give enough information to determine which is more likely.  Worst of all, the prospectus also does not tell how much the issuer is charging you.  This charge is embedded in the pricing and the returns.

(iv) As with all structured products, the maximum return is limited. After 1 year and 11 months, the bank may buy back product by paying a 5 per cent bonus.  The ad and sales staff give the impression that you are fortunate if you receive this bonus.  In fact, the opposite is true.  You will receive it only if the fund does exceptionally well.  If that happens, the issuer buys you out, thereby limiting your gain. The remainder of the gain (often the bulk of it) goes to the issuer.  

Distributors:       DBS, POSB    

Product type:       Structured Product

Product name:     "Triple Happiness Fund"

The Bold Claim: "A 6.5 per cent payout 6 months after inception date." 

What's wrong:  (i) The payout information is correct.  Many customer, however, may believe that a "6.5 per cent payout" means a "6.5 per cent 6-month return".  It does not.  To make this large payout in a short time (6 months), the fund dips into the fund's capital. It means it is simply giving back a part of your own investment and calling it a "payout".  

(ii) As with all structured products, returns are not guaranteed but vary from a minimum to maximum.  Sales staff often imply the maximum return is likely.  This is not correct.  In fact, the prospectus does not give enough information to determine which is more likely. 

Distributor:       Citibank

Product type:      Structured Product

Product name:    "DepositMax"

Bold Claim: "Returns of 2.7 to 6.2 per cent." 

What's wrong:  These are not annual but "18-month returns".  The annual returns are one-third less at 1.8 to 4.1 per cent.

Distributors:   DBS, HSBC, Maybank, Standard Chartered

Product type:   Structured Product

Product name: "Japan Blossom Fund"

Bold Claim: "Fixed annual payout of 4.8 per cent." 

What's wrong:  The fixed payouts are not really fixed.  It states in the prospectus as well as the footnotes of the newspaper advertisements, "They are subject to counter-party risk and are not guaranteed."

Distributor:             UOB

Product type:           Guaranteed Fund

Product name:         "Income Star Fund"

Bold Claim: "5 per cent guaranteed payout." 

What's wrong:  You receive 0 per cent in the first 18 months.  It lowers the average yearly payout to less than 5 per cent over the holding period.

Footnotes:  i) Bank products evaluated here include structured investments, structured deposits, capital protected funds and capital guaranteed funds. 

ii) Sources of information: Prospectuses, fact sheets, benefit illustrations and interviews with bank officers.