smelly wrote:The hot spots of 2004 include principal-protected notes, a nanny investment if ever there was one
You suggested that this was evidence of Rob “not liking” PPNs in ’05? I have no idea what he means by “nanny investment”. Mary Poppins was a nanny wasn't she? Everyone loves Mary Poppins don't they. So maybe it was a positive comment.
So, for me, that leaves two negative remarks;
The costs of capital protection are such that a long-term investor would do better to simply buy stocks or funds.
The price of protection has always been the weak spot with capital guaranteed products
But
the rest of the article says ……………..
The analysis firm Investor Economics has studied the product sales trends in the financial industry and identified a "risk management" theme that will persist in 2005. "Investors haven't really changed their desire, which is to increase wealth," says Earl Bederman, the firm's president. "But they are more conscious of protecting wealth."The fund industry had some bad publicity to contend with in 2004, with four big companies agreeing to pay $156.5-million in fines after acknowledging they permitted a few favoured clients to engage in abusive trading that penalized rank and file unitholders.
Some in the financial realm believe that cumulative negative publicity has turned both investors and some advisers against funds. "If you want the top 10 issues of 2004 from market professional's point of view, numbers one through five would be mutual funds," said one wealth management executive. "Everyone hates mutual funds now."
An increasingly popular alternative to both GICs and funds in 2004 was the principal-protected note, which offers the opportunity to make gains based on various stocks or stock indexes and, at worst, get your principal back. The idea of capital protection obviously resonates with investors.
"Some clients can't handle the volatility, they can't handle the risk factor," said Steven Marshall, president of Open Sky Capital, a major player in structured products like principal-guaranteed notes that is part owned by National Bank of Canada. "They want to know if there is a way to bring a sense of security, which is the capital guarantee, without losing too much of their return, at a reasonable price."
The price of protection has always been the weak spot with capital guaranteed products, but Mr. Marshall said that's slowly changing as the market develops. "Competition has forced many structurers to bring far more innovative products out there, with far cheaper fees," he said.
Mr. Marshall estimates that structured products, including principal-guaranteed notes and closed-end mutual funds that are listed on stock exchanges, have attracted roughly $13-billion in assets. He says asset growth of 50 per cent a year is possible as the structured product market widens to include new products in areas like fixed income.
The surprising thing about the safe investing trend is that it has taken hold during a two-year period in which the stock markets have turned in the best two years since the bull market of the late 1990s. Expectations of weak equity markets in 2005 mean there's no reason for the trend to wane, said Mackenzie's Mr. Feather. "I think you're going to see it prevail for quite some time," he said. "I really do."
And the second article includes……………
For the I-can't-lose-money investor.
Principal-protected notes give in give investors exposure to baskets of stocks, stock indexes, mutual funds and hedge funds without risk of losing money, and now income trusts are available in this format as well. While these notes aren't funds -- they're more like GICs -- many of them are made available through the FundSERV electronic trading system that the mutual fund industry uses.
Two trust-based note series were launched this week from Faircourt Asset Management: Faircourt principal protected ROC deposit notes, which are targeted at non-registered accounts and have been set up to offer tax-advantaged monthly distributions, and Faircourt principal protected income trust deposit notes, which are meant for registered accounts.
Principal-protected notes are a minor investing craze among risk-averse people who think it's better to have their capital protected in a complex, illiquid security than to simply commit to more transparent, higher-returning traditional investments.
From this you deduce that Rob didn't like PPNs in 2005?!?
I didn't want to get into yet another fruitless discussion but....
1. I've never seen Cramer on CNBC but read an article about him a few months ago. As I recall, he is -- or was -- a licensed advisor. (gasp!) In any event, the academic study you touted is hardly news. Over something like two DECADES, Mark Hulbert (edited to correct name) has documented how very, very, very, very few stock market tipsters have reliably delivered value. For that matter, I wonder how retail advisors like you would fare if an academic combed through client records and computed returns for the median client.
As I think about it, who does the greater disservice -- Cramer or outright shills like
DR Jerry White, Garth Turner et al who are paid handsomely by experienced, licensed, qualified "professional" advisors (and co-oping product manufacturers). I'd be surprised if many of the Ma and Pa Kettles who go to those financial "seminars" are also watching CNBC.
2. But more to the point, let's go through your critque of that Carrick column:
The analysis firm Investor Economics has studied the product sales trends in the financial industry and identified a "risk management" theme that will persist in 2005. "Investors haven't really changed their desire, which is to increase wealth," says Earl Bederman, the firm's president. "But they are more conscious of protecting wealth."
Carrick is quoting Earl Bederman. That's what journalists are supposed to do -- quote people. Bederman's firm (a client of mine) tracks the types of products that investors are buying by gathering sales data from a wide range of retailers and manufacturers -- including Assante, I believe. Do you dispute Bederman's view? Do you disagree with his findings that products touting downside protection have been big sellers (unfortunately, in my view)? Exactly, what's your problem with this quote?
Some in the financial realm believe that cumulative negative publicity has turned both investors and some advisers against funds. "If you want the top 10 issues of 2004 from market professional's point of view, numbers one through five would be mutual funds," said one wealth management executive. "Everyone hates mutual funds now."
I heard the same talk -- didn't believe it but heard it. This was sloppy work on Carrick's part. The exec probably asked not to be quoted by name but Carrick could have, and should have, identified the type of business this person does. I'd place more value on this quote if it came from a retail brokerage executive than if it came from a guy at a firm that manufactures PPNs.
An increasingly popular alternative to both GICs and funds in 2004 was the principal-protected note, which offers the opportunity to make gains based on various stocks or stock indexes and, at worst, get your principal back.
Are PPNs "increasingly popular"? Yes -- unfortunately. Are they an alternative to GICs and funds? Yes. Do they offer opportunity to make gains based on various stocks or stock indexes? Yes, if you're talking about the generic definition of gains as opposed to the tax act definition. Is the worst case that you get back your principal? Yes, unless there's hanky panky, a risk you face with any investment.
The price of protection has always been the weak spot with capital guaranteed products, but Mr. Marshall said that's slowly changing as the market develops. "Competition has forced many structurers to bring far more innovative products out there, with far cheaper fees," he said.
Here it's Carrick who states that the capital guarantee has always been the weak spot of such products? Was he wrong? He then goes on to quote a market participant who said competition has led to lower fees. I pay no attention to PPNs so I don't know if Marshall was being honest. Do you? In any event, Marshall is with a firm that's registered and licensed to do business. If Carrick shouldn't be quoting someone who knows about the mechanics and marketing of the product from the inside, who should he be quoting -- a "professional" advisor who either loves or hates them based on the marketing bumpf that Marshall published and the gladhanding of Marshall's wholesalers?
Mr. Marshall estimates that structured products, including principal-guaranteed notes and closed-end mutual funds that are listed on stock exchanges, have attracted roughly $13-billion in assets. He says asset growth of 50 per cent a year is possible as the structured product market widens to include new products in areas like fixed income.
I don't know if this was or wasn't factually correct. Carrick should have asked Bederman, the professional market tracker, though Marshall was probably quoting Bederman's data. There's no group like IFIC that compiles data on these products. Bederman's firm does. I don't who else does.
Expectations of weak equity markets in 2005 mean there's no reason for the trend to wane, said Mackenzie's Mr. Feather. "I think you're going to see it prevail for quite some time," he said. "I really do."
Here again we have a journalist actually quoting someone instead of mouting off on his own. In this case, the source is interesting because it's a guy who runs a big company that manufactures
both PPNs and mutual funds. What's wrong with running his insight -- especially when it reflected the prevailing view on the street?
Now let's look at the next excerpt:
without risk of losing money,
Assuming no hanky panky, does the PPN guarantee return of capital? Yes or no. Sure, Carrick could have gone into opportunity cost and inflation, but if I recall correctly, the article was an overview of a lot of products. Whenever you sell a mutual fund, do you directly and clearly tell the client that:
-- He/she can lose money due to market effect or poor management
-- The manager who built the fund's track record might leave, or might not even be around now
-- The manager running the fund might drift away from the advertized style
-- The reported MER does not include trading costs
-- The fund might pay an unexpectedly large taxable distribution
-- The fund might have only a so-so record against an index that can be bought much more cheaply and tax-efficiently through an ETF
-- The fund's sponsor might be acquired by another company, which then might merge this fund with one of its own
-- The fund might be little more than a closet index with some foreign content added on
Do you give those warnings and others verbally, or do you assume the client will thoroughly read and understand the prospectus?
While these notes aren't funds -- they're more like GICs --
Actually they're more like index-linked GICs. But, like GICs and unlike funds, they're issued for a set term. And, like GICs and unlike funds, the open investor's return (if any) is taxed as interest. And, like GICs and unlike funds, there's a guarantee that the initial capital will be returned. And, like GICs but unlike funds, the money is locked in for the specified term. (I understand that some PPNs do offer secondary trading, but there's also secondary trading for some GICs.) So, are PPNs "more like GICs" than they are like funds?
Principal-protected notes are a minor investing craze among risk-averse people who think it's better to have their capital protected in a complex, illiquid security than to simply commit to more transparent, higher-returning traditional investments.
Craze...complex...illiquid
More transparent...higher-returning
Which set of adjectives is more positive?