Thumbs down on Capital Series Australia
Commonwealth bank call their new Capital Series Australia a new dimension in structured investments. They are having a laugh, a truer tagline would read same old structured investment. I normally throw these offerings straight in the bin as that is where they belong. They are designed to deceive investors and deliver guaranteed profits to the creators and unscrupulous financial adivisors who recommend them. They are seldom lambasted by the financial media as that media are dependent on advertising from the large institutions. I’ve decided to dig a bit deeper this time as there is one good point about this capital series offering from CBA. The timing. Sadly, if you plot the quantity of structured investments on offer over time you won’t get a normal distribution, you’ll have a strong correlation with market peaks. Most products are offered in bull markets, ouch!. With the majority close to market peaks as the lambs are led to the slaughter. So a single hand clap goes to CBA for launching a structured product now, when good rewards look highly probable.
Now for the bad
- The amazing disappearing yield trick. Read more on this massive hidden costs below, under costs. The disgusting thing is they don’t list this as significant disadvantage in the pds. CBA are taking the yield and don’t think to mention it!
- All they are guaranteeing is that you will underperform the market over the next 5.5 years. Underperform by a large margin.
- Are you prepared to read 127 pages of legalese across two documents?
- and understand it and its implications? I spent half an hour reading and all I saw were conditions and clauses in CBAs favour. I had scores of questions and there was no one single clear concise explanation. That alone should put it in the too hard bin.
- You pay a huge amount for the packaging, marketing, commissions, unnecessary downside insurance and more.
- Getting $100 back in five and a half years times is a really bad deal. It would be an incredibly bad result over this coming 5.5 years. Considering inflation is likely the value of that $100 may be less than $75 in 5.5 years.
What’s the alternative
Buy an index fund. You have control over the start date and could dollar cost average in. Resulting in a high probability of a better entry price. More importantly you’d have total control over the end date. Any financial advisor should be able to able to advice you about opportunity cost. If an advisor recommends this product to you get them to explain how it’s a good deal to pay for the right to swap opportunity cost for downside protection for a highly unlikely event. Is that clear? Opportunity cost is valuable, every time you invest you swap your opportunity cost for a potential return. The longer you are tied in the greater your opportunity cost and hence why you normally receive a higher potential return. In this Capital Series, through the magic of marketing, investors attention is misdirected by the magician like promoters and financial adivisors who earn their living from making this stuff up and flogging it .
In short they’re trying to make you pay for something that you can have for almost free with greater control over , incur no lock in and enjoy greater liquidity with.
OR
Buy Argo or another excellent investment vehicle at NTA (net tangible assets). Just don’t overpay. At NTA you getting possible upside from market outperformance and investors who lately in the cycle will happily more a premium to NTA. Two potential upsides, while capital series is all downside.
But what if I really need that protection?
The protection only works in 5.5 years from now, you’re paying a lot for a single point in time protection. Especially when as their own marketing points out it is incredibly unlikely that the market will be lower in 5.5 years. If you’re worried about shorter term volatility then you shouldn’t be investing now. However, if you really want the capital protection then buying the right to sell at the current market is still significantly cheaper. That’s a topic for another article and really you don’t need it.
Costs
If direct 0.55% of maturity value if cashed in. It is unclear whether you can avoid the brokerage cost if you take ownership of the underlying. Still keep in mind that opportunity cost.
If through a broker add 2.2% upfront and 0.55% annually. That’s a high price to pay someone who should not be recommending such a product to start with!
The Amazing Disappearing Yield Trick
So direct seems reasonable at a maximum cost of 0.55%. Or does it!
Think about what you’re investing in and the components that make up total returns. For an index like ASX200 there are two components; growth and yield. Do you see the magic slight of hand now? Where has the yield gone? That’s right CBA are stealing the yield using 127 pages of legalese and a close to worthless capital protection to distract you. Nice magic trick guy, no doubt you’ll suck in a lot of investors.
So what is the real cost?
The current yield on the ASX 200 is not as easy to find as you’d imagine. The index fund STW lists the yield as 5%. Whether it is 2% or 5% it is way too high a cost to pay.
How much will it cost?
Well if the yield is 3% then you’re paying around 17%, with the yield at 5% your paying 31%.
AVOID this Capital Series Australia offer and most structured products you are ever offered. You’re paying 17-31% to sacrifice your opportunity cost and be locked in on CBA’s terms which you’d need weeks to figure out the details hidden in their 127 pages of legalese.
Offer document Part 1
Offer document Part 2
Related posts:
Analysis of Capital Series Australia from Commonwealth Bank…
AVOID this Capital Series Australia offer and most structured products you are ever offered. You’re paying 17-31% to sacrifice your opportunity cost and be locked in on CBA’s terms, which you’d need weeks to figure out the details hidden in their…
Thanks for the article. I was thinking of investing in this offering, but thought I would do some research first. Your analysis cuts through all the crap. The glossy brochures were subsequently binned.
Thanks Bruce, I’m glad I saved you some time. I didn’t read every page of the PDS, who could at 127 pages? So, I may have missed some details.
“Legal, disclaimer:
All the usual stuff. Whatever this guy said if you need to read something, plus every other disclaimer I can think of. PLUS I have absolutely zero formal qualifications in accounting, finance, financial planning or closely related fields. Don’t believe the hype or my words.”
the above is from your “about” page ….
the last sentence is a tad disturbing….”don’t believe the hype or my words”…
Bruce, if you don’t know me or haven’t discussed investing with me over a number of years why would you trust me? Their are myriad reasons why people write things on the internet.
Even if someone is honest, like I try my utmost to be, they will have biases. You should always check the facts and ask questions like:
How do they know that?
Why are they saying that?
Can I invert what they are saying to gain more insight?
What biases do I assume this person to have?
and on and on.
My aim is to present information with enough links and clear explanation so anyone with a modicum of research skills can follow. At other times things will be nothing more than my opinion.
I have on occasion not done exactly what I said I would or had. For example I recall saying I had sold OHI when in fact I had only placed a limit order to sell. The price of OHI fell away that day and my order was not hit for around two weeks. So I hadn’t actually sold.
I write this blog for scores of reasons. I do not write it for money. As this article points out the financial industry is built around deception. I would prefer to uncover it than add to it. There are excellent individuals and companies in the financial industry, I wish to align with them.
Bruce, if I’ve missed the point why you find the last sentence disturbing then please let me know.
Hi Dean
I think you’ve misunderstood this product a tad. This invests a chunk of the money into a Bond to provide the capital guarantee, the rest goes to buy a call option on the index, you get 100 to 120%/130% of what the index does over the 5.5 years? (can’t remember the exact amount), but the participation depends on what the Bond cost them and the call option cost them on the day of investing.
If they bought into the ASX200 including dividends, you would see the participation as being roughly 70%-90%/100%. So this isn’t the big con you seem to think it is
However, you are right, these companies charge a heap in hidden charges, they all do, but if you want a capital guaranteed investment and more importantly 100% investment loan, you’re pretty much lumbered with it.
Your analysis gives the impression that the historical prices of ASX 200 includes dividends, it doesn’t.
Either way its a fairly decent offering compared to some of the other rubbish out there.
And yes I work in financial services and no, I don’t work for CBA.
Hi Frank
Thanks a lot for your informed comment.
I not sure how you drew the conclusion that I misunderstood the product, when I did not comment on the detailed structuring of the product.
I’m also not sure where I gave the impression the ASX200 includes dividends. It absolutely doesn’t and my main point was that CBA is hoping investors think that it does and at no point do they point out that investors won’t be getting the dividends.
All of the above is mere detail. The bottom line is this product guarantees (except if someone can show me the upside) under performance to the accumulation index over the next 5.5 years in all circumstances, except the very unlikely situation of the index being around 30% lower in exactly 5.5 years!
It is irrelevant that other products are worse, except in that most structured products are terrible investments for retail investors.
How can your or anyone say this is a fairly decent offering? I see nothing decent in it, unless investors have the opportunity to participate in outperforming the ASX200 index by more than 30% (ie the amount of dividends they’ll loose). As volatility is currently high the IV on options will mean CBA is likely to pay a high price for those calls, reducing the chances of any outperformance.
Can anyone point me to a page in the PDS that shows how investors may outperform?
Cheers
Dean
I don’t understand what this has to do with the accumulation index?
Are you saying investing in the accumulation index is the alternative?
In that case how would you provide the capital guarantee?
You are correct, the cost to investors is in effect the dividends they would receive if they invested directly in the accumulation index. But if someone is investing for the sake of trying to get into the market whilst it seems low and wants the certainty offered by a capital guarantee and more to the point wants 100% investment loan, where is the accumulation index alternative? There isn’t one.
I agree that the likelihood of the index being 30% lower in 5.5 years is low, but then again I’d of said something similar about the market falling over 40% in the last 12 months.
Its a bit like saying buying a Range Rover will guarantee you will use up more fuel than a Commodore and its going to cost more to buy.
With regards to terrible structured products, I think you should look more at the CPPI products like Perpetual Protected Investments & Macquarie Fusion, thats where the real story is.
Frank I can only assume you are not being completely honest. If you have read my article I fail to see how you can not know what this has to do with the accumulation index.
Your question about where is the accumulation index alternative totally misses the point. Of course there is no directly comparative product available, that is the whole point of structured products. To make something of no value available and charge for it.
Think outside your box and ask whether there is any real value being offered. The answer is no. If you come to any other conclusion then I suggest you’re letting financial compensation or other biases interfere with your thinking.
Investment loans over charge. There is no need to be considering a capital guarantee over exactly a 5.5 year time frame at this point. If you advise clients then do the right thing and recommend they buy an index fund or similar product.
In regard to the comment on 1st Dec 2008, why is outp erformance the major issue. It appears the WFC is the result of an obsession with “out performance”. What if you don’t want to lose money but you need to invest & get a reasonable return i.e. the return required to meet your objectives. If you’re not chasing the Holy Grail of “Out Performance” then these type of offers fullfill a part (I stress “a part”) of any reasonable investment portfolio. No, not for everyone but suitable for part of some portfolios.
The issue with this offer is that you’re paying an incredibly high fee for very limited protection. The current yield on the ASX 200 is around 7%, so that is your annual fee for the protection, which as I pointed out in the post is almost worthless. IIRC the yield/fee was around 5.5% when I originally posted the article.
The second major issue is the deceptive nature of the PDS and marketing material. CBA went to pains to hide the fact they were keeping the yield.
You don’t need outperformance. Go for the ASX200 index fund and get capital growth plus yield plus TOTAL control over the timing.
It’s a good thing that you’ve pointed out the opportunity cost in an explicit manner. This is definately worth taking into account (although given your obvious subjectivity I’ll check the math myself).
With regard to disclosing the yeild, you might want to re-read the offer documents. I know we all love a bit of bank bashing but it states pretty clearly on p.4 Part 1 that it may or may not pay coupons (with reference to section 1.7 for more explanation). In Pt.2 p.3, section 2.2 it states clearly with regard to this issue of the product “coupons are not payable for either strategy 1 or strategy 2″.
Any one reading this will no doubt start questioning your motives if you make incorrect statements.
Your final point about TOTAL control. We live in uncertain economic times. You invalidate you entire point suggesting “Total control” exist anywhere at any time. There is a cost involved: too high or too low is relative to the need of the investor. It seems this product is attempting to provide certainty in uncertain times (for some people / organisations & some of their portfolio).
Skip, I have no motives except an honest review of this product. I have no relationship with CBA and no issue with them in general. Are you able to say the same?
If you are a financial advisor then why are you not willing to provide your name and company details?
IT DOES not state the disappearing yield clearly enough for most retail investors. I know this as many have contacted me to say thanks for pointing it out.
My point about total control is correct. In the CBA offer you are restricted to their dates. With an index fund you have control over entry and exit times, you can dollar cost average, sell part at any time etc etc.
No intelligent retail investor in the world could think this was a good deal. Only financial advisors and CBA could think this is a good deal as they make money at the expense of investors. Which are you Skip?
Simply pointing out some of you’re comments are not factual.
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