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In my opinion there are several things about this product that are bad:
1 – The underlying Index appears to only have a simulated track record and therefore has never been tested in the “real world”. The similar product that CIMB launched in Malaysia in 2008 is now only worth as little as 80% of cost price.
2 – The fees on the product are high – the 2% Index fee (which CIMB claim is to “defray costs”) and the 5% performance fee is more akin to a hedge fund type product rather than a structured deposit.
3 – If the Evergreen II Index does badly then CIMB will take money out of the Index and into a risk-free asset (ie a regular deposit account). That means there is a risk that the investor ends up holding a deposit that gives zero exposure to the Index and 100% exposure to a low-yielding deposit account. This often happens with these kinds of products, and leaves the investor with a product which is very different to what he thought he was getting. In my opinion this risk should be disclosed in the marketing material.
4 – CIMB claim to give the investor “free money” by increasing the account size by 25%. However in the event that investors choose to withraw their money before the product matures (in 25 years) then CIMB will take back the 25% but leave the investor with any profit or loss from that extra 25%. What does that mean? That means the investor is being given a leveraged position in the product – if it works then you make more, if it loses then you lose even more. If the product does badly (like the CIMB Malaysia product has done) then investors will end up with even bigger losses than they thought, if they want to get their money back. This is meant to be a safe, capital-guaranteed type product, why are CIMB leveraging the product?
5 – The Evergreen II Index is denominated in Euros. That means that if the Euro declines in value versus the Singapore Dollar (as it has been doing all year) then the invesor loses. Why does an investor want this extra risk? It makes no sense for a Singaporean investor to take this risk.
All in all this seems to me to be a badly thought-out product whose advertising fails to disclose important features and risks of the underling index and product.
Hi Maureen,
Some of the points you raised are exactly what another person told me. Unfortunately, most people in the street will not know this.
ReplyHi,
I just want to warn investors on this product.
Do note that this product was introduced in Malaysia in 2008 with a few tenors (15,20,25,30 years if I am not wrong) If you track the performance of the Evergreen II index, it is a really good performance from 2008 till now. However, I cannot say the same for the unit share price. It was introduced in Malaysia at $1. As of June 2010, the unit share price is priced at less then $0.90. It goes even lower for those who bought a longer tenor product.
As such, although the underlying index performance is fantastic, I cannot say the same for the unit share price. I have asked about the ratio of returns of the underlying index to the unit share price and was told that it is close to 1-1. However, I am skeptical now.
http://forum.lowyat.net/topic/805771
Price chart in MY: http://1-million-dollar-blog.com/cimb-max-investsave-interactive-riv-trending/
ReplyHi TT,
Thanks for your comments.
Interesting to note that net of costs, the RIV has largely underperformed the index.
Replythe reason that the product issued by CIMB in Malaysia has underperformed the Evergreen II index is that its performance is linked to a different index – the “Evergreen Index”. The original “Evergreen Index” has a very good “track record” until the product was actually launched in late 2008. However since then, the index has done poorly and lost 9% in 2009 (despite the fact that equity markets did very well during that period):
http://www.cimbbank.com.my/index.php?ch=ci_per_st&pg=ci_per_st_inv&ac=4&bb=4243&tpt=cimb_bank
Why did the Evergreen index do so well prior to October 2008 and then so badly? It would appear that prior to October 2008 the “track record” of the Evergreen Index is a SIMULATED track record. ie the strategy of the index has been selected, based on back-testing, in order to create an impressive track record. Of course once the product is actually launched the real ability of the Index is shown and unfortunately that hasnt been good – its easy to create an investment strategy that works after the event but not so easy before!
But this doesnt seem to worry CIMB bank as now they have come up with a new Evergreen Index – the Evergreen II index – for use on their new product here in Singapore. And guess what? The Evergreen II index “performed” just fine in 2009!:
http://www.cimbbank.com.sg/index.php?ch=sg_per_wm&pg=sg_per_wm_sd&ac=37&bb=709&tpt=cimb_bank
Hi Kamal,
I am surprised MAS actually allows CIMB to sell a blackbox kind of product in the form of the Evergreen index to the retail investor. We do not know the components of the index. Have we not learnt the lesson of Minibond?
Furthermore, it is nowhere mentioned (or buried very deep inside) that the returns are simulated. A backtested return is good for marketing, but useless for all other purposes.
ReplyThere is no free lunch. Isn’t this like if someone comes to you and say, lend me 100K for 25 years. If I can pay you more then I will pay you more. If you want back the money before the time is up you will get less. You will get back a guaranteed amount at the end of the quarter century if I can pay you. If I cannot pay you then I am bankrupt or if I am bankrupt then I cannot pay you.
ReplyI’m always skeptical about these ‘capital protected’ products, esp one as long term as this. Just buy straight into the CIMB Evergreen II Index, allocate part of your portfolio to a zero coupon bond, and presto, you have your own ‘capital protected’ product with no lock in!
ReplyHi Tatooedbanker,
Can’t buy into the index directly as it’s a specially created CIMB index to be used inside this structured note.
But you are definitely right about zero coupon bond portion. The capital protected is usually there for marketing purposes. Makes it easier to sell the product.
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