BAML report on structured products explodes the myth of poor returns

BAML report on structured products explodes the myth of poor returns

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Structured products live up to their promise

Structured products have produced astonishing returns during the financial crisis and rarely disappoint investors, according to a report from Bank of America Merrill Lynch (BAML). Reviewing the performance of 40 structured products that have launched and matured in the past 10 years, the bank discovered that 37 made a positive return (usually in double-digits annually), two broke even and only one produced a return lower than the issue price.

"This track record... is the result of keeping issuance costs low, keeping the return profiles transparent and relatively simple and adhering to a philosophy of aiming to restate traditional equity market risk (ie. unlimited upside, full downside) into more predictable return profiles," states David Curry in a report that was published at the end of 2010.

The leading example that Curry gives in his analysis of the results is ELDeRS 28A Shares, Capital Accumulation 6, which provided an annual return of 11% subject to defined performance of the FTSE 100 Index. (See table below.) "Capital was only at risk if the FTSE 100 closed down 50% during the life and more than 40% at the end of the Shares' life," states Curry. Over a two-year term, the FTSE 100 index fell 13% while the structured product generated a positive return of 22%.

When quizzed, UK investors expect a 7-12% return from their investments, and fit their expected returns from the FTSE 100 into that range. "To target this type of return, investment managers and stockbrokers may be drawn into writing calls against stock positions and missing assets with different risk characteristics (ie. equity funds, fixed income, property, hedge funds, etc) to subjectively arrive at a desired point on the risk/reward curve," states Curry.

Performance of matured Shares (August 2000-October 2010)

 

ELDeRS Series/Share name

Life

Total Return over Issue Price

% change in reference Index

Stepped Income or Growth

ELDeRS 3D - Stepped Growth 2

7 years

80.41%

32.28%

MLFG - Stepped Growth

7 years

75.26%

-9.00%

ELDeRS 3C - Stepped Income 2

7 years

68.04%

32.28%

MLFI - Stepped Income

7 years

60.82%

-9.00%

ELDeRS 13B - Stepped Growth 3

6 years

57.00%

12.24%

ELDeRS 13A - Stepped Income 3

6 years

48.00%

12.24%

ELDeRS 2B - Stepped Growth

5 years

44.33%

66.89%

ELDeRS 2A - Stepped Income

5 years

39.18%

66.89%

Autocallables

ELDeRS 16A - Capital Accum 2

3 years

27.00%

0.70%

ELDeRS 8B - Early Growth

3 years

26.77%

37.98%

ELDeRS 28A - Cap Accum 6

2 years

22.00%

-13.33%

ELDeRS 28B - Cap Accum 6

2 years

22.00%

-9.19%

ELDeRS 29A - Cap Accum 8

2 years

21.00%

-5.54%

ELDeRS 16A - Cap Accum 2

2 years

18.58%

-0.38%

ELDeRS 21A - Cap Accum 3

1 year

11.00%

9.74%

ELDeRS 15A - Cap Accum

1 year

9.00%

14.10%

Accelerated Growth

ELDeRS 1C - UK Accelerated

5 years

95.00%

63.75%

ELDeRS 11B - US Accelerated

3.5 years

46.00%

29.17%

ELDeRS 9B - UK Accelerated

6 years

33.84%

20.97%

MLJEP - Japan Accelerated

6 years

15.46%

7.20%

ELDeRS 9D - Japan Accelerated

6 years

-9.98%

-10.88%

Capital Protected

ELDeRS 1A - UK Cap Protected

5 years

51.00%

57.67%

ELDeRS FTSE Sec Growth – 1B

5 years

35.00%

57.67%

ELDeRS US Cap Protected – 11A

3.5 years

33.00%

29.17%

ELDeRS UK Secure Growth – 9A

6 years

21.21%

20.97%

ELDeRS UK Sec Growth – 12A

6 years

20.00%

25.85%

ELDeRS UK Cap Protected– 12B

6 years

12.00%

25.85%

MLJEP - Japan Enhanced

6 years

10.31%

7.20%

ELDeRS 9C - Japan Cap Prot

6 years

1.01%

-10.88%

ELDeRS 13C - Japan Cap Prot 2

6 years

unchanged

-27.46%

30 Stock Basket

MLDR I - Defined GBP Zero

3 years

15.80%

-1.03%

MLDR I - Defined USD Zero

3 years

15.80%

-1.30%

MLDR II - Zero Shares II MLDR II

3 years

14.70%

0.76%

MLDR I - Defined GBP Income

3 years

12.00%

-1.30%

MLDR I -Defined USD Income

3 years

12.00%

-1.30%

MLDR II - Defined Income II

3 years

9.50%

0.76%

MIDIG - Zero Shares

3 years

4.50%

-20.60%

MIDIG - Defined Income

3 years

2.60%

-20.60%

Bear Market

ELDeRS 15B - Rev Capital Acc

4 years

38.00%

-12.76%

ELDeRS 11C - UK Rev Growth

3.5 years

unchanged

40.99%

Source: Bank of America Merrill Lynch

 

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