UOB's Structured Deposit 2013 Series (3)

UOB's Structured Deposit 2013 Series appeared to be quite popular.  Series (1) in August and Series (2) in September.  Now, Series (3) is launched in October, but with some revisions from series (1) and (2): 

Series (3) promotional information:
1. Total Guaranteed Fixed Interest of 9.6% of the Principal Amount over 5 years and 11 months (equivalent to an effective interest rate of 1.6193% per annum)

2. 100% Principal Amount guaranteed when held to maturity. 

3. Minimum investment of $5,000

This structure product has a bonus interest component linked to 5 Singapore companies' shares price performance:

Potential Bonus Interest of up to 6% linked to 5 Singapore Company Shares

Shares in Underlying Basket

Ascendas Real Estate Investment Trust ("AREIT") DBS Group Holdings Limited ("DBS") Keppel Land Limited ("KPLD") SembCorp Marine Limited ("SMM") Singapore Telecommunications Limited("ST")

Assuming an investment amount of S$10,000, held till maturity:

1. Best case scenario - If all 5 stocks are at least 95% their initial values:

	Best Case Scenario (Maximum Interest Potential)
End of Year	Guaranteed Fixed Interest Rate on Principal Amount	Maturity Variable Interest Rate on Principal Amount	Total Interest Payable
1	1.6%	1.0%	2.6%
2	1.6%	1.0%	2.6%
3	1.6%	1.0%	2.6%
4	1.6%	1.0%	2.6%
5	1.6%	1.0%	2.6%
At maturity	1.6%	1.0%	2.6%
Total interest payout	9.6%	6.0%	15.6%
Principal + Interest payout	S$10,000 + S$960 + S$600 = S$11,560

2. Worst case scenario - If any one of the 5 stocks is less than 95% their initial values:

	Worst Case Scenario (Minimum Interest Payable)
End of Year	Guaranteed Fixed Interest Rate on Principal Amount	Maturity Variable Interest Rate on Principal Amount	Total Interest Payable
1	1.6%	-	1.6%
2	1.6%	-	1.6%
3	1.6%	-	1.6%
4	1.6%	-	1.6%
5	1.6%	-	1.6%
At maturity	-	-	1.6%
Total interest payout	9.6%	-	9.6%
Principal + Interest payout	S$10,000 + S$960 + S$0 = S$10,960

The bonus interest structure for Structured Deposit 2013 Series (3) has changed again.  Instead of giving out maturity bonus interest at the end, as in Series (2); there are potential bonus every year again, like in series (1).  The best case scenario in series (3) has total of 15.6% interest, comparing with the total 19.3% interest for Series (1) best case scenario.  The total interest for Series (2) best case scenario is only 12.5%.  

Yes, your principal amount is guaranteed, but it is also locked in for the next 5 years and 11 months.  There is a loss of liquidity, if any other opportunity arises.

I have mentioned in my earlier post that the additional 2% bonus interest for Series (1) is not easy to get.  You would need all of the 5 stocks to be 105% over the initial entry price in order to get the 2%.  And it is 2% or nothing, there is no in-between bonus. 

Now, the additional 1% bonus interest for Series (3) is also not easy to get.  You would need all of the 5 stocks (in 5 different sectors) to be at least 95% over the initial entry price in order to get the 1%.  Any of the 5 stocks performing poorer than 95% entry value, and your bonus interest goes down the drain.

Lastly, the interest rate 1.6% is fixed, which means it won't get higher with market fluctuation.  Currently, ICICI Bank is offering 1.50% p.a. for FD (<$50,000) on 36 months tenure term. 

This structure product supposed to end 12th October,  but is it really a "smarter way to invest"?

UOB's Structured Deposit 2013 Series (2)

After UOB's Structured Deposit 2013 Series (1) closed in August, UOB's Structured Deposit 2013 Series (2) quickly followed, but with some major revisions:

 

Other promotional information:
1. Total Guaranteed Fixed Interest of 9.5% of the Principal Amount over 5 years and 11 months (equivalent to an effective interest rate of 1.6091% per annum)

2. 100% Principal Amount guaranteed when held to maturity. 

3. Minimum investment of $5,000

This structure product has a bonus interest component linked to 5 Singapore companies' shares price performance:

Potential Maturity Bonus Interest of 4% linked to 5 Singapore Company Shares

Shares in Underlying Basket

CapitaLand Limited ("CAPL") Keppel Corporation Limited ("KEP") Oversea-Chinese Banking Corporation Limited ("OCBC") SembCorp Industries Limited ("SCI") Singapore Telecommunications Limited("ST")

Assuming an investment amount of S$10,000, held till maturity:

1. Best case scenario - If all 5 stocks are at least 93% their initial values:

	Best Case Scenario (Maximum Interest Potential)
End of Year	Guaranteed Fixed Interest Rate on Principal Amount	Maturity Variable Interest Rate on Principal Amount	Total Interest Payable
1	1.7%	-	1.7%
2	1.7%	-	1.7%
3	1.7%	-	1.7%
4	1.7%	-	1.7%
5	1.7%	-	1.7%
At maturity	-	4.0%	4.0%
Total interest payout	8.5%	4.0%	12.5%
Principal + Interest payout	S$10,000 + S$850 + S$400 = S$11,250

2. Worst case scenario - If any one of the 5 stocks is less than 93% their initial values:

	Worst Case Scenario (Minimum Interest Payable)
End of Year	Guaranteed Fixed Interest Rate on Principal Amount	Maturity Variable Interest Rate on Principal Amount	Total Interest Payable
1	1.7%	-	1.7%
2	1.7%	-	1.7%
3	1.7%	-	1.7%
4	1.7%	-	1.7%
5	1.7%	-	1.7%
At maturity	-	1.0%	1.0%
Total interest payout	8.5%	1.0%	9.5%
Principal + Interest payout	S$10,000 + S$850 + S$100 = S$10,950

The bonus interest for Structured Deposit 2013 Series (2) is greatly reduced.  Instead of giving out bonus interest every year, there is only the maturity variable interest remains.  So, instead of the total 19.3% interest for Structured Deposit 2013 Series (1) best case scenario, the total interest for Structured Deposit 2013 Series (2) best case scenario is only 12.5%.  

Yes, your principal amount is guaranteed, but it is also locked in for the next 5 years and 11 months.  There is a loss of liquidity, if any other opportunity arises.

I have mentioned in my earlier post that the additional 2% bonus interest for Structured Deposit 2013 Series (1) is not easy to get.  You would need all of the 5 stocks to be 105% over the initial entry price in order to get the 2%.  And it is 2% or nothing, there is no in-between bonus. 

Structured Deposit 2013 Series (2) has addressed this issue.  However, now there is only the maturity variable interest remains.  The 4.0% maturity interest for the best case scenario is pathetic and not even 1% a year if you averaged it out for the whole tenure term.  Lastly, any of the 5 stocks not above 93% the entry price and your maturity variable interest becomes just 1.0%.

Lastly, the interest rate 1.7% is fixed, which means it won't get higher with market fluctuation.  Currently, ICICI Bank is offering 1.50% p.a. for FD (<$50,000) on 36 months tenure term. 

This structure product supposed to end 14th September,  but is it really a "smarter way to invest"?

UOB Structured Deposit 2013 Series (1)

UOB's Structured Deposit 2013 Series was eye-catching as 9.3% looked quite interesting:

Other promotional information:
1. Total Guaranteed Fixed Interest of 9.3% of the Principal Amount over 5 years and 11 months (equivalent to an effective interest rate of 1.5687% per annum)

2. 100% Principal Amount guaranteed when held to maturity. 

This structure product has a bonus interest component linked to 5 Singapore companies' shares price performance:

Potential Bonus Interest of up to 10% linked to 5 Singapore Company Shares

Shares in Underlying Basket

DBS Group Holdings Limited ("DBS") Keppel Corporation Limited ("KEP") Sembcorp Marine Limited ("SMM") Singapore Airlines Limited ("SIA") Singapore Press Holdings Limited ("SPH")

The potential bonus will be given out if all the above 5 stocks are above 105%, compared with the initial stock prices when the structure product begins.

Assuming an investment amount of S$10,000, held till maturity:

1. Best case scenario - If all 5 stocks are above 105% their initial values:

	Best Case Scenario (Maximum Interest Potential)
End of Year	Guaranteed Fixed Interest Rate on Principal Amount	Potential Bonus Interest Rate on Principal Amount	Total Interest Payable
1	1.55%	Not Applicable	1.55%
2	1.55%	2.00%	3.55%
3	1.55%	2.00%	3.55%
4	1.55%	2.00%	3.55%
5	1.55%	2.00%	3.55%
At maturity	1.55%	2.00%	3.55%
Total interest payout	9.3%	10%	19.3%
Principal + Interest payout	S$10,000 + S$930 + S$1,000 = S$11,930

2. Worst case scenario - If any one of the 5 stocks is less than 105% their initial values:

	Worst Case Scenario (Minimum Interest Payable)
End of Year	Guaranteed Fixed Interest Rate on Principal Amount	Potential Bonus Interest Rate on Principal Amount	Total Interest Payable
1	1.55%	Not Applicable	1.55%
2	1.55%	0%	1.55%
3	1.55%	0%	1.55%
4	1.55%	0%	1.55%
5	1.55%	0%	1.55%
At maturity	1.55%	0%	1.55%
Total interest payout	9.3%	0%	9.3%
Principal + Interest payout	S$10,000 + S$930 + S$0 = S$10,930

However, upon closer examination, this structured product is less appealing.  In actual fact, it is just an effective interest rate of 1.5687% p.a. for 6 years.  Yes, your principal amount is guaranteed, but it is also locked in for the next 5 years and 11 months.  There is a loss of liquidity, if any other opportunity arises.

Next, that the additional 2% bonus interest is not easy to get.  You would need all of the 5 stocks to be 105% over the initial entry price in order to get the 2%.  And it is 2% or nothing, there is no in-between bonus. 

But can this happens?  The main activities for these 5 companies (DBS, KEP, SMM, SIA and SPH) cover finance, marine, property, air transport, media, etc; which is a very wide coverage.  It is a long shot that nothing bad would happen in such a wide field for the next 6 years, be it financial crisis, property bubble, oil price, regional conflict, pandemic, earthquake, volcano eruption, etc, etc.  Just one of the stocks not doing 105% and the bonus interest will not materialize.  Also, SPH price was hyped up by the launch of SPH Reit and it is not clear how the stock will move in the future.

Moreover, the interest rate 1.55% is fixed, which means it won't get higher with market fluctuation.  As the 12 months FD is now at 1.18% p.a. (Bank of China), I would be very surprised if the 12 months FD rate will not move up to exceed 1.55% in the near future.  Furthermore, ICICI Bank is already offering 1.55% p.a. for FD on 36 months tenure term. 

This structure product supposed to end 31st August, but according to UOB's website, applications are now closed due to overwhelming response.  People are rushing to take up this 1.55% p.a. structured product, but is it really a "smarter way to invest"?

One last point, I wonder why UOB wanted to use its rival DBS as one of the 5 companies in the basket.  Why not UOB???

JP Morgan Asia Confidence Notes - Lesson Learnt

We are supposed to diversify our investments, or not putting all eggs into one basket.  This could reduce exposed risk, and in case one investment failed badly, will not affect the overall health of the full portfolio.  Definitely we would not want one bad egg to affect all the eggs in the basket.

However, those toxic structured products that were sold before Lehman Brothers' collapse, although having many component companies in their fund structures, did not work this way.  Just one bad egg (Lehman Brothers) and the whole product failed.

Same with JP Morgan Asia Confidence Notes.  When we invest money into 4 markets, we hope to diversify.  And if one market fared badly, we do not want it to affect the whole investment. 

However, in JP Morgan Asia Confidence Notes's structure, any one market will drag the whole portfolio down.  Since if any one market fall 50%., the trigger event would activate, and does not take into consideration performance of the other 3 markets.

In this way, instead of one chance for failure, we have actually exposure to 4 times chance for failure.

There are just too many factors that would affect the market.  Some we can think of, and some we may not imagine yet.
1. Regional or World-wide financial crisis.
2. Regional conflict (war) that have potential to drag in more and more countries.
3. A superbug that is more virulent than SARS.
4. Freak election that overthrow the Singapore government 

Of course not all structured products are bad, we need careful consideration before investing.  Definitely, purchasing one with your life savings, on the spur of the moment, during a short bank visit is a big no-no.

JP Morgan Asia Confidence Notes (Part 3)

I invested $50K into JP Morgan Asia Confidence Notes in June 2008.  I received the first quarterly payout of $937.50 in September 2008.

Almost immediately after I received my first quarterly payout, in mid September, Lehman Brothers collapsed.  After that event, the global financial market began a period of extreme volatility and all the stock indices fell sharply.

Suddenly, most of the structured products, which were previously promoted and sold as "high returns and low risks" have became hot potatoes and their risks greatly escalated. 

On Sep 18, 2008, The Straits Times reported that a structured product sold by DBS, High Notes 5 - with a promised annual return of about 5 per cent, was at great risk and warned that the investors may lose their entire principal in that Lehman-linked product.

Subsequently, other structured products have fallen one by one.  News received that another DBS structured products - High Notes 2 have fallen and investors may received just about 10% of their principal.

Then, more important to me, the structured products from JP Morgan are failing.  Pinnacle Notes Series 3 has fallen and Series 2 and 6 are also sinking.

Finally, I received a call from my "personal banker" that one of the indices in JP Morgan Asia Confidence Notes has dipped below the 50% barrier, and the "trigger event" may happen on the next observation date.  See attached graph below.

What options do I have?

1. I can hold the product until 2.5 years and hope that the worst index is above the 50% barrier then.  No loss to my principal in such event.

2. I can redeem the product immediately, but will suffer about 20% loss on my principal.

Although option 2 is undesirable, I still need to consider it because if the worst index ends below 50% initial level, I will  lose more than 50% of my invested principal.

At that time, I was on overseas assignment and the second option was not available to me, as I could not sign an agreement for early redrawal.

A small miracle happened for me and other JP Morgan Asia Confidence Notes investors, the worst index climbed back above the 50% barrier at the December observation date.  I received the second quarterly payout of $937.50 in December 2008.

I thought the worst was behind for JP Morgan Asia Confidence Notes, as the indices were rising slowly after Dec 2008.

However, the roller coaster ride was not over.  In February 2009, the indices fell again.  The worst index was teetering close to the 50% barrier as the March 2009 observation date approached.

Another miracle happened at the March observation date.  The worst index was just above the 50% barrier, an even more close shave and narrower escape than at the December observation date.

After March 2009, the worst was really over and all the indices rose slowly and steadily.  There was no more danger at the remaining observation dates.

During the 2.5 years tenure of JP Morgan Asia Confidence Notes, none of the indices ever reach their initial index values. 

I have collected the full 10 quarterly payouts, a total of $9,375 and the full principal of $50K on the product's maturity.

One last note, my "personal banker" did not survive through this crisis and was no longer at the bank when I withdrew my principal when JP Morgan Asia Confidence Notes matured in December 2010.

JP Morgan Asia Confidence Notes (Part 2)

How exactly did JP Morgan Asia Confidence Notes work?  I have thrown away the product brochure.  But I remembered it was something like:

JP Morgan Asia Confidence Notes are tied to Singapore, Malaysia, Thailand and Taiwan stock indices and pay 7.5% p.a. coupon fixed on a quarterly basis, but is callable every quarter.

Scenario 1 : If the indices go above the initial index values

At the quarterly observation date, if all the 4 indices have gone above the initial index values, the bank has the right to "call" the product, i.e., the bank will redeem the product by returning the investors the principal with that quarter's coupon payment.   In more details, the notes would end if the closing levels of all four indices at the observation date - either concurrently or separately on different valuation dates including preceding ones - is higher than their respective initial levels.

For example, at observation date 1, if just Singapore and Malaysia indices are above their initial levels, the notes continue the quarterly payout.  At observation date 2, Thailand and Taiwan indices are above their initial levels, even though Singapore and Malaysia indices have fallen below the initial levels, it would trigger the "call" or "buy-back" event.

Outcome: Investors receive 100% principal, with quarterly payouts until early "call" of the product.

Naturally, investors will not wish for this scenario as they will not receive the full quarterly payouts for 2.5 years, a total of 10 quarterly payouts.

Scenario 2: If the indices stay between 50% and 100% of initial index values

If scenario 1 did not occur, at all quarterly observation dates during the 2.5 years, if all the 4 indices are below the initial index values, and above 50% initial index values, the bank will continue to the quarterly payouts.

Outcome: This is the best case scenario.  Investors receive 100% principal after 2.5 years, with a total of 10 quarterly payouts.

Scenario 3: If any of the indices fall below 50% at observation date

During the 2.5 years, if any one of the indices fell 50% from the initial index value at the quarter observation date, then the trigger event happens.  At this point in time, the product will stop quarterly coupon payment.  Investors do not know their loss, because they need to wait till the end of the 2.5 years to see where does the worst index ends.   

Scenario 3A: If the worst index ends above the initial index value

At the end of the 2.5 years (Final Valuation Date), if the worst index ends above the initial price, then no loss is incurred.  Investors receive 100% principal.

Outcome: Investors receive 100% principal, with quarterly payouts until trigger event.

Scenario 3B: If the worst index ends below the initial index value

If the worst index ends below the initial price, the loss will be the difference between the initial index value and the index value at the end of 2.5 years.  In other words, if worst index is 40% initial value, investors would get 40% principal.

Outcome: Investors receive (Final Index Value / Initial Index Value) x Principal, with quarterly payouts until trigger event.

This would be the worst case scenario, but no chance that the indices would fall to zero.

The next post will talk about how my JP Morgan Asia Confidence Notes actually performed during the 2.5 years. 

I never know that it is going to be a journey on the Knight Bus of Harry Potter tales, where you never quite know what will happen next.

(Part 3 to come...)

JP Morgan Asia Confidence Notes (Part 1)

Let's talk about my experience with the purchase of a structured product.  Of course that was before the collapse of Lehman Brothers, Sep 2008.

It was one day in June 2008 when I renewed my fixed deposit at the bank.  That day I learnt that the bank have assigned a "personal banker" to "take care of all my financial matters" with the bank.  This "personal banker" told me that interest rate for FD was too low, and introduced a structured product for better returns.

The JP Morgan Asia Confidence Notes has the following structure:

1. Tenure of 2.5 years
2. 7.5% p.a coupon fixed – payable quarterly.
3. Based on Singapore, Malaysia, Thailand and Taiwan Indices movement.  The buffer level for Principal to be affected is 50% of index (index level at start of tenure) for any of the 4 countries.   Meaning one of the indices must fall by 50% (at observation date) for the Principal to be affected.

4. Early callable every quarter (at observation date), if all of the indices go above the initial index level.

The minimum investment amount was $50K.  Although the "personal banker" told me that the principal is not protected, I was given a strong impression that it was safe and low-risk.

This was also the opinion of most of the financial "gurus" and analysts at that time.  Most people did not believe that the indices would drop by 50% during the next 2.5 years.   Most people thought that the most likely outcome was that the bank would "call" the notes early before the 2.5 years tenure is up because all indices go above the initial index level.  One analyst even regretted that the minimum investment amount was too high, so that not more people can reap the benefits.  

Decided against putting all my eggs in one basket, I invested $50K from my FD into this JP Morgan Asia Confidence Notes, while the remainder stayed in the FD account.

This portion of investment with JP Morgan Asia Confidence Notes will be earning 7.5% p.a, with payment every quarter.  The portion with FD will be earning a miserable 1%.

But in this world, anything can happen......

(To be continued......)