# MLC Investment Protection - Heads MLC wins, tails I lose



## sydboy007 (16 August 2013)

just had a quick squiz and an MLC product they're advertising on the SMH

At least at a Casino you know you're likely to lose.  This product sux big time.

Hopefully anyone thinking about this product would read the PDS, but I have my doubts.  They're also a bit disingenuous in using the 1999-2009 time frame in their shiny graph.

The fee they charge is pretty steep

_Assumptions

Based on the initial starting balance you have entered, this calculator illustrates the Protected Capital Value and Protected Account Balance using Protected Capital for a 10 year term. The calculations are based on MLC Horizon 4 Balanced Portfolio unit price data in Superannuation over the period 31 March 1999 to 31 March 2009. This assumes no contributions or withdrawals during the term, including no adviser fees or insurance premiums. The Protected Account Balance is shown net of all administration, investment management and Investment Protection fees. *This assumes an administration fee of 0.40% and Investment Protection fee of 2.0%. Investment management fees are reflected in the unit price.*_

I love that they can bump up the protection fee to a mighty 7%, or they can just move your money into a new investment option.  Not sure how it's protection if the "insurer" can make so many changes should things go pear shaped.  As for adverse demographic changes, we all know the population is aging and the number of dependents to work is increasing so how can they use it as an excuse???

_Changes we may make to your protection

We may need to change the protection features even after you've started your protection. Changes can happen at any time as a result of legislative or regulatory changes. Otherwise the changes listed below can only happen if certain events happen first, e.g. material or adverse long term changes in market or demographic conditions. Changes that may be made include:

*the fee you pay for protection, however it won't exceed 7% pa*
*switching your protected account balance in to a new investment option*
    only allowing future contributions to a different investment option to the one you've chosen
    how often market gains may be 'locked-in', but the lock-in will be at least every two years
    reducing the withdrawal limit if you choose Protected Capital
    stopping or restricting the addition of new investments into your protection
    reducing your protected income payments, if you choose an income for life, but by no more than 20%.
    If any of these changes occur, we'll let you know before the change is made.
_


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## burglar (16 August 2013)

sydboy007 said:


> just had a quick squiz and an MLC product they're advertising ...




I hate MLC


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## bigheadache (16 August 2013)

I haven't read the PDS but I don't think the numbers are that necessarily out of whack. it's a matter of understanding exactly what you want and what they are doing. MLC are providing capital protection for 10 years. imagine if you replicated the same thing to your portfolio.. by buying a series of put options. How much do you think it will cost you? 

And they can ratchet the protection fee up to 7%? Well again, looking at options, options are subject to changes to volatility. If vol rises, then the cost of your options will rise. At least they've capped it at 7%. imagine what the cost of your options would have been during the GFC.


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## sydboy007 (16 August 2013)

bigheadache said:


> I haven't read the PDS but I don't think the numbers are that necessarily out of whack. it's a matter of understanding exactly what you want and what they are doing. MLC are providing capital protection for 10 years. imagine if you replicated the same thing to your portfolio.. by buying a series of put options. How much do you think it will cost you?
> 
> And they can ratchet the protection fee up to 7%? Well again, looking at options, options are subject to changes to volatility. If vol rises, then the cost of your options will rise. At least they've capped it at 7%. imagine what the cost of your options would have been during the GFC.




If you go for a 10 year protection you are stuck witht he investment for 10 years as early withdrawl means you get your balance, not the capital protected balance back.

I'd also argue that over a 10 year time frame it's unlikely you would see a capital loss over that period, even less so over a 20 year period.

The thing that gets me is they can me changes AFTER your protection has started.  Sounds a bit WA Government to me


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## banco (16 August 2013)

bigheadache said:


> I haven't read the PDS but I don't think the numbers are that necessarily out of whack. it's a matter of understanding exactly what you want and what they are doing. MLC are providing capital protection for 10 years. imagine if you replicated the same thing to your portfolio.. by buying a series of put options. How much do you think it will cost you?
> 
> And they can ratchet the protection fee up to 7%? Well again, looking at options, options are subject to changes to volatility. If vol rises, then the cost of your options will rise. At least they've capped it at 7%. imagine what the cost of your options would have been during the GFC.




You're being too generous. Capital protected products are usually a scam product.  You notice in the PDS they say they can switch your protected account balance to another investment option?  So you sign up for the equities option for 10 years.  Year 2 market enters a bear market.  They switch out your investment to cash and you spend the next 8 years paying your steep fees for bank interest.  Happened in the GFC with quite a few of these scam products.


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## bigheadache (16 August 2013)

sydboy007 said:


> If you go for a 10 year protection you are stuck witht he investment for 10 years as early withdrawl means you get your balance, not the capital protected balance back.
> 
> I'd also argue that over a 10 year time frame it's unlikely you would see a capital loss over that period, even less so over a 20 year period.
> 
> The thing that gets me is they can me changes AFTER your protection has started.  Sounds a bit WA Government to me




Well that's how they work. Like I said, think about how you would replicate it yourself. You'd buy a series of at the money put options on the annual reset date. The options change price with implied volatility and of course, you have no idea what your put options cost in year 2,3,4,5,6,7,8,9 are. If you understand that, then you'll understand why the protection fee changes. 

I'm not here to advocate this product. I'm just trying to explain to you as simply as possible the mechanics of why the protection fee changes.




banco said:


> You're being too generous. Capital protected products are usually a scam product.  You notice in the PDS they say they can switch your protected account balance to another investment option?  So you sign up for the equities option for 10 years.  Year 2 market enters a bear market.  They switch out your investment to cash and you spend the next 8 years paying your steep fees for bank interest.  Happened in the GFC with quite a few of these scam products.




There are two types of capital guaranteed products. Firstly, there were zero coupon bond products. Basically for your $1 invested, they'd buy a zero coupon bond for $0.90 (or whatever - depends on the interest rate) which is your capital protection and use the $0.10 to buy derivatives to get your market exposure. The zero coupon bond matures to $1 which is your starting capital. If your derivatives blew up, at least at the end you got your $1 back.

The products you talked about were CPPI products. They work by allocating between a risky asset (say equities) and a risk free asset (like cash). the ratio between the two is supposed to adjust so that you will always end up with your protected capital at maturity as a minimum.

Believe it or not, CPPI products behaved exactly the way they were supposed to. The market fell bad, the CPPI products allocated to cash and investors got their starting money back at the end. 

The problems I see with alot of capital protected products is that most people (especially financial planners sadly) do not understand the different types, how they work, and what the pitfalls are. The main weakness of CPPI is that early falls lead you to be cash locked for a long period of time. This has never been hidden from investors - its just that alot of people didn't recognise this because they don't bother to ask questions about the mechanism.  

the other thing is people borrowed against these products. When you don't understand how something works and you gear up against it, thats always a risk.

There is nothing scammy about capital protected products. Apart from alot of people not understanding the mechanisms and the pros/cons, investors are also a bit greedy to be honest. people want all the equity upside but want downside protection at low/no cost, and often don't recognise that portfolio insurance cost is directly related to volatility. Capital Protecting a share portfolio is expensive. it gets more expensive when markets are volatile and you need it the most. If you bought put options over the whole portfolio it would be expensive. CPPI is cheaper than buying put options, but as you noted you run the risk of being cash locked if you have an early fall. 

I myself would never use any of these products. if you invest in the long term and appreciate equity risk, then you shouldn't need capital protection. they are also very expensive, but as I mentioned above, if you appreciate that more volatile assets cost more to protect, then you should not have cause to complain or be surprised by this.


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## banco (17 August 2013)

bigheadache said:


> I myself would never use any of these products. if you invest in the long term and appreciate equity risk, then you shouldn't need capital protection. they are also very expensive, but as I mentioned above, if you appreciate that more volatile assets cost more to protect, then you should not have cause to complain or be surprised by this.




But who exactly do these CPPI suit? Apart from financial advisers (who at least in times past might have got commissions from pushing clients into them) and banks. They are a scam in the sense that they are a complicated product that is designed to bilk retail investors.  You don't see sophisticated investors signing up for these bull**** products.   How many people at the divisions of banks that sell these garbage products put their own money into them? I would guess zero.


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## sydboy007 (17 August 2013)

banco said:


> But who exactly do these CPPI suit? Apart from financial advisers (who at least in times past might have got commissions from pushing clients into them) and banks. They are a scam in the sense that they are a complicated product that is designed to bilk retail investors.  You don't see sophisticated investors signing up for these bull**** products.   How many people at the divisions of banks that sell these garbage products put their own money into them? I would guess zero.




My feelings as well.

I suppose if they made the product easier to understand, and highlighted the fact you are locking away money for a 10 or 20 year time frame then I'd be a bit more comfortable with it.

It seems to me they would only work during very large market falls near the end of the 10 year term - as their nice chart shows.  I doubt it would look such a crash hot if the start time was say jul 2003 till jul 2013.

It annoys me how the financial industry cherry picks a very particular scenario to highlight the benefits of their.  Possibly they should have to provide an scenario highlighting what can go wrong with their product.

At the end of the day it boils down to don't invest in something you don't fully understand.  Probably better off buying AFI or ARG and let some competent people manage your money for a very low cost with a long history of out performing the market.


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