Saturday, November 8, 2008

Dr Money Looks at HN2


Distributors: DBS, POSB

Name of Product: "DBS High Notes 2"

Ad Description: Picture of a lady looking lovingly at a string of pearls

Type of Product: Structured Product

The Bold Claim: "A potential return of 21.5 per cent over 5 years."

The Facts: (i) Return for years 1 to 5 are 3.5 % + 3.5 % + 3.5 % + 5 % + 5 % = 21.5 %. These are the maximum yearly returns.

(ii) The ad does not tell the minimum returns and, as with all structured products, the prospectus does not give enough information to know which is more likely -- the min or max return. Bank sales staff often imply that the maximum return is more likely. In fact, there is no way to know this.

(iii) As with all structured products, the maximum return is limited. The cap is 14 per cent over 3.5 years, which comes to 4 per cent per year. The ad and sales staff give the impression that you are fortunate if you receive this early payout. In fact, the opposite is true. You will receive an early payout only if the fund does exceptionally well. If that happens, the issuer will buy you out, thereby limiting your gain. The remainder of the extraordinary gain (often the bulk of it) goes to the issuer.

(iv) As with all structured products, the return is linked to products and events which are nearly impossible to forecast. In this case, "The performance of DBS High Notes 2 is linked to a basket of 8 international and regional banks, each with a minimum rating of A- by Standard and Poors".



Wilson said...

Yes, agree. And also in that same ad where a pretty face is looking at a string of pearls, there is a line which says: "Spread your risk with a basket of bank credits (referring to the reference entities)...." This is a highly misleading statement as the bank intentionally omits the "first-to-default" clause so as to give potential investors the impression that the investment risk is diversified among the 8 reference entities. The truth is that any of the reference entities gets into trouble, the investment principal is gone. So far the bank has dodged to comment on this misleading statment. Perhaps someone with the opportunuty could press the bank to give its comment.

Anonymous said...

Understand Dr.Money's comments were made two years. I think today Dr.Money would say he was misled by the selling materials as the product HN2 was even more risky and toxic than he had pointed.

Besides the 8 reference notes, HN2 is also exposed to the deadly risk of the reference notes (the CDOs), which DBS for some reasons did not reveal to us all, including Dr.Money.


Anonymous said...

Yes, while it is correct that Doctor Money's cricism of HN2 were made two years ago and they may look too mild today, he was the ONLY person critical of HN2 (and other structured products) at that time.