Responding to a recent Australian Securities and Investments Commission (ASIC) report that expressed concerns about the way capital-protected products are marketed to retail investors, Mr Elsworth said he had some sympathy for product providers.
On the one hand, the regulator is taking measures to shorten Product Disclosure Statements (PDSs) to make them more relevant for retail investors, he said.
“In the next breath [providers are] being criticised for not disclosing things properly – or perhaps [doing so] in a misleading manner. It’s a bit of a balancing act,” Mr Elsworth said.
But there is a difference in the way a product is marketed and what is contained in the PDS, he continued.
Products that are marketed as providing ‘conditional protection’ are potentially misleading to investors, Mr Elsworth said. Capital-protected products traditionally have a bond at their core to provide the ‘protection’ and riskier assets sitting on top of them to provide the investor with returns.
But these types of products have been few and far between in recent years, he said.
“There’s been less of that bond-and-call capital protection ever since interest rates started going down after the global financial crisis hit,” he said.
Other products that are less popular these days are protected equity loans and constant proportion portfolio insurance (CPPI) products. In fact, the most popular products in the space are more synthetic, and often don’t really offer capital protection at all, he said.
Mr Elsworth gave the example of Macquarie’s Flexi Trust 100 Trust product, which is marketed on the Macquarie website as providing “leverage”, “market exposure” and “capital protection”.
However, there are only two mentions of the term “capital protection” in the 150-plus page PDS for the Macquarie product – one of which warns about the implications of changes to capital protection tax laws.
“It’s internally leveraged,” he said. “You’re essentially taking out a compulsory loan, and that provides the basis of the exposure. That exposure is capital-protected – but what is not protected is the interest payments that you make on that.
“It’s certainly a bit of a grey area in terms of what’s capital and what’s interest. If you happen to read the 150-page PDS it’s clear enough. But how many investors have the time or inclination to do that?” Elsworth asked.
One benefit of the product is that the investor can walk away at any time and not be obliged to make further interest payments, said Mr Elsworth.
Internally geared products like Macquarie’s are useful for younger investors who are “cash rich and asset poor”, he added.
