Principal protected notes

[selkirk]

Recently a friend asked about principal protected notes from Altamira. They are also offered at banks and sometimes brokerages. anyways for the most part I do not care for them here are a few reasons.

some notes may be worthwhile but for the most part the devil is in the details.

Reasons to avoid (for the most part principal protected notes)

1. Returns can be capped.
these from Altamira go for 8 years until maturity.
however after 4 years can be redeemed by the issuer for 46.41% or 10% compound rate over 4 years.

sometimes the market could have a great bull market say 15% compound, probably not but you never know, you would miss out.

2. the divdends are not reinvested. many of these companies increase their divdends 5% a year, (ie. cdn. financials insurance, pipelines, banks) on average. you get none of the dividends. which in a flat market can make up for 30% or more of your total return.

3. management fees. the global note charges you 2.93% a year. they may reshuffle the portfolio once a year to make sure all securities are equal weighting. 2.93% is stealing it is not active management. 2.93% plus no dividends.

4. Many of these notes income from them counts as interest, which is taxed much worse than capital gains.

5. if one of the holdings in this group blow up it can hurt the returns, unlikely but who knew in 1999, worldcom, enron, would be memory. maybe overvalued but zero???

6. how they are managed

below are the stocks that make up these notes, the cdn. note has many good stock in it that trade on TSX and US. if you just bought most of them you would out perform the notes without losing those growing divdends.

thanks
selkirk



Altamira Global Blue Chip note

Alcan Inc.
Bank of America
Bank of Nova Scotia
Barrick Gold Corp.
BCE Inc.
BNP Paribas
Canon Inc.
CitiGroup Inc.
Encana Corp.
ENI SpA
Exxon Mobil Corp.
General Electric Co.
Honda Motor Co. Ltd
Johnson & Johnson
Kyocera Corp.
Magna International Inc.
Manulife Financial
Microsoft Corp.
Nestle SA
Novartis AG
Pepsico Inc.
Pfizer Inc.
Procter & Gamble Co.
Royal Bank of Canada
RWE AG
Siemens AG
Thomson Corp.
Toronto Dominion Bank
Total SA
Wal-Mart Stores Inc.


Altamira Canadian Blue Chip note

Alcan Inc.
Bank of Montreal
Bank of Nova Scotia
BCE Inc.
Canadian Imperial Bank of Commerce
Dofasco Inc.
Loblaw Companies Limited
Enbridge Inc.
Imperial Oil Ltd
Magna International Inc.
Manulife Financial Corporation
Falconbridge Limited
Quebecor World Inc.
Royal Bank of Canada
Sun Life Financial Inc.
TELUS Corporation
The Thomson Corporation
Toronto-Dominion Bank
TransAlta Corporation
TransCanada Corporation

 

[selkirk]

I have in the past ten years made 2 large investments in prinicipal protected notes; one worked out great the other was anoying.

BULLS
issued by Merrill Lynch Canada back in 1994 (95??) they ran for 5 years, and returned double the SP 500. so if they market did 10% you did 20%.

the notes were protected at $10 the issue price. there was .15cents of insurance so if the note was worth 20.15 you would get $20.

if it was below $10 you would still get the whole $10. bought at $10, and in the market as prices of $10.50-$11. sold it on average for $22.

by the way only about $70 million were sold since most investors saw the sp 500 have a good month and thought it was fully valued at the time.....short term thinking can hurt.

2. Futures protected notes

these were backed by the bank of montreal and compriseed of a collection of money mangers playing futures/commodity markets.

these markets are very volatile and thought that these notes would be a safe way to play with a chance of good/great returns. $5000 for each note

at the end of 5 years I made a total of 10%, would have done better in 90% of the blue chip stocks I follow or just the index.

on this trade was a complete idiot and did not due enough research, the bank of montreal does not make their earnings grow by 15% a year by risking it on the futures. they invested in safe low risk, low returns. and everyone got their managemnent fees, and at the end I made 2% a year. which was locked in............
an investment designed and sold to idiots and on that day I qualified.

so one good and one bad.
make sure you know the details.

thanks
selkirk

 

[DOGS THAT BARK]

Got a question somewhat along the lines of your post but a little different.
For online brokerage accounts what is best avenue for parking the cash that is sitting in accounts. Have had some in there waiting for oil to get a little lower or diff situations to arise but drawing paltry interest on money market account. Whats best route that you can move in and out of quickly.
Thanks

 

[selkirk]

not many choices, money market rates should improve interest rates will go up .50% also sometimes these rates are lower but as there paper matures rates go up slightly.

make sure the mer is low, there is also cashable GIC/cds, sometimes good rates.

also would look at index products that track short term bonds, these do fluctaute in value but not by much. they are also very liquid. will get a list of them

do not ussually have much in cash but this may change in feb, as may lose some stocks to covered calls. will probably put some money in a index product that tracks the 5yr. cdn. bond.

will list all of them in a few weeks.

thansk
selkirk

 

[selkirk]

sometimes it is worthwhile to buy short term to medium term corporate debt.

however most corporate debt has been bid up, and are not worth the extra risk, to government debt. this changes though and sometimes you can get a much better yield.....now is not that time.

thanks
selkirk