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Jun 22

Structured Products – tough to get your money back

Source: Credit Suisse Global Investment Returns Yearbook 2010

The above chart shows the gross outperformance of Australian shares (including dividends) versus Australian Bonds and Bills. Over the 110 years to the end of 2009, shares provided an additional return of only 6% to 6.8% versus bonds and bills respectively.

Believe it or not, there is no other country in the world that has produced a greater equity risk premium over bonds and bills than Australia over the last 110 years…the contrarian investor is probably saying that its someone else’s turn but anyway, I digress…

…all I have to say is that given 5 to 12 year government bonds in this country are only yielding between 5% and 5.5% at the time of writing, it is an absolute disgrace that many structured products available to retail investors require the ASX 200 Accumulation Index to return double digits to cover the cost of funding!

Using this simple, but frequently used, measure for forecasting long term equity performance, if we assume the premium is likely to be 6% against bonds, then sharemarket returns will be around 11% to 11.5% over the next 5 or more years. With an expected dividend yield around 4%pa then the ASX200 Share Price Index performance will only be 7%pa…this is less than the cost of funding many of these appalling structured products (keep in mind structured products typically provide exposure to the ASX200 Share Price Index…not the accumulation index).

That’s my rant for the day.

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