May 14

I Still Hate Structured Products – JB Global’s Latest

Its been a little while since I’ve ranted about structured product but for the second straight year a set of structured producted produced by JB Global have created some annoyance in me. I don’t know much about JB Global other than, they’re not too global, and they release a lot of structured products because, as far as I can tell, they are an easy sell to the gullible.

Now, these products do sound quite appealing. The latest set includes returns that are linked to the performance of Berkshire Hathaway (Warren Buffet’s company); China and India; US Real Estate (that appears quite cheap compared to Australian property…unfortunately for the US there is still a massive over-supply); our favourite sharemarket, ASX200. They’re capital protected and you can borrow up to 100% of the investment! There are numerous other components to the product but there is one aspect to the product that stopped me looking any further into it…the incorrect definition of how the issuer calculates stock market volatility.

Now, this perhaps doesn’t sound much on the surface, but the products final payout is dependent on the level of calculated volatility of the underlying assets (the higher the vol the lower the payout) so the fact they use the wrong formula destroys my interest and I cannot have any faith in it. For those who are interested in this error, when calculating annualised sharemarket volatility based on daily prices you calculate the annualised figure by multiplying the daily volatility by the square root of 252 (which is the approximate number of trading days in a calendar year)…this product multiplies the daily volatility by the square root of 365 (obviously the number of days in the year) which results in an artificially inflated figure that is not at all a reflection of annual volatility…hence the marketing materials and anything else to do with this product is quite meaningless to me and should be to anyone else looking at this product. And don’t forget, the higher the vol the lower the payout and the vol is calculated incorrectly too high!

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