`Guaranteed Returns`

A lot of investment products will speak about `guaranteed returns` or `capital guaranteed`, especially in the largely unregulated offshore market. Guaranteed returns are offered in closed funds, and structured notes linked to markets in Europe, Japan and North America amongst others.  The truth is, nothing is truly guaranteed, because the guarantee is only as strong as the institution or government making the pledge in the first place.

Lehman Brothers produced a lot of products claiming to be guaranteed, but depositors lost their money after the company went bankrupt. Government pledges to guarantee deposits after the financial crisis only covered, typically, less than $100,000 or equivalent of bank deposits, often excluding pure investment related products. Moreover, even assuming all governments always kept their pledges and were able to keep such pledges, the currency and inflation risks in the event of an economic crisis are huge.

During my time working overseas advising expats, many funds promising guaranteed returns, often with excellent track records, have collapsed. LM, an investment which was based in Australian, collapsed last year. The fund, which was regulated in one of the most regulated financial centers in the world, had a great track record and was based on investing in real estate, has left many investors completely out of pocket. Recent funds being sold onshore and offshore, such as UK student accommodation funds, are also in liquidation.

I am not saying that all structured notes and leveraged and illiquid assets are bad. Having one home to live in, which isn’t mortgaged, is good for people in many situations; and some liquid funds and structured notes have performed well and returned investors a good return.

However, readers should consider one thing. If structured lending to developers and other industries such as farming, was so profitable, with so little risk, then why are private equity firms and other people in the know not looking to buy into such opportunities? Why do such products need to be retailed, and sold hard, to consumers, if they are such great opportunities?

The world’s top markets have had more than 100 years of consistent gains over long periods of time. Somebody who invests monthly into the markets, moreover, does not need to worry about short-term trends, as buying cheap, can allow for higher returns, as dollar-cost averaging shows.

One of the positives of equity investing, which isn’t always stated, is that it is a more liquid investment, and a buyer and seller can be found. Next time you are pitched by your adviser/stockbroker, a good question to ask is `is this fund liquid` or `does the fund allow daily trading`.

If you insist on buying into illiquid funds and bonds, at least go through some of the more sound financial institutions. Ultimately funds guaranteed by Goldman Sachs or any of the other big players, have a much better chance of honoring their guarantees than some boutique fund.