RBS issues more 'emotion-free' notes

Royal Bank of Scotland (RBs) Group is selling its fifth series of UK structured notes with returns based on proprietary indices, which have fallen more than 12 per cent this year.

RBS plans to sell about £750 million ($1.2 billion) of the 5.5-year notes by the end of the year to individual investors, said David Lake, head of UK structured product sales. The securities will be issued under the bank’s Navigator and Autopilot structured plans.

Navigator uses moving averages to determine whether it makes so-called long or short investments on stocks included in the UK’s FTSE 100 index. Because decisions are made according to the model, “we call them emotion-free investments,” said London-based Lake.

 

“These products have worked well historically over a number of years when you have had strong trends in the market,” he said. “They don’t work quite so well when the markets are choppy, which has been the case in the last six months. It depends where the market is in the next 5.5 years.”

The Navigator index has fallen 12.7 per cent this year, compared with a four per cent decline in the FTSE 100.

Autopilot uses a proprietary formula to invest in developed and emerging market stocks, commodities and property when prices rise, switching to UK inflation-linked assets when markets fall. The Autopilot index has declined 12 per cent this year.

Standard and Poor’s Dynamic Multi-Asset Strategy index, which follows a rules-based trading approach to allocate money across five asset classes, rose four per cent this year.

‘Complicated’
Autopilot and Navigator can only rebalance their asset allocations once every month, which means they could miss short- term trends, Lake said. The notes were first issued in the UK in July 2009.

“These may be technically, mathematically and scientifically the best investment products ever designed, but they are immensely complicated to understand and that in itself is usually good enough reason not to invest,” said Danny Cox, head of advice at independent financial adviser Hargreaves Lansdown. “The back testing is inconclusive as it doesn’t show the last year clearly since the index was launched.”

Lake said the products were more complex than traditional structured products, which means “it takes a little more time to educate people on their benefits and why they are useful.”

Navigator and Autopilot charge fees of four per cent, which are incorporated into the price. Investors will get their initial investment back on maturity.