Feeling a bit sad tonight…learning that my mother had lost a substantial amount in the recent structured notes investment, practically a quarter of her life savings since the fund lost a third of its value.

I was quite irritated with the investment professional who did not properly explain and disclose to her the risks of the investment, even the fundamental fact that it was an absolute return structured fund and not a capital guaranteed fund. She was still under the impression in fact, that she would get back her capital, and what they have paid in the last three times were in fact, ‘dividends’.

Working the numbers, the typical fixed deposit rate for her amount invested is around 0.6. Working on a compounded rate, this is the amount which should be gauged against the loss and not the original amount. This is something investors often neglect.

Such structured funds are usually a compilation of different equity and debt components. This fund features a sequence of equities, call options, bonds (in the form of some sub-funds), and reliance on gold spdr to balance. Also an investment in some reits (and my mother doesn’t even know what are reits!!)

My mother also had no idea of the basic 5% sales fee and the annual 1.2% management fee, but thats just my mum.

So we know how call options work. And basically they have failed in the past two years given the bearish market, as they are meant to capture the upswing (as opposed to a put option).  Then, given the bearish property market, it was no wonder that reits took a massive downswing as well. And equities? Goes without question. The fund did have a focus on Singapore, but still US made up around 18.5% of assets.

So I calculated that funds under this manager have lost 30.5% thus far (2 funds under this umbrella), caused partly because of the bad choices of the fund managers, which is quite ironic since they chose a benchmark of sibex +1% (3.5% thus far). And, what she still doesn’t understand is that the fund has to go up about 60% before she can even break even.

The weird part which I was trying to understand for a long time was the fact that my mother kept insisting that she was getting ‘dividends’. Given the structured elements of the fund, where on earth were these ‘dividends’ coming from?

Then I realized – there has been no net income, no capital gain…which means, the ‘dividends’ was a return of original capital.

Which sums up the ridiculousness of this particular capital structure, if you ask me.

This round, my sentiments go to the side of the investors who bought into this hogwash.

I can continue on, on how it required about above 20% gain for the fund to distribute 6.5% per annum to investors. (math people, do your computing of risks)