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Euro regulator targets under-performing and complex investments


The European Securities and Markets Authority has delivered a damning indictment on the sale of poorly performing and expensive complex financial products to retail investors.

Its report, ‘Retailisation in the EU’ examines the growth in the sale of alternative Ucits, where assets under management grew from €20bn (£17bn) to €85bn between 2007 and 2012 and structured retail products, whose outstanding amounts totalled €770bn at the end of 2012.

The research concluded while their sale to retail financial consumers has increased, there is evidence to show that both products have produced lacklustre returns to investors.

Comparing 600 alternative Ucits funds and 2750 structured products with capital protection sold across the EU to consumers between 2007 and 2012, Esma found evidence that average returns for both products were typically just 3 per cent for alternative Ucits and even less, at 2.5 per cent for structured products.

In addition, an analysis in the report of a sample of 76 structured products sold to retail investors found that they are sold, on average, with a significant issuance premium, estimated at around 4.6 per cent of the issue price and up to 5.5 per cent when the credit risk of the issuer is included.

The report states: “From a consumer protection perspective, retail investors may face difficulties in understanding the drivers of risks and returns and returns of complex products. As a result it might be particularly challenging for investors to make proper investment decisions.

“If retail investors do not properly understand the risk and reward profile of complex products, unexpected losses might lead to complaints, reputational risks for issuers and a loss of confidence in the regulatory framework and more broadly in financial markets.”

Esma will use the reports’ findings in its policy work on improving investor protection by promoting better information disclosure at the point of sale about the total costs of investing in complex products and specific risks attached to each product.


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There is one comment at the moment, we would love to hear your opinion too.

  1. There are a lot of “bad” UCITS funds being sold to investors, including those with excessive fees. But a major underlying cause is the UCITS structure itself. It intentionally forces investors to gamble with their money and “invest” in non-diversified portfolios. For example, commodities are forbidden to be included in UCITS funds. Perhaps the regulators should have read this chapter in my best-seller “Myth #11 – Commodity Trading is Risky.” (Remember, it’s a MYTH):

    Bottom line is that diversification is the one true “Free Lunch” of investing. But if a person starts with just considering long stocks, bonds and real estate as being the only portfolio options, then true diversification cannot be achieved.

    My approach to diversification is quite different from conventional investment wisdom. One concept I think you’ll find most interesting is in that I replace asset classes with “return drivers” and “trading strategies” (as I point out in the book, asset classes are simply long-only trading strategies that do not attempt to disaggregate their many separate return drivers). Once viewed in this fashion it is easy to create a truly diversified portfolio, rather than one constrained by the shackles of asset classes.

    I’m pleased to provide a complimentary link to the final chapter of the book, where I present the benefits (greater returns & less risk) of a truly diversified portfolio:

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