Annuity using leverage

[saladrat]

Anyone has experience investing in annuities using leverage?

My RM is promoting this to me. Supposedly I can borrow 40 to 60% from the bank to invest. I.e., if the annuity is $100k, I only need to fork out $40 to $60k and still get the interest on the full amount. Of course, have to pay interest for the leveraged amount.

How does this perform through recessions/bad economy? Any risk of losing everything?

Just want to see if I can hear from people who actually invested in such product what is your experience and any advice cos I'm new to this.

 

[BBCWatcher]

It's rather likely this is a bad idea, but here are some threshold questions:

1. What are the guaranteed annuity payouts? (Anybody can project a fantasy, including you on your own, so I would ignore the non-guaranteed parts.)

2. Who's doing the guaranteeing? Is it a highly creditworthy, SDIC protected life insurer, or is it the new annuity division of Boris's Crab Shack, a limited liability partnership incorporated in Yemen?

3. What are the margin terms (fixed interest rate period, variable interest rate characteristics such as reference rate, prepayment penalty, etc.)? What happens when there's a "margin call"?

4. Can you safely handle the cashflow implications? For example, if (when) the interest rate spikes, are you prepared to pay off the margin loan in full for this particular product? Does the annuity payout flow make any sense in your life circumstances?

5. What happens if you die or are otherwise incapacitated?

6. Is your "Relationship Manager" compensated for pushing this rather exotic product? Does this person have a genuine fiduciary responsibility to you, and is this person doing a good or better job respecting that responsibility?

 

[saladrat]

Thanks for the feedback!

Guaranteed for year 1 and 2 is 1.55%, after that he said will go up to 4 to 6%, I suppose this is the non-guaranteed portion, I didn't get any prospectus so far just verbal.

2. Prudential is the issuer.

3. As for the leverage, the idea is to loan using JPY at interest rate of 0.6%. The LTV is something like 70%. The risk I guess is on the currency fluctuation of SGD/JPY and interest rate of JPY which is low or negative.

4. I haven't thought about it yet... maybe its better at this time to put money in REITS or fixed income fund

5. Haven't seen the prospectus but there should be an insurance component to the annuity.

6. There's no sales charge, they take comms/profit from Prudential. So far this RM has pushed me unit trust, annuity and now structured notes. Unit Trust I bought some fixed income fund, doing ok. Annuity and structured notes are new to me so I am a bit cautious. Overall I do understand RM job is to push products so I am overall being cautious and trying to do some homework and asking other people with experience

It's rather likely this is a bad idea, but here are some threshold questions:

1. What are the guaranteed annuity payouts? (Anybody can project a fantasy, including you on your own, so I would ignore the non-guaranteed parts.)

2. Who's doing the guaranteeing? Is it a highly creditworthy, SDIC protected life insurer, or is it the new annuity division of Boris's Crab Shack, a limited liability partnership incorporated in Yemen?

3. What are the margin terms (fixed interest rate period, variable interest rate characteristics such as reference rate, prepayment penalty, etc.)? What happens when there's a "margin call"?

4. Can you safely handle the cashflow implications? For example, if (when) the interest rate spikes, are you prepared to pay off the margin loan in full for this particular product? Does the annuity payout flow make any sense in your life circumstances?

5. What happens if you die or are otherwise incapacitated?

6. Is your "Relationship Manager" compensated for pushing this rather exotic product? Does this person have a genuine fiduciary responsibility to you, and is this person doing a good or better job respecting that responsibility?

 

[xtwis7]

Financing on annuities is not new.

Based on what your RM is suggesting, the total single premium is around $150k with $40-60k as the downpayment?

You can see it as a very similar concept to a downpayment for a property where the biggest difference is that your annuity payouts are not subject to tax.

Most annuities right now based on $100k will give around $300/mth after the 5th year, with at least 50% of that being guaranteed and the other 50% being projected at the insurers’ participating fund’s performance.

Ask yourself what made you interested in this.

 

[BBCWatcher]

Guaranteed for year 1 and 2 is 1.55%, after that he said will go up to 4 to 6%, I suppose this is the non-guaranteed portion, I didn't get any prospectus so far just verbal.

That'll be non-guaranteed, yes.

2. Prudential is the issuer.

That's a quality issuer.

3. As for the leverage, the idea is to loan using JPY at interest rate of 0.6%. The LTV is something like 70%. The risk I guess is on the currency fluctuation of SGD/JPY and interest rate of JPY which is low or negative.

OK, that's a twist, called the "Yen Carry Trade." Yes, your primary risk is if (when?) the Japanese Yen appreciates. Then you could be in big trouble.

4. I haven't thought about it yet... maybe its better at this time to put money in REITS or fixed income fund

Well, back all the way up to what your investment time horizon is and what your existing household holdings are.

5. Haven't seen the prospectus but there should be an insurance component to the annuity.

Not necessarily. A simple life annuity, for example, pays a regular benefit for the rest of your life. Then it stops when you stop.

6. There's no sales charge, they take comms/profit from Prudential. So far this RM has pushed me unit trust, annuity and now structured notes. Unit Trust I bought some fixed income fund, doing ok.

Out of curiosity, how much was the initial sales charge on that unit trust, and what is its annual total expense ratio?

Financing on annuities is not new.

Indeed, but the yen carry trade aspect is a twist.

You can see it as a very similar concept to a downpayment for a property where the biggest difference is that your annuity payouts are not subject to tax.

Not currently subject to Government of Singapore tax. I, a resident of Singapore, would pay some U.S. tax on this annuity income, as it happens.

Ask yourself what made you interested in this.

Yes, "first principles" are important. What's the time horizon for this money, and how is the household currently financially positioned?

 

[yantao]

This is interesting as my RM is also offering JPY/CHF leverage loan and 0.65% interest and margin call at -15%.

But instead of annuities, my RM is offering PIMCO Fixed Income with ~4% monthly dividends.

Seems like a common tactics to squeeze more commissions from their clients.
But of course, if we (as client) gains on that, it's a win-win situation.

Anyone has experience investing in annuities using leverage?

My RM is promoting this to me. Supposedly I can borrow 40 to 60% from the bank to invest. I.e., if the annuity is $100k, I only need to fork out $40 to $60k and still get the interest on the full amount. Of course, have to pay interest for the leveraged amount.

How does this perform through recessions/bad economy? Any risk of losing everything?

Just want to see if I can hear from people who actually invested in such product what is your experience and any advice cos I'm new to this.

 

[saladrat]

Initial sales charge was 2% ... thats very high... but now as a longer term customer I will get 1%.

The fund is quite strong, PIMCO GIS Income Fund. Pays fixed monthly dividend. I was able to leverage JPY carry trade 2x

 

[saladrat]

This is interesting as my RM is also offering JPY/CHF leverage loan and 0.65% interest and margin call at -15%.

But instead of annuities, my RM is offering PIMCO Fixed Income with ~4% monthly dividends.

Seems like a common tactics to squeeze more commissions from their clients.
But of course, if we (as client) gains on that, it's a win-win situation.

Seems exactly the same as what I was sold.

The sales charge was a huge turn off at 2%. It wiped out half of the first year dividend.

And the leverage to JPY/CHF better be done at a time when the fx rate is in our favour. The profit from the fx movement will be better

 

[BBCWatcher]

Initial sales charge was 2% ... thats very high... but now as a longer term customer I will get 1%.

That's still infinitely higher than the zero sales charge over at POEMS, dollarDEX, and FSMOne.

The fund is quite strong, PIMCO GIS Income Fund. Pays fixed monthly dividend. I was able to leverage JPY carry trade 2x

The PIMCO GIS Income Fund is an actively managed fund that invests in U.S. dollar debt securities. It holds a mix of debt instruments, including sovereign and non-sovereign, investment grade and junk, U.S. based and non-U.S. based (but still almost all U.S. dollarized, except for 6% of the holdings). Its fund managers charge a whopping 1.45% per year in fees, which is quite high. The underlying weighted portfolio yield is currently 2.39%, which means that if bond prices and interest rates don't vary and if all these debtors pay all their debts (no defaults), this fund should provide an annual net yield of 0.94% (in U.S. dollar terms) to fund holders. For perspective, if you merely park U.S. dollars in 2 year U.S. Treasuries the net annual yield is currently 1.58% (assuming a non-U.S. person in a tax free jurisdiction such as Singapore). That's the world's very safest vehicle for parking U.S. dollars, backed by the full faith and credit of the United States Treasury. This PIMCO fund skews mostly toward short maturity instruments with an average weighted maturity of just over 2.2 years, so the 2 year U.S. Treasury comparison is fair. (It's extremely affordable to buy and hold U.S. Treasuries from Singapore via Interactive Brokers for example, especially in US$100K clips. You'll end up with only very slightly less than 1.58% yield, U.S. government guaranteed.)

The odds are very much stacked against you with this fund due to the 1.45% annual management fee. I am not a fan. Please let me know if I've missed anything, but I don't think so.

 

[saladrat]

That's still infinitely higher than the zero sales charge over at POEMS, dollarDEX, and FSMOne.


The PIMCO GIS Income Fund is an actively managed fund that invests in U.S. dollar debt securities. It holds a mix of debt instruments, including sovereign and non-sovereign, investment grade and junk, U.S. based and non-U.S. based (but still almost all U.S. dollarized, except for 6% of the holdings). Its fund managers charge a whopping 1.45% per year in fees, which is quite high. The underlying weighted portfolio yield is currently 2.39%, which means that if bond prices and interest rates don't vary and if all these debtors pay all their debts (no defaults), this fund should provide an annual net yield of 0.94% (in U.S. dollar terms) to fund holders. For perspective, if you merely park U.S. dollars in 2 year U.S. Treasuries the net annual yield is currently 1.58% (assuming a non-U.S. person in a tax free jurisdiction such as Singapore). That's the world's very safest vehicle for parking U.S. dollars, backed by the full faith and credit of the United States Treasury. This PIMCO fund skews mostly toward short maturity instruments with an average weighted maturity of just over 2.2 years, so the 2 year U.S. Treasury comparison is fair. (It's extremely affordable to buy and hold U.S. Treasuries from Singapore via Interactive Brokers for example, especially in US$100K clips. You'll end up with only very slightly less than 1.58% yield, U.S. government guaranteed.)

The odds are very much stacked against you with this fund due to the 1.45% annual management fee. I am not a fan. Please let me know if I've missed anything, but I don't think so.

hmmm, I am currently getting a yield of about 4% pa, excluding the leveraged amount. If base on the base investment that I put in minus interest then yield is about 10%, excluding sales charge and any fx gain from switching the loan back to SGD if jpy weaken

 

[BBCWatcher]

hmmm, I am currently getting a yield of about 4% pa, excluding the leveraged amount.

Yes, because, despite the stiff 1.45% annual fee headwind you're suffering, the bond market has enjoyed a great bull market recently, i.e. bond prices have gone up/interest rates down. But if you were holding U.S. Treasuries and sold them before maturity, same thing. Anybody/everybody has been able to make money going long on bonds lately. Will that continue forever? Of course not.

If base on the base investment that I put in minus interest then yield is about 10%, excluding sales charge and any fx gain from switching the loan back to SGD if jpy weaken

And you can leverage up U.S. Treasuries too if you want, plus add the yen carry trade if you want. There's three layers of massive risk in what you're doing, and I'm just illustrating how the first layer is a dog because the lowest risk net forward yield is about 50 basis points higher than what you're doing.

This all works brilliantly if/when bonds continue their bull run, margin interest rates remain low (and with the bull run there's no margin call), and the Japanese yen doesn't appreciate. Change any of these "ifs" substantially and you're in a world of hurt....

....But you know that, right?

 

[boredboiboi]

Initial sales charge was 2% ... thats very high... but now as a longer term customer I will get 1%.

The fund is quite strong, PIMCO GIS Income Fund. Pays fixed monthly dividend. I was able to leverage JPY carry trade 2x

You can get lower than 1%

 

[Geeezz]

it’s quite common fr banks to do sth like that. earn coms both ways. a little on the loans and most frm the products.

that said, you will still be able to earn money. what turned me off is the exposure to market risk (insurers investments returns), interest rate risk and currency risk. remember that you will only be paying the interest, so you will have to pay it for life!

 

[yantao]

Initial sales charge was 2% ... thats very high... but now as a longer term customer I will get 1%.

The fund is quite strong, PIMCO GIS Income Fund. Pays fixed monthly dividend. I was able to leverage JPY carry trade 2x

Citibank is offering cash- back to offset the sales charge so it's around 1% (of 50% off sales charges) provided if you hold the funds for ~8 months.

 

[yantao]

it’s quite common fr banks to do sth like that. earn coms both ways. a little on the loans and most frm the products.

that said, you will still be able to earn money. what turned me off is the exposure to market risk (insurers investments returns), interest rate risk and currency risk. remember that you will only be paying the interest, so you will have to pay it for life!

Good point.
Not sure what's the conditions for loan redemption.
Assuming that there are no major fluctuations, sell the unit trust and repay the leverage.

 

[yantao]

What other funds can we consider with lower annual fee?
Maybe I am too overweight in bonds markets for now.
CHF is quite high right now.

Yes, because, despite the stiff 1.45% annual fee headwind you're suffering, the bond market has enjoyed a great bull market recently, i.e. bond prices have gone up/interest rates down. But if you were holding U.S. Treasuries and sold them before maturity, same thing. Anybody/everybody has been able to make money going long on bonds lately. Will that continue forever? Of course not.

And you can leverage up U.S. Treasuries too if you want, plus add the yen carry trade if you want. There's three layers of massive risk in what you're doing, and I'm just illustrating how the first layer is a dog because the lowest risk net forward yield is about 50 basis points higher than what you're doing.

This all works brilliantly if/when bonds continue their bull run, margin interest rates remain low (and with the bull run there's no margin call), and the Japanese yen doesn't appreciate. Change any of these "ifs" substantially and you're in a world of hurt....

....But you know that, right?

 

[tangent314]

LQDE has a 5 year performance of 4.81% compared to 4.59% for PIMCO Income Fund USD class. LQDE's underlying bonds didn't perform as well as PIMCO's, but the much lower TER more than makes up for that.

 

[Shiny Things]

3. As for the leverage, the idea is to loan using JPY at interest rate of 0.6%. The LTV is something like 70%. The risk I guess is on the currency fluctuation of SGD/JPY and interest rate of JPY which is low or negative.

OHHH HELLLL NOOOO.

Borrowing in JPY to invest in an insurance policy in SGD turns this into a GIANT leveraged bet on the SGDJPY FX rate.

If the SGD weakens, or if the Japanese yen strengthens, you'll have to post more collateral against the loan to bring the LTV back down—otherwise they'll call the loan and stick you with a huge leveraged loss.

 

[cadvin]

hmmm, I am currently getting a yield of about 4% pa, excluding the leveraged amount. If base on the base investment that I put in minus interest then yield is about 10%, excluding sales charge and any fx gain from switching the loan back to SGD if jpy weaken

Looking at the PIMCO GIS fund the distribution of the fund is around 4%, out of which more than 30% is coming from capital distribution and not real income generated by the fund. The manager is juicing up the distribution to make the fund more attractive as many person often confuse fund distribution with yield.

In that case PIMCO is quite transparent and reporting the actual underlying portfolio yield net of fees which is of 2.39% only.

Source: pimco (dot) com (dot) sg/en-sg/investments/gis/income-fund/e-inc

On top of that you are taking a leverage bet against JPY which is typically seen as a refuge currency that tends to appreciate in time of market stress. So the investment has a strong wrong way risk.

I would personally not be comfortable at all with this kind of investment but each investor has its own risk tolerance. As long as the sales person correctly informed you of all the risk involved I guess there is nothing wrong with it.

 

[JuniorLion]

Bringing the discussion back to the original topic, annuity using leverage isn't a bad idea, but it depends on your use cases.

It's "like property", but only in the perpetual income distribution, but it lacks the "capital growth" capability.

Unless TM Retirement GIO counts.