We thought they had been forgotten. But in recent months, formula funds have been making a resounding comeback. Their promise? Yields of 5%, 6% or 7%. Assorted, more and more often, a capital guarantee, all lodged in a life insurance envelope. So: miracle or mirage?
Formula funds have been around since the 1990s.Jet 3 case BNP Paribas, in particular. But since, radio silence. For more than 10 years, this asset class fell into oblivion.
Until this year. Because in 2022, no less than 60 new formula funds appeared on the French market. A return to grace that these so-called structured products owe to market conditions. But not only.
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Winning formula
First there was inflation. After several years of calm, prices suddenly soared. This increase was to be only temporary. But 12 months later, inflation is still there. In January, it reached 6% over 1 year in France.
To curb it, the central banks raised their key rates. Once. Then two. Then three. As a result, European Central Bank (ECB) rates jumped by 300 basis points since the beginning of last summer. Never seen.
This rate increase was accompanied by a high volatility on the equity markets. In 2022, the CAC40, for example, recorded 9.5% losses. Same story in the United States, where the S&P 500 fell by 20%.
Giving up some profitability in favor of more security
With such levels of volatility, you have to have a strong heart to get into the equity markets. This benefits the formula fund, which offers more guarantees, observes Cyril Garbois, co-founder of the Cashbee savings solution.
Because, precisely, formula funds are a good tool for diversification. It’s a way of going to the equity markets by giving up a little profitability in favor of more security, believes Stefan De Quelen, managing director of Meilleurtaux Placement.
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6% risk free, really?
Structured products also benefited from soaring interest rates. When you invest in a formula fund, you are investing in a debt product, ie bonds. However, with the raises ratesnewly issued bonds are more profitable, says Cyril Garbois.
Result? Some formula funds now offer annual returns of 5, 6 or even 7% net of costs. With, more and more often, a capital guaranteewhich may be partial or total depending on the case.
High returns without the risk of capital loss? Of course it makes noise. And for several months, individuals have been flocking to invest in this hitherto unknown asset class. But is this enthusiasm justified?
Savings: beware of these too enticing promises!
6% return per year
A formula fund is made up of several parameters. First there is the underlying, i.e. the product on which you are placing a bet. This may be an index, a basket of shares or even currencies.
In practice, you do not invest in this product. You are simply betting on its evolution. For example: the Onyx 1 fund, marketed by Cashbee, has the iStoxx France ESG 40 Decrement 50 stock market index as its underlying.
Next comes thecoupon target. This is the return promise made to you by the fund’s managers. This is accompanied by a number of terms. If these conditions are met, you will receive the advertised coupon.
Example: in the case of the M Rendement 9 fund, issued by the Goldman Sachs bank, if the S&P Eurozone 50 Net Zero 2050 Paris-Aligned Select 50 Point Decrement Index (EUR) TR index closes its original level or above before the fund’s maturity, then you will receive an annualized return of 6%.
Finally comes the lucky date, ie the maximum life of the fund. In the case of the M Rendement 9 fund, for example, it is 8 and a half years old. When the product is launched, the date from which the price of the underlying will be fixed is also chosen.
It is this course that will serve as a reference for the entire life of the product, specifies Cyril Garbois. Then, with fixed odds, we check whether the underlying is above the reference level. Depending on the case, this observation may be annual, half-yearly or daily.
Several scenarios are then possible. For example, in the case of the Onyx 1 fund: If in the first year, the underlying reaches or exceeds the fixed level, the product is called back, and you are returned your starting capital, as well as your 6% coupon, explains Cyril Garbois. And if not? We start again on a period of observation. Then 1 year later, we look again at the price of the underlying. If it reaches the fixed level, you recover your capital and two coupons of 6%, continues Cyril Garbois.
And so on until the maturity date, which is 10 years for this particular fund. When the product comes to an end, the price of the underlying is examined one last time. And if the conditions are met, you get all your coupons.
On the other hand, if the underlying has not reached the fixed level, the coupons are not paid. The remuneration of the product is then zero. As for your starting capital, it is returned to you (after deduction of costs). At least in some cases.
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no miracles
Because not all formula funds offer the same level of protection! The so-called funds protected capitalfor example, ensure the reimbursement of your capital… But only under certain conditions.
The capital invested is reimbursed if the Euro iStoxx EWC 50 index exceeds 40% but do not exceed 50%can we read in the Key Investor Information Document (KIID) of the M Rendement 5 product.
Be careful to find out about the level of protection offered by the funds
In other words: in the event of a drop in the markets, you will not receive your coupons. And you risk losing part of your capital. Be careful to find out about the level of protection offered by the funds, warns Cyril Garbois.
Formula investments cannot work miracles: a high possibility of performance is always accompanied by a high riskreminds the Authority of the Financial Markets (AMF).
Very often, there is a trade-off between protected capital funds, which are risky but more profitable, and guaranteed capital funds such as Onyx 1 and M Rendement 9, which are more secure but whose returns are lower in return.
Another subtlety: most of the time, the capital guarantee only applies when the product is kept until lucky. And some funds apply additional fees for early exit.
Before investing, therefore, be sure to find out about the maximum lifespan of the product. And only invest money that you can afford to lock in for the entirety of that time.
Last point: whatever the level of protection offered, there is a solvency risk. In the event of default by the issuer, the capital loss could be total. Hence the interest in subscribing to this type of product with a robust issuer, observes Cyril Garbois.
Things to keep in mind before betting on structured funds
- There capital guarantee is not systematic: check the instructions carefully.
- This guarantee is only valid on a chance basis: only invest the savings you will not need during several years.
- Returns are subject to conditions: focus on the detailed formulas to understand how it works.
- These funds are most often kept within a PEA or a life insurance. The returns of the structured product do not take into account the taxation eventual, nor the costs PEA or life insurance.
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