Wednesday, 20. December 2017

Certificates Surprise with Low Costs

Scientific study determines the total cost of investment in certificates

Professor Dr. Lutz Johanning, Holder of the Chair of Empirical Capital Market Research at WHU

The annual cost of investing in certificates averages 0.71 percent. This is the finding by the Academic Advisory Board of the German Derivatives Association (DDV), based on 24,830 investment certificates with an issue volume of 8.169 billion euro. Even if hedging costs, for instance the purchase costs of the product components, are factored in, the value does not exceed the 1-percent mark.

The costs of a security paper play a central role for every private investor, particularly in times of low interest rates and low returns. Still, the amount of these costs is often unknown and not transparent to private investors. The members of the German Derivatives Association have pledged to practice full cost transparency under the Derivatives Code, a voluntary commitment to full cost transparency on the part of issuers of certificates. For some time now, in their product information sheets they have reported the estimated value of a certificate by the issuer. Now the averages for costs are available in the different categories of investment certificates.

The cost of the certificate investments, which includes the costs of the expected issuer margin, sales commissions and issue premiums, is an average of 0.71 percent per year of the term of the certificate. This was the finding of the Academic Advisory Board of the German Derivatives Association (DDV), the membership of which also includes Professor Dr. Lutz Johanning, Holder of the Chair of Empirical Capital Market Research at WHU – Otto Beisheim School of Management, based on 24,830 investment certificates with an issue volume of 8.169 billion euro and issued by the member banks of the DDV during the first half of 2016. Even if hedging costs, for instance the purchase costs of the product components, are factored in, the value does not exceed the 1-percent mark.

Of this 0.71 percent, 0.3 percent is attributable to the expected issuer margin, 0.32 percent to the sales commission and 0.09 percent to the issue premiums. The expected issuer margin goes to the issuers as remuneration for structuring, market making and settlement and also contains the profit of the issuer. On the other hand, sales commissions and issue premiums are used to pay for the services of the sales units and investment advice.

“With transparency in regard to total costs and cost components, when they purchase the products, investors can already estimate which part of the investment they are paying for issuance and investment advice. From 2018 onwards, under PRIIPs and MiFID II, this comprehensive cost transparency will also be required for life insurance and mutual funds and will help investors better understand and compare products,” explains Professor Dr. Johanning, who is co-author of the study.

 

Dr. Hartmut Knüppel, CEO and Member of the Board of Directors at DDV, adds: “Clarity and transparency for certificates, and cost transparency in particular, are an important contribution to investor protection and really serve the investor. Anyone who otherwise wants to build up wealth and provide for old age cannot ignore securities. In addition to the large selection of underlying assets and tailor-made risk/return profiles, low costs also speak in favor of certificates.”