Are PPNs a bad investment?

[aquaswim47]

I believe that PPNs are a junky investment. I was looking at a 4 year PPN that had a 2.65% load (4.022% Future Value, 3.265% mid-way future value). It was difficult to tell whether it was a bond or a mutual fund that was composed of the index funds. In other words, I'm interested in knowing if principal protection notes are synonymous with principal-protection funds or completely different products altogether and if they are different, what are their differences? I am wondering whether the fees are embedded in the missed dividend payments or whether these are really principal-protection funds, instead of notes that have a massive annual expense ratio, as well, each year. However, since it looks like the investment invests in Europe/Japan (which may be at a market peak) that market protection could be important if at a lower cost. The CUSIP is: 867990SP9. It invests mainly in Europe and Japan, but may also invest in China, South Korea, and emerging markets which are far riskier than Europe and Japan. What's worse, many emerging markets and Europe may have had too long of a run-up and need to cool-off (have a bear market). However, due to our war in Iran/Iraq, stem-cell research, and desire to pursue new technology including alternative energy, the US may again have a superior bull market. That's unless the FED wrecks it with an interest rate hike. That would not be good for US investments in the short-term. The Fed should be happy if inflation is between 3-4%, not under 2%. That's an obsession.

Currently, it is invested in this is a long-term 6.5% CD that is likely to get called purchased November 10, 2006. I was thinking of balanced funds like VALIX for this $1K if there was some sort of pullback (maybe to 12,700). In other words, I may give up the belief that the market will fall in 2007 after four years of consecutive gains since the gains are mainly from overseas and our markets are undervalued due to the 2000-2003 bear market. I will be much happier when my outlook can be for the next 47 years instead of solely the next 5 years as it is now because then I can get far more aggressive. I plan to retire at age 70, but I'm between a rock and a hard-place since I am only 1/3 the way towards having a 1 year emergency fund. I'm working towards becoming a stock broker and I don't think by looking at these products, I'm even that intelligent since there are so many better products out there like VTI, VTSMX, VGTSX, FDVLX, FIVLX, IOO, VBK, PZI, VO, VGK, SPY, DIA, QQQQ, or SSO (200% of the S&P 500 index), etc.

[Stocktrading101]

Don't know this one, but bumpin it anyway!

[WallStGolfer31]

I just wanted to define PPNs to anyone who doesn't know what they are first, some people might not know what you are talking about. PPN stands for Principal-Protected Note. It's a synthetically constructed financial security that has special properties by combining a number of other financial securities, bundled, packaged and traded in a single instrument. If anyone needs further info, just ask in the thread, I'll be glad to expand.


But on the topic of PPNs as an investment. It all depends on the investors preferences. You're not going to make a killing on theses things most of the time, as the risk is low. The only significant risk you really face is inflation risk, because the yield to worst is like you stated, often in the range of 1-2%, sometimes lower. This is the price you will pay for having the principal fully protected.


Sometimes it is impractical for individual investors to put together these "packages" of financial instruments they may desire. Thus, PPN's serve as a valuable resource for those investors.

Another great application of PPNs in a portfolio is for those looking to have exposure to indices, industries, or even individual stocks while eliminating the risk of downside exposure. The sacrifice? The yield-to-worst is very low, and thus you expose yourself to a decline in real purchasing power when the investment matures. The risk return trade-off is just exchanging downside risk for inflation risk, which to some investors, is entirely acceptable, even desired.


In my opinion, PPNs have their place, just like all other financial instruments.

[aquaswim47]

I'm glad you responded. That's what I thought myself. I was just looking either for confirmation or a lack of confirmation on what I had said. Thank you.

It does look like the PPN has no ongoing fees. It looks like an interesting buy than as the cost of the insurance is 0.8% per year.

[aquaswim47]

I looked at the JPM cash-flow statement and it appears to be of losing some of its credit quality. It has borrowed heavily last year mainly during the 2nd quarter (may have resulted from its mix in the sub-prime lender crises). It's a AA- rated company, which is better than an A+ rated company. However, due to its borrowings and net cash-flow losses, it looks like the company may have some trouble. It's other current liabilities is weird.