Swing Fund

A customer invested $25,000 in the Swing Fund (managed by a local bank) in early 2002. After waiting for 5 years, the customer received a return of $25,528. The gain is $528 (i.e 2.1% for 5 years, or 0.4% per year).

The formula used to compute this return is:

(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.

Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.

The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.

During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. Where does the difference go?

What is the logic of formula (b)? I cannot understand its logic. It seems to me (and I stand corrected), that it is designed to take advantage of the naive customers.

I cannot understand how the regulators can allow the financial institutions to market this type of complicated product to unsavvy customers. We need stronger protection for consumers.