THE public's seemingly insatiable appetite for tracker bonds continues to be fed, with two more products coming on the market from the Irish Nationwide Building Society and from Ark Life, the life assurance arm of AIB Bank.
The Irish Nationwide bond, called Century Bond 2000 matures, as its name suggests, on May 31st, 2000. It tracks the indices of eight world stock markets - 25 per cent USA, 25 per cent Japan, 15 per cent British, 10 per cent France, 10 per cent Holland and 5 per cent each from Switzerland, Spain and Germany - and aside from the capital guarantee, also guarantees a minimum 12 per cent gross return at the end of the three and a half years.
There is no upward limit on the total return available from the indices performance. The minimum investment is £3,000 and final returns are averaged over the last six months to protect investors against any sudden market falls. This bond closes on November 27th.
The other tracker, is the 10th issue of Ark Life's Guaranteed Tracker Bond. Half the investment (minimum £2,000) is linked to the Eurotrack 100 index representing European stock markets (except Britain ) while the other half is linked to the Nikkei 225. Investors have a choice of either a three or five-year tracking period.
If you choose the three-year bond, at the end of the term you will receive your capital plus a maximum 75 per cent of any rise in the relevant index; choose the five-year bond option and you get 100 per cent of the rise in the relevant index.
These bonds are subject to 27 per cent DIRT, but there is a gross, deposit-based version appropriate to charities, pension funds or non-residents.
Meanwhile AIB, which was the first institution to set up tracker bonds, has produced charts to show the gross maturity values of the first trackers it introduced in 1991. The best performing tracker was the three-year European bond, brought out in January 1991 and matured in January 1994. It produced a gross percentage return of 59.77 per cent or nearly 20 per cent gross per annum. Poor market conditions throughout 1994 took its toll on the two FT-SE 100 bonds that matured in May and December that year with returns of 23.44 and 24.21 per cent gross respectively. The market picked up again over 1995-96 and the five-year FTSE 100 tracker produced just over 50 per cent gross over the period, just over 10 per cent per annum gross.
Chart two is the current posit ion of AIB trackers that have not yet matured. Investors who took out the tracker issued in December 1991 will be delighted to see that it has so far produced a 73.80 per cent gross return or a 15 per cent per annum gross return. It matures in a month. The one, two and three-year returns so far also reflect this kind of annual growth performance.
These high returns are indicative of both the recovery from poor 1994 values and of strong stock markets generally, but anyone thinking about getting back, generally, into the equity market needs to keep in mind the past experience of many ordinary folk who 10 years ago got caught up in all the stock market hype and bought shares when, like today, prices were very high. The 1987 crash proved the inevitable - that which goes must come down.
Investors tempted by the kind of returns made by these trackers need to keep in mind that what they are seeing may be the peaking of the indices, with future five-year period returns falling below these levels.
