Q&A: Dominic Coyleanswers your personal finance questions
Q About 18 months ago, a family member invested €150,000 in evergreen smart funds with Bank of Ireland. As you are aware, this is the more cautious fund comprising equities, property, cash and fixed interest. Aside from the exhortations of the investment adviser, I believed she was making the right decision.
Can you imagine my horror, when I discovered last November, following a fund performance report from the aforementioned bank, that the investment was only worth €94,500.The decline in value has really baffled me even allowing for the deterioration in equity and property funds in the interim.
Her initial plan was to hold the investment for seven years. It would now appear that she will have to leave it considerably longer if she is to make any return on it at all. On reflection, she would have been better off to have left it in a deposit account.
I would like to know is the “capital” guaranteed after so many years of entering the fund or are such funds a complete waste of time in that the investor could lose a considerable amount of money?
W.R., by e-mail
AAs it happens, the Evergreen Fund is not particularly "cautious" fund but it defined by Bank of Ireland itself as a "growth" fund. This would indicate a slightly more aggressive approach to the pursuit of profit and a consequent willingness to accept some risk and the possibility that funds can, at times, fluctuate so that they are worth less than the original investment.
Certainly, the last documentation I saw for the fund – dating back to September last year – would bear that out. Just under half the entire fund was held in equities, although this was slightly down on earlier in the year.
The 10 largest individual stock holdings of the fund at that stage included financial services groups AIB, Axa, BNP Paribas and HSBC. Also there were building materials giant CRH, oil firm Total, food group Nestlé, mobile phone giant Nokia and pharma groups Roche and Novartis. I’m not going to run through the performance of each one but, suffice the say, you could not have expected much return last year from the banks or construction sectors.
In addition, the Evergreen Fund has by its own account, a heavier than average weighting in property – another area on which it would have come unstuck last year.
Its holding were not out of kilter with its stated position. The fund generally targets an allocation of between 40 per cent and 60 per cent in equities and between 20 and 30 per cent in property.
Only 8 per cent of the fund was held in cash at that point – in hindsight, the home for savvy investors over 2008.
It is all a bit of a comedown for the evergreen fund which is now nursing losses of 30.6 per cent over the past year, 11.5 per cent on average each year over the past three years and 2.5 per cent per annum over the past five years.
Until now, evergreen had made a virtue of the fact that since its establishment as the first balanced managed fund in the Irish market in 1971, it had never fallen in value over a five-year timeframe, outperforming its peers over the medium to long-term investment profile.
Your relative’s misfortune would appear to be that they entered the fund towards the back end of 2006, just as its was reaching its peak. Examining the performance chart, it seems to have been in steady decline since early 2007. The scale of the decline you mention does not seem inordinate – especially when you bear in mind that the reduced valuation will also reflect the impact of management fees and any other charges imposed within the fund.
And, of course, other funds in the same sector will also have suffered.
What to do now.
Yes, in hindsight, she would have been better to leave the cash in a deposit account for the past 18 months but that’s the annoying thing about hindsight, it is no use in working out the approach for the future. You would be tempted to say that much of the pain in the market has now been priced into her investment – though I would have to concede that I would have thought that at the start of last year.
There are certainly mixed views out there, with some predicting a bounce followed by further stock market falls and other foreseeing only a slow recovery. It is quite possible that your relative may be looking at keeping the money where it is for longer than the intended period. Certainly, withdrawing it now would crystallise the loss.
On the subject of capital guarantees, there are funds for cautious investors that offer capital guarantees, including a guaranteed evergreen Fund that is now closed to new business.
The thing with capital guarantees is that while the capital is secure regardless of performance, you will only get a fraction of any investment growth. That is because enough money has to be put on deposit to meet the guarantee, if necessary.
Anyway, as best I can tell, the fund in which your relative has invested has no such guarantee.
Q I have a capital gain of €3,308 which, less the €1,270 exemption, comes to €2,038. I therefore will have to pay €448 capital gains tax.
I also have made a capital loss on bank shares of €3,213 and want to write one off against the other. How do I go about doing this? Do I have to pay the CGT due by the end of January and get a refund of tax paid? Thanks for your help.
Mrs Y.W., Dublin
AThere's going to be quite a few people in your situation juggling capital gains and losses in the current environment and you're right when you imagine that there are certain prescribed ways of going about it.
The good news is that you do not have to pay tax on a capital gains liability and then try to claim back for losses, at least when they occur in the same year. I am assuming that is the case with the scenario you describe.
However, you also will not be able to apply the annual exemption to capital gains tax in the manner you outline. What happens in any given period is that you offset gains against losses first. In your example, that means you would set the capital gain of €3,308 against your incurred losses of €3,213. That leaves you with a net gain of €95.
At that point, when you have the net gain for the period, you apply the CGT exemption. As it is well in excess of your capital gain of €95, you will incur no capital gains tax liability.
What you cannot do is apply the exemption to the gain and then offset the losses – a situation that would leave you with a net loss that would be carried forward against future gains.
Until now, capital gains tax liability incurred in the first nine months of the years had to be paid to the Revenue, with a CGT return, by the end of October, with any gains in the remaining period payable by January 31st of the following year. However, in his budget, Minister for Finance Brian Lenihan adjusted those dates as the exchequer tries to maximise its short-term income in the current economic crisis.
From this year, capital gains arising in the first 11 months of the year will be payable by year end with any gains made in December payable by the end of the following October, which is the existing deadline for income tax returns.
Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle @irishtimes.com. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions.
All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
