SOMEWHERE deep in the interior of a shiny office block in Dublin, an actuary, a marketing manager and a fund manager are devising their next issue tracker bond. Because of the saving public's seemingly insatiable diet for these hybrid stock market investments, this next tracker will probably look pretty much like all the others, with perhaps a few modifications.
First and for&most, the bond will guarantee the investor's capital sum; the savings term will range from three to six years; a relatively well-known stock exchange(s) will be represented and there may be a minimum guaranteed return, usually no more than 30 per cent. Most of all, the designers will be aiming to keep the literature and application form simple, the up front fees low and the closing date prominent.
Aside from providing cautious investors with a relatively risk-free outlet for their money, the tracker bond, above all has resurrected the single premium savings market for the life assurance companies, the banks and building societies. It hasn't done anything to restore confidence in the regular savings market since only lump sum investments apply, but it has gone some way to stemming the flow of money into low DIRT deposit accounts and post office savings products.
It should come as no surprise then, that there are at least eight different trackers on the market from ACC Bank, Anglo Irish Bank, Ark Life, Bank of Ireland, Canada Life, Irish Life, Ulster Bank, and the First National Building Society, each of them with a closing date between today, in the case of Irish Life's bond, and mid-May or mid-June for the others. Minimum investment is usually £3,000 or £5,000.
Companies such as Canada Life and Ulster Bank are offering global trackers in which the investment is spread between a number of markets. Another, Ark Life, is targeting funds at the Japanese Nikkei index while Irish Life, First National, Anglo Irish Bank and Bank of Ireland are all including the Nikkei in their portfolio in addition to other indices like the FTSE-100, and the Standard & Poors 500.
The levels of capital guarantees and profits are the main features of these bonds and vary from 90 per cent of capital, plus 200 per cent of any market growth (Irish Life), to the First National one which offers full capital guarantees plus minimum guaranteed returns of 20 or 30 per cent up to a maximum of 75 per cent of the initial investment. The Anglo Irish Bank bond provides a lock-in feature which guarantees returns already achieved should the markets grow at any time by 50 per cent. (An option under the First National bond also provides a lock-in facility.)
It is difficult to establish which tracker provides better value, but independent financial advisers we spoke to say they prefer bonds that do not offer guaranteed profits, mainly on the grounds that the cost of such guarantees, in the form of profit ceilings can sometimes be too high. Yet, the consensus view is also that profit lock-ins are a good idea.
The main attractions of tracker bonds are that they are relatively simple to under stand and to execute, they are taxed in the same manner as deposits (i.e. 27 per cent) and they offer some of the growth potential of international stock markets without the worry of losing any, or all, of your capital due to market volatility.
One downside view shared by the three advisers we consulted, Ross Barry of Barry Ross and Associates, Eddie Hobbs of Financial Engineering and John Crowe of KPMG Stokes Kennedy Crowley, is the long maturity period of the bonds - usually about six years.
"My main fear is locking my clients into the markets for such a long time," says John Crowe. "They are a worthwhile product for a certain customer but only if they do not need an income and have access to other capital. You should certainly never put all your money into one. I would prefer a two or three-year tracker, but you can't have it both ways a capital guarantee and a shorter maturity period.
"Given that An Post is still offering upwards of 6 per cent and your capital back after six years and no tax liability, a lot of people buying trackers really need to ask themselves what it is they expect from these products."
The one bond which Ross Barry actively promoted, he says, was the 3-year ICS Building society tracker launched last autumn. "I really liked this bond, which was a Nikkei, 100 per cent growth guaranteed. It was a good time to get in when the Nikkei was at 18,000 - it's now about 28,000 - but I noticed they haven't brought out another one.
"My worry is that too many people are still buying tracker bonds who wilt not be able to sustain the contract period and risk losing some of their capital if they have to cash it in early."
Eddie Hobbs believes there is a place for tracker bonds with certain clients, but only for sums less than £10,000, a view also shared by Ross Barry and John Crowe.
"Trackers are very inflexible; you lock your money into a specific market for a specific time. You also have to wonder at the margin the bond managers are taking in the background. I would not advise anyone to put any more than 5 per cent of their net investible assets into them and would instead recommend that for greater amounts people create their own home made trackers.
"There is no question that tracker bonds are meeting a psychological need, but not a real one. Anyone with £10,000 can put £8,000 of it into a deposit account which after five years will guarantee them £10,000 back. With the other £2,000 they can then buy a really good stock here or in Britain that is on the move and won't blow up in their face. There is every chance it will far exceed the return from a tracker and they can use their CGT allowances to offset any tax."
Independent advice is one way to try and establish the correct tracker for you, but meanwhile Irish Life has two very good free booklets available Your Guide to Tracker Bonds and Understanding Futures, Options and Tracker Bonds which may shed some light on the basic theory of how they operate.
