The tracker bond market has returned with a vengeance after a slow period last autumn when interest rates were falling and the bull run that international stock markets had enjoyed for four years finally came to an end.
Two more companies, First Active and Irish Life, have joined BCP and Ulster Bank in introducing new trackers - both of them in a mixed portfolio of countries that include Japan.
The First Active bond tracks the performance of the FTSE 100, Japanese Nikkei 225, the US S&P 500 and the AEX, the Amsterdam stock exchange. It requires a minimum £3,000 (€3,809) and offers two investment options, the first for five years and six months in which the capital is 100 per cent guaranteed, but limits the return to just 37 per cent of any growth from the combined indices. The second option is also for five years and six months but raises the potential return to 55 per cent of the indices. The capital guarantee in this case reduces to 90 per cent to help pay for the higher potential return.
The cap on the growth potential of the first option, to just 37 per cent, reflects that the FTSE 100 and the S&P 500 are represented: these are two of the world's leading stock markets and guaranteeing the capital in such circumstances is going to be expensive at a time when interest rates are so low.
The Irish Life Higher Growth Option V tracker, which requires a minimum £5,000 investment, has split the portfolio of indices between three European ones - the Swiss SMI (1/3), the Dutch AEX (1/6) and the French CAC (1/6) and the Japanese Nikkei (1/3).
The cost of the derivatives being purchased is cheaper for these indices than for the FTSE 100 or S&P 500 and this explains how Irish Life can guarantee a minimum of 87 per cent of the capital at the end of the nearly six-year term, but also allow for 80 per cent of any returns from performance growth. Unusually, there is a 3 per cent entry charge, which will automatically reduce a £10,000 stake to £9,700.
If these four indices either lose growth or stay flat and you have invested £10,000, you can be sure to get £8,700 back. If the market
grows by 20 per cent over the period, you will get a before tax return of £10,252 which is calculated using the formula: (£10,000 multiplied by 87 per cent) plus (20 per cent multiplied by 80 per cent multiplied by £9,700) £10,252. If the market achieves a 50 per cent growth rate your return would be £12,580 before tax. (Deduct 24 per cent tax for the net return.)
After nearly six years and a 20 per cent hike in market growth, £252 does not seem like much of a return. The same money, invested directly in assorted blue chip companies in the same stock markets, achieving the same growth rate, would cost you only the stockbroker commission and yield closer to £2,000 gross. You would also enjoy the income stream from any dividends and pay just 20 per cent capital gains tax, £1,000 of which could be offset against your personal CGT allowance.
With the currency risk between euro countries now gone, a direct stock investment option in euro stocks should be looked at again, especially by investors who think they could handle the risks involved. But remember that the strongest point in favour of trackers is the capital guarantee, something you forfeit the moment you start buying and selling shares. The closing date for the First Active tracker is March 5th, before which you can earn 2 1/2 per cent interest on your investment lodged up to the issue date. The Irish Life tracker closes on March 12th.
