THE appeal of tracker bonds has been mainly that they are both simple to understand as well as being "safe" investments. So long as you keep the contract in place for the designated period your initial capital is guaranteed, while growth returns depend upon the performance of the stock exchanges to which your bond is linked, subject to the conditions of the contract.
Different trackers offer different ways of computing growth: some limit the total amount that can be paid out; others not only guarantee capital but a minimum return of say, 20 or 30 per cent and might even lock-in growth at various stages. The common thread between them all, however, is the need for growth of some kind to be recorded, no matter how small, before any guarantee returns or lock-ins are activated.
Two new guaranteed products have just been launched, a conventional tracker from Bank of Ireland Asset Managers Guaranteed World Bond series and a new Capital Plus Bond from Scottish Provident, which is linked to the FT-SE 100 and the German DAX, but which does not "track" the indices in the way that a conventional tracker does.
BIAM's lastest tracker, the Eighth Guaranteed World Bond requires a minimum £3,000 investment and will pay out 115 per cent gross of any growth achieved over the 5 1/2-year period of the contract, that is, 100 per cent of the growth achieved by the various indices plus an additional 15 per cent. If, for example, the markets achieve a 45 per cent rise in growth after the 5 1/2 years, you will "receive that plus 15 per cent of 45 per cent or another 6.75 per cent making a total gross return of 51.75 per cent. (Tax is liable after April 1st at 26 per cent.)
The B of I bond is a simple, straightforward one, represented by the equal weightings of stockmarkets in the US, Britain, Japan and continental Europe. The 5 1/2-year term is at least six months longer than most other trackers and potential investors who have any second thoughts about leaving their money intact for even five years should think very carefully about this one since early encashment can put your capital or return at risk.
The Scottish Provident product is an interesting alternative to the conventional tracker for those investors who are prepared to take a gamble that the two markets concerned - the FT-SE 100 and the DAX 30 will, at the end of six years, have improved their position from the starting date. If such a position is achieved, no matters if the improvement is only slightly ahead of the launch position, the investor will be guaranteed a net return of 45 per cent (the equivalent of 60.8 per cent gross.) The risk you take is that if the markets have soared during the period, you will still only receive a 45 per cent net return; this bond, unlike many trackers which allows you to benefit from the total growth achieved, has put a net ceiling on the overall return it will pay out.
You can also take an income from this bond, which requires a minimum investment of £5,000, but no capital guarantees apply on such an option.
The BIAM World Bond closes on April 12th and the Bank will add an additional 0.5 per cent capital allocation for investors who place their money before March 21st.
