Tracker bonds have appealed to investors for a number of reasons the capital guarantee, the relatively short average investment periods of three to five years and the opportunity to benefit from the growth of international stock exchanges during this latest bull run of the markets.
One market that has never participated in conventional tracker bonds, however, has been the ISEQ the Irish stock market index. This is primarily because options (the vehicle by which investment managers can buy into the markets) have not been available on such a small list of public companies. This is bad for investors since the ISEQ has been one of the world's best-performing markets over the past several years.
In an effort to partly address this issue, Ulster Bank Investment Managers has put together what it is describing as the first ISEQ tracker bond, though in fact it is a low DIRT (i.e. 10 per cent) special investment policy linked to the performance of the ISEQ. Unlike conventional trackers, this one charges a 5 per cent initial fee, after which the balance of your money is invested in the fund, a minimum of 10 per cent of which is invested in Irish shares with a capitalisation of less than £200 million. This fund, says Ulster Bank, will have a single unit price which can be determined daily, based on the performance of the underlying Irish shares which include the following top 10 ISEQ companies: AIB, Bank of Ireland, Elan Corp, CRH, Jefferson Smurfit, Irish Life, Kerry Group, Independent Newspapers, Avonmore Waterford and Irish Permanent.
You will need a minimum of £5,000 to invest and 95 per cent of your capital (the other 5 per cent having gone in the initial fee) is guaranteed, but only so long as you do not encash before the five-year term is up. Encashments are permitted after the first 12 months, but the capital sum will not be guaranteed and the price can fluctuate.
What also makes this bond different from conventional trackers is that it is a direct investment in the Irish index and its performance, as opposed to the purchase of options on that index. It differs from direct stock market investment, however, in that dividend income is used to pay annual management charges, though whether this represents a financial advantage over being charged an additional 1 or 2 per cent of the fund per annum is difficult to determine because dividend income can vary.
Because this bond comes under the legislation that governs special investment policies, the maximum investment is limited to £75,000 for an individual and £150,000 for a married couple in two separate policies. These limits must also take into account any other special savings accounts, special portfolio investment accounts or any other low DIRT policies held. Many commentators believe the huge bull run that has been enjoyed by world stock markets, and especially the ISEQ, may be coming to an end. Investment returns are notoriously cyclical commentators suggest the fall-out from the financial difficulties in the Far East are likely to be the main cause of any slowdown here. Nevertheless, the accompanying graph shows just how impressive ISEQ returns have been over the past 10 years, despite the 1992 Gulf War and the 1994 currency crisis. When these two years are taken into account, the average annual return has been a remarkable 18.3 per cent.
A more modest 8 per cent per annum growth rate in this ISEQ bond would still represent an after-tax profit of £3,959 or total return of £13,959 on capital of £10,000. A 10 per cent annual growth rate would result in an even higher after-tax profit of £5,650, or a total return of £15,650.
The capital guarantee after five years is an attractive feature of this ISEQ bond as is the low tax liability most investment bonds are subject to 24 per cent internal tax. Some financial advisers believe that by-passing the middlemen in this case Ulster Bank and Scottish Legal Life, the policy underwriter, who must each take their cut and investing directly in the ISEQ would not only mean lower charges, but better returns since you would get dividend income as well as any capital growth. That argument is a good one for someone with larger sums to invest. But investors should always check with an independent adviser before making a decision, in order to compare products on the market and to ensure a full explanation of investment conditions and the effect of all costs and charges.
