Latest product attempts to address downsides of trackers

THERE is no shortage of investment products on the market - they range from low-cost PIPS for people with relatively small amounts available each month, to sophisticated offshore unit trusts for lump-sum investors. In between are post office certificates and bonds. Special Investment Accounts guaranteed bonds including trackers, longer term with-profit and unit- linked managed funds and direct stock market investments. Now another has been added a guaranteed, open ended equity account from Bank of Ireland Asset Management, (BIAM).

It is important to put this new product, unique in the Irish market, into context. For the past five years the tracker bond has shown itself to be one of the more popular investment options, taking in upwards of Pounds 300 million per annum, much of it money from smaller investors interested in three features the capital guarantee, the relatively short associated investment period, on average three-to-five years, and the fact that it allows access to international equity markets.

The downside of the trackers has been that the guarantees - of capital and in many cases of a small percentage return - have come at a price, usually the setting of a maximum return. Also, the averaging" of the return over the last six or 12 months can have an impact on the final value, depending on whether the market has been volatile or not during those final months. Trackers also impose sharp penalties if you encash them early. The tracker investment period is certainly shorter than that required to achieve profits from conventional bonds or managed finds, but it is inflexible.

BIAM's new product, called Gateway, has attempted to address these issues. Very simply, it is a deposit account that offers an interest return linked to the performance of a basket of five world equity or stock markets, specifically, the US S&P 500, the UK FT-SE 100, Eurotrack 100, (European markets), Nikkei 300 (Japan) and the Hang Seng (Far Eastern markets). The weightings that BIAM choose to be represented in Gateway reflect corresponding weights in BIAM's EUT International Fund.

Calculated every three months, your investment - a minimum of Pounds 10,000 - increases by a proportion of the rise of the equity markets concerned. If the markets go down or remain level during the quarter, your fund is unaffected. Any gains achieved in any particular quarter are locked in and can not be taken away. The proportion of the rise depends upon the wholesale level of three-month interest rates and the cost of the options on the selected stock markets. The other attraction of this product is that after the initial three-month period, you can, with one week's notice, withdraw your cash (again, Pounds 10,000 is the minimum withdrawal) with no penalty, on any of the quarter account dates. You can make additional deposits of Pounds 10000 on those dates.

There are no entry or exit costs associated with the Gateway account, but BIAM makes its margin by charging your find the equivalent of 0.5 per cent of its value every quarter. Over the year, this is a two per cent charge, quite a bit higher than other lump-sum investments in which annual charges can be as low as a quarter or half a per cent depending on the size of the investment, but more usually three-quarters of a percentage point.

BIAM justifies its margin on the grounds that it is a quarterly one and there is nothing to stop investors from withdrawing and reinvesting their money as they please, with no penalties. If the market goes through flat or negative periods the account can be closed and the charge avoided. Your finds can be re-invested - again at no charge when the market picks up again and the return is sufficient enough to justify the charge.

While it makes sense to play this account quarter-by-quarter, the bank is not portraying it as a short-term one, but rather as a deposit that gives longer-term investors a return linked to stock market performance". While it could be argued that the 2 per cent annual margin on your fund value is not significant when markets are performing well (and your capital is always guaranteed), investors with say, Pounds 50,000 who leave their finds in the account for two flat or negative quarters, is facing a Pounds 500 deduction (i.e. 1 per cent) on the account. Four flat or negative growth quarters and that charge on the fund rises to Pounds 1,000 (i.e. 2 per cent), compared say, to the Pounds 375 (i.e. 0.75 per cent) annual management charge associated with most other lump-sum investment funds.

In today's booming stock market conditions, the above is a worst-case scenario and over the past 10 years, the average return from a Gateway Account would have been in the region of 10.5 per cent per annum before tax.

BIAM includes a table in its promotional material for this account which shows the quarterly performance of the selected indices to which Gateway is linked since 1987 and the return that would have been achieved by an actual Gateway account, had one existed over the period. (The percentage returns on the Gateway account column include its margin of 2 per cent.)

Some quarters showed substantial negative returns which affected the annual return. For example, in 1990, the first quarter showed a negative return of -3.5 per cent, the second quarter returned 5.3 per cent, the third -16.6 per cent and the fourth 3.8 per cent bringing the total percentage return for the year down to -12.0 per cent. Because the nature of the Gateway account does not allow any negative returns to affect the status of its funds, the same annual return on the equivalent Gateway account for 1990 would have been +5.3 per cent.

The table, above, shows the annual comparable returns between the actual return on the indices over the period and the return that a Gateway account would have returned had such an account been in place over the period.

Some intermediaries Family Money spoke to have reservations about the Gateway Account, believing it to be a better alternative to the conventional tracker bond because it does not tie up a person's money for longer than three months at a time, and locks in any fund growth.

But they also say that the quarterly/annual margin of the fund that BIAM is taking is too high compared to other, higher value products like UCITS, other off-share vehicles and even direct stockmarket investment in safe blue-chip stocks, despite not having built-in guarantees. Annual charges on most off-shore accounts are lower than the 2 per cent charged by Gateway and they are not subject to automatic DIRT of 26 per cent. Profits on such funds are subject to Capital Gains Tax, but CGT allowances can be used to offset tax due.

"An investment like this is by its very nature, cautious, since the capital has to be safeguarded," one adviser told Family Money. "If you are a cautious investor and have Pounds 10,000 or more at hand, but also have a mortgage, you should seriously look at reducing your mortgage. You can improve your cashflow, by dropping your monthly payments, or you can reduce the years remaining and avoid all that future compound interest.

"If you don't have a pension, or it is inadequate, you need to consider whether your Pounds 10,000 would be better spent investing in a pension in which you are automatically getting a 48 per cent tax break plus, at the moment, excellent fund growth."

For more information about Gateway contact Bank of Ireland Asset Management directly at (01) 661 6433 or an independent intermediary.