Wednesday 23 October 2019

Consumers warned tracker bond returns are set to fall dramatically

Charlie Weston

Charlie Weston

CONSUMERS have been warned that the returns on tracker bond investments are set to fall dramatically.

Lower interest rates mean the bonds are set to be far less attractive, according to research by Merrion Stockbrokers.

Some €1.2bn was invested in the bonds last year.

Tracker bonds are fixed-term investments where typically most of the money is invested in a deposit-based account and the rest is invested in the stock market, in a stock-market index or mix of indices.

Consumers will usually have to invest a minimum of €5,000 and the term is fixed for between three and six years. Investors will have no access to their money during this time.

The bonds have proven highly attractive because of promises of up to 100pc capital protection.

But now head of investment at Merrion Stockbrokers Niall Duggan said the dramatic fall in banks' and central banks' interest rates means that returns from tracker bonds are set to come down by a quarter.

"These lower interest rates and lower bank funding rates are having a dramatic impact on the cost of the capital protection feature of these tracker bonds that Irish investors find so attractive."

He said some €1.6bn was put into the bonds in 2010, with the amount invested falling to an estimated €1.2bn last year.

Many of the bonds have five-year terms, at the end of which the capital is fully protected.

But with falling interest rates it is becoming more expensive to fund the capital protection element of the bond.

This means there is less left to provide an investment return.

Mr Duggan said: "The amount of the investor's fund available to provide investment returns has fallen from around 20pc to 5pc."

This means that the potential investment performance is set to be just a quarter of what it was in the past.

Irish Independent

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