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Stockbroker says tracker bonds are poor value for investors

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Niall Duggan, head of investments at Merrion Stockbrokers

Niall Duggan, head of investments at Merrion Stockbrokers

Niall Duggan, head of investments at Merrion Stockbrokers

Investors have been advised to avoid putting money into tracker bonds. Low interest rates mean these products are poor value, Merrion Stockbrokers said.

Investors pumped just over €1bn into structured investments in this country 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 or a stock-market index.

Investors usually have to invest a minimum of €5,000 and the term is fixed for between three and six years.

The big attraction is that the capital invested in a tracker bond is guaranteed.

But head of investments at Merrion Niall Duggan said the fact that euro zone interest rates are down to just 0.05pc, after 14 cuts in the European Central Bank rate since 2008, meant these investments were no longer viable, and would result in disappointing returns for investors.

Low interest rates mean the cost of protecting the capital leaves little left to be invested in shares or a stock market index.

"The lowering of interest rates has had a dramatic impact in terms of increasing the cost of capital protection," he wrote in a note to clients.

Merrion Stockbrokers, and its wealth division Merrion Solutions, said it was no longer selling tracker bonds, and Mr Duggan said this was a brave call by the stockbroker as it had been a big seller of the bonds and would now lose business.

"It is because European interest rates and bank funding rates are so low that Merrion Solutions has announced that it will no longer be producing fully capital-protected structured investments for the Irish market. Merrion Solutions has concluded that when full capital protection is provided, there is not enough of each investor's capital being spent on the investment upside potential that these investors expect from five-year investments."

Mr Duggan said that banks here, insurers and other providers are likely to keep offering trackers, or capital-protected structures.

"But Merrion believes this will result in disappointing returns for investors," he said.

The stockbroker expects the ECB to keep interest rates very low until 2017.

Tracker bonds are hugely popular in this market.

Merrion says €1.4bn was invested in what it calls structured investments in 2012, with the amount invested falling to €1.07bn last year.

Capital-protected products, or tracker bonds, make up the majority of the money going into structured investments. Up to August this year some €772m has been invested in structured investments, said Merrion.

In 2012 ACC settled 500 cases after its customers sued in the Commercial Court over tracker bond investments the bank had allegedly promoted.

The investors claimed they lost money after borrowing from the bank to invest in various Solid World tracker bonds in 2003 and 2004. The court was told the investments were very popular among Irish investors in 2003 and 2004.

An estimated €650m worth of the geared-tracker bonds were sold to more than 1,000 people who borrowed an average of €200,000 from ACC to invest. Most investors took out loans with ACC to buy the bonds and the losses they suffered arose out of interest repayments on the loans, the court heard.

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