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Last Updated: Thursday, 17 April, 2003, 07:04 GMT 08:04 UK
The 'safe investments' that backfired

Analysis
By Julian Knight
BBC News Online personal finance reporter

An elderly woman against the backdrop of a falling market
Some savers are about to lose all of their original investment because of an apparently safe saving scheme - so-called high income bonds.

Some of the high income bonds taken out in 2000 carried a three-year expiry date and are about to mature amid stock market gloom.

And the latest research reveals investors in a certain Scottish Mutual Income Bond, for example, need the EuroStoxx 50 index to rise by 139% within three weeks in order to get their money back.

Even the most optimistic investor will have to admit such stellar returns are simply not going to happen.

And the Scottish Mutual investors are not alone. There are literally thousands of people who have ploughed much or all of their life savings into high income bonds.

Wave theory

Now, time is running out for some savers who are on the verge of having their original investment wiped out.

At the height of the last bull market, high income bonds were bought en masse as a supposedly safe means of riding the crest of the stock market wave.

They saw the words 'Income' and 'Bond' in the product title and wrongly thought they were safe investments
Craig Whetton Chartwell Investment Management

For the term of the bonds - usually three or five years -stock market growth would help guarantee an annual income often close to the 10% mark.

In the current low interest rate environment, thousands of savers have been attracted to the products, as they generally offer a rate of income that is much higher than traditional savings rates.

The theory went that, even if the market suffered a slight reverse for one year, the growth in other years would make up for the hiccup.

As a result, people near retirement were attracted to the bonds, according to Craig Whetton chief executive of Chartwell Investment Management.

"They saw the words 'Income' and 'Bond' in the product title and wrongly thought they were safe investments."

Lazarus

But nose-diving share prices has meant that the investments have turned out to be anything but safe.

Over the next 3 months, according to new research from Chartwell Investment Management, six high income bonds will mature and investors are set to lose their money (unless markets worldwide make the greatest comeback since Lazarus).

Investors who bought these bonds tell a similar tale - at the back of their mind they had an inkling of the risk but the marketing just emphasized the positive and how safe these products were
Marlene Shalton Independent Financial Adviser
For example, the Eurostoxx 50 has to grow by 137% by 22 May before investors in a certain NDF bond can get their full money back.

What is more, the Nasdaq 100 has to grow by a staggering 172% before 8 December if some savers at Scottish Mutual are to get their money back.

Mis-selling or mis-marketing?

At a time when tales of investor woe are rife, the plight of high income bond investors is deeply unsettling.

Some observers say it highlights the worst practices of financial firms.

But this is not necessarily another case of mis-selling by greedy, commission-hungry financial advisers?

High-income bond woe
AIG Life bond one FTSE 100 has to rise 72% by 6 May
Scottish Mutual bond nine EuroStoxx 50 has to rise 139% by 6 May
NDF Extra Income & Growth Plan two EuroStoxx 50 has to rise by 137% by 22 May
Scottish Life bond one EuroStoxx has to rise 137% by 9 May
AIG bond three FTSE 100 has to rise by 70% by 10 July
Source Chartwell Investment Management

Marlene Shalton, director of Chamber Morgan James Cardiff-based independent financial advisers, says the advisers were not at fault in this case.

"These bonds were invariably sold through advertising and direct marketing," she explained.

"At the back of their (investors') minds, they had an inkling of the risk but the marketing just emphasized the positive and how safe these products were."

The FSA admits that the vast majority of bonds were bought directly by the public, but still does not lay all the blame at the hands of the bond providers.

"We are not going to point any fingers at one aspect of the process," Louise Buckley, FSA spokeswoman told BBC News Online.

The FSA claims to be on the "front foot" over high income bonds; back in February the City watchdog told firms to explain risks better to investors.

Bolting horses

But some experts believe this is shutting the stable door after the horse has bolted.

"The real sufferers are those investors who back in 1999 and 2000 bought bonds with early maturity dates," Mr Whetton says.

"Firms were falling over themselves to offer attractive headline income rates with capital returned in no time at all.

"However, a bond that runs for three years is higher risk than one that matures in five."

Furthermore, it took until last March for the FSA to fine the first ever UK financial company for misleading advertising.

And many people think that is too little, too late.

"Sadly, investors are led on by the marketing, a much closer eye has to be kept on the small print and the way in which investment risk is communicated to investors," Ms Shalton said.

As for those investors who believed the marketing hype and now face losing everything, the FSA has few words of comfort.

"At the end of the day if people were made aware of the risk, there is nothing we can do," Ms Buckley said.




SEE ALSO:
Savers: Anywhere left to hide?
16 Jul 02  |  Business
Investors face 21st century gloom
13 Feb 02  |  Business
Investors recover confidence
25 Nov 02  |  Business
Investing in troubled times
04 Oct 02  |  Business
Battered investors shun shares
23 Jan 03  |  Business


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