Run a mile if the bank is trying to sell you a tracker bond

IF your bank is trying to sell you a tracker bond, then think hard before you part with your hard-earned cash. The brutal truth is that most tracker bonds sold by banks, stockbrokers and investment firms are poor performers.

Research from the Central Bank found more than half of investment bonds and trackers sold by stockbrokers and investment firms underperformed State savings products sold by An Post branches.

The regulator has warned consumers about the investments.

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

You will usually have to invest a minimum of €10,000 and the term is fixed for between three and six years.

They are usually marketed as tracker bonds, investment bonds, or kick-out bonds.

About two years ago Merrion Stockbrokers broke from the pack and stopped selling tracker bonds to its clients. It advised investors to avoid putting money into them. Low interest rates mean these products are poor value, it said.

The big attraction is that the capital invested in a tracker bond is guaranteed. Low interest rates mean the cost of protecting the capital leaves little left to be invested in shares or a stock market index.

The low interest rates being paid by banks on deposits has meant money has poured into these products, which the Central Bank calls structured retail products.

Close to €1bn of structured retail products were sold last year, with 371 of these investments launched.

But consumers were warned that many of these products do not guarantee the capital that is invested, unlike previous versions of these investments.

A themed inspection of firms selling these products was carried out. “The Central Bank is of the view that structured retail products are not always a suitable alternative for consumers, given their complexity and potential for partial or total loss of investment,” the regulator said.

It said weak product governance arrangements were identified in some firms selling the investments.

Products which involved investors borrowing were sold by a number of firms, but the risk associated with the debt element of the product was not properly highlighted, the Central Bank said.

A performance comparison exercise found that over half of the products that matured in 2014 and 2015 underperformed when compared with State savings options available when the structured retail products were launched.

You have been warned.