Money times with Jill Kerby

Your search for more investment knowledge will pay dividends LAST week's article about safeguarding your savings and investments has resulted in a number of letters and e-mails from readers who are interested in more detail on some of the suggestions recommended by the three advisors (Eddie Hobbs, Vincent Digby and Mark O'Byrne) that I spoke to. 'I was very interested to read about tracker bonds in your recent column,' wrote one reader. 'My personal experience several years ago was not very successful. I did get my money back, but with only a tiny return. How are these new bonds any different and are the charges lower?' Another asked if Eddie Hobbs recommends any emerging market funds as well as energy funds, while another asked, 'how do inflation-linked bonds actually work?' The level of interest in these quite sophisticated investments is a huge development, and very welcome. For too many years investors here bought expensive, mixed, managed funds or the endowment mortgage version that produced very poor returns (except to the commission-paid broker) or, at the other end of the investment spectrum, invested solely in Irish shares, and mainly bank shares. We know, unfortunately, how badly those choices turned out. The questions from these readers suggest they are more aware of the importance of diversifying their savings or investments away from a single asset (like cash, or property, or financial shares) and are aware of the importance of the product type. A recent survey by Aviva confirms that while three quarters of those surveyed believe the world of investing is more risky now, 49 per cent wish to invest in the next 12 months by splitting their cash between deposits, fixed-term, capital-guaranteed investments, bonds that will protect against inflation, into blue-chip, dividend-paying shares directly or into pooled funds, into companies or funds in growing productive parts of the world, and into the commodities that they also need for their growing populations and industry. First of all, let's look at tracker bonds. My reader's experience was not satisfactory and after inflation he probably made a small net loss when tax was taken into account. The new versions of trackers, says Vincent Digby of Impartial.ie, have improved because some, like Ulster Bank's Index Combination Bond and Aviva's new Secure Plus Fund, guarantee not just your cash back, but an approximate ten per cent deposit return (paid after year one in Ulster Bank's case) and exposure to commodities and emerging markets in the investment side of the product. Costs, he says, are still relatively high, but they do offer more liberal shares than many previous trackers, although they could be vulnerable to inflation. They need to be considered only as part of a diverse portfolio. Another reader, and yet another cautious investor, was debating buying into the new, four-year, state National Solidarity Bond, 'but I am wondering now if a foreign, inflation-linked bond would be better. How do they work and where can I buy them?' Inflation-linked government bonds can be purchased with the assistance of a stock-broker. They also come in the form of bond funds, with the bonds of several countries represented. When you buy a conventional bond, say, for five years, you not only receive your capital or 'principal' back at the maturity date, but every year the bond pays a 'coupon', a fixed rate of return. However, if your coupon is worth, say, four per cent of the principal, and inflation runs at six per cent, you will suffer a loss of two per cent. What sets inflation-linked bonds or bond funds apart from traditional ones is that both the initial principal amount and the coupon payments are indexed to the inflation rate. If inflation rises, your money more than keeps its spending power. A good advisor or your stockbroker can discuss the finer points and lay out a selection of bonds or funds that suits your needs and your budget. Finally, another reader, a teacher with two teenaged children, has saved all their child benefit payments. 'They are now in their teens and I figure they might end up working someday on the other side of the world so I thought I might take a chance at putting a few thousand euro into an investment. You and Eddie Hobbs and others write about emerging markets but I haven't got a clue which ones are worth considering.' This reader is right. Investment options can be baffling, but the reluctance of fund managers up to even five years ago to invest in places like China, India, Brazil and Malaysia is long gone. These great, developing countries are the growth centres of the world now, but are not risk-free by any means. Every familiar Irish life assurance company and also the likes of RaboDirect.ie  offers different emerging market funds that you can examine at your own pace, on-line. Some funds represent several countries and companies while others represent just a single country. You can see, on-line, when the fund was launched, the companies represented and what the annual and cumulative return(or loss) has been. Most are risk-rated. Many of these funds are duplicated (or nearly so) in the form of a low-cost ETF. This is an exchange-traded fund that trades on stock markets as a single stock. These can be bought from stockbrokers or, more cheaply, via your own on-line trading account (I use TDWaterhouse.ie). The free www.lovemoney.com UK website is a terrific source of information about emerging markets, ETFs, commodities and other investment options, but here in Ireland, ex-stockbroker Rory Gillen of the excellent InvestRcentre.com offers day-long courses around the country on stock market investing as well as specifically investing in ETFs. A course is worth taking if you want to really understand how investments work and the risks and rewards involved in also taking more control of your own money.