Money
Bonus bonds
Introduction
Bonus Bonds are the single largest retail unit trust in New Zealand. We take a look at the pros and cons.
Bonus Bonds offer big prizes, an excellent fund rating and no obvious downside. What’s not to like?
How about the low odds of winning a big prize, high fund-manager fees, unnecessary tax … and not being part of the Government’s Retail Deposit Guarantee Scheme.
How it works
When you buy Bonus Bonds you’re purchasing units in a collective investment scheme that pools money from its investors and buys a range of investments (its assets). The assets that the scheme can buy are limited to government bonds, local authority debt, bank debt and company bonds.
As in other collective investment schemes, the income from these assets is given back to investors after fund-manager fees, expenses and tax are paid.
The difference with Bonus Bonds is that the payout is a lottery: the scheme’s income is allocated through regular prize draws. So what you get back is not in direct proportion to how much you’ve put in. Of course the more you invest, the more chances you have of winning a prize.
You could win big (the largest prize is $1 million). But you could earn nothing at all.
The key trade-off
Bonus Bonds are managed so that all the income (after fees, expenses and tax) earned in any year is allocated as prizes. This income includes capital gains and losses.
Occasionally income may be transferred in or out of a “reserve fund”. This is used to smooth out income (the prize payout) from year to year, or potentially to cover a situation where the assets lose their value.
Short of exceptional circumstances, the value of the units in the scheme won’t change. What you pay for a unit in the scheme will be the same as what you get when you sell it back and withdraw your investment. So you’ll get your money back – but don’t expect it to be any larger than what you originally invested.
Because the scheme’s income is paid out in prizes, you lose out if you don’t win one. At least with a bank deposit you would have earned some interest income!
Popularity
There’s no doubt that having an investment with a lottery element is popular. Regular Bonus Bond punters we spoke to were committed fans, pointing to the fun in getting an unexpected prize cheque (even if it’s a small one) in the post.
They also liked not having to pay an application fee, the small $20 minimum investment and the fact your money can be accessed quickly. And, unlike Big Wednesday, the money you spend to take part you get back. It’s an investment, not a true lottery.
What are the odds?
By the end of March 2009, nearly 2.6 billion Bonus Bond units had been issued – making it the largest retail unit trust in New Zealand.
If you owned 20 of those (the minimum investment is $20), your chance of winning the first prize of $1 million in the monthly draw is around 1 in 130 million. This is almost 50 times worse than your chance of winning Big Wednesday with a standard 6-line ticket at a cost of $6.
Your chance of winning a small prize – thousands of $20 prizes are given out monthly – is much greater. But the odds are never better than 1 in 9600.
Is it a good deal?
If you’re happy to be in a lottery, what you need is a decent-sized prize pool. That means you don’t want too much “leakage” from the pool in fees, expenses and tax.
Fees and expenses
The Bonus Bonds’ fund manager (ANZ Investment Services) is paid a fee of 1.3 percent of the gross value of the scheme’s funds. And the financial statements of past years suggest that expenses deduct another 0.1 percent.
At a total of 1.4 percent, these are expensive leakages. It’s possible to find other large cash-and-bond funds that have fees and expenses (“management expense ratios”) of less than 0.7 percent. AMP Capital NZ Cash Fund, for example, has a management expense ratio of 0.63 percent.
Tax
Your Bonus Bonds' prizes (if any) are taxed at 30 percent and all prizes are distributed on a tax-paid basis. So if you’re on a tax rate lower than this and you win a prize, you’re paying more tax on it than you would on the interest income you’d get from a cash PIE (see our news item for more about cash PIEs).
If you’re on a higher tax rate, the Bonus Bonds tax policy works to your advantage just like a cash PIE.
What are the risks?
We were surprised to find the Government’s Retail Deposit Guarantee Scheme doesn’t cover Bonus Bonds. So if the scheme’s assets lose a lot of value and the losses can’t be met out of the reserve fund, investors may face significant capital losses. There’ll be no government bail out.
Credit rating
The credit-rating agency Standard & Poor’s has given the Bonus Bonds portfolio an “AAAf” fund rating – its highest possible rating. This means it believes the investments in the portfolio are unlikely to fail.
Asset portfolio
The Bonus Bond asset portfolio is restricted to “low risk” debt securities. This is not embedded in the trust deed, but achieved through an “investment objectives and policy” agreement approved by the fund manager’s board of directors after consulting with the scheme’s trustees (Trustee Executors).
While there’s no suggestion that the current investment policy will be altered, the Bonus Bond prospectus makes it clear the scheme’s “investment objectives and policy” can be changed at any time if the fund manager and the trustees agree.
In theory, the portfolio could include just about anything – shares, insurance and underwriting contracts (the cause of high-profile financial collapses such as Credit Sails), even unsecured personal loans. That’s as well as loans to the fund manager or trustee, or to parties related to them.
Related party lending
Around 25 percent of the Bonus Bond asset portfolio is held in corporate bonds and the balance is held in bank investments (including all the major banks), government bonds and local authority investments. The scheme’s trust deed allows funds to be invested in companies related to the fund manager.
At the moment around 18 percent of the portfolio is made up of “related party” loans to ANZ/National Bank, the fund manager’s parent company.
The trust deed places no limit on what percentage of the fund can be invested in any one company – including any “related-party” company. However, a spokesperson for ANZ told us the upper limit on exposure to any one company was 20 percent. This is a condition of maintaining the “AAAf” Standand & Poor’s rating
Our view
- Bonus Bonds are not part of the Government’s Retail Deposit Guarantee Scheme – but Standard & Poor’s gives the scheme’s assets an “AAAf” rating.
- If the fund manager’s fees and expenses were lower, there would be more money available for prizes.
- Bonus Bonds’ tax structure penalises prizewinners who have low tax rates.
Misplaced your prize?
If you’ve got Bonus Bonds but have no idea what they’re worth or whether you’ve won a prize, you can ask any ANZ branch staff to find out (take some identification). If you’ve won a prize but haven't claimed it, the prize money will have been automatically used to buy more Bonus Bonds in your name.
More information
- Bonus Bonds website: www.bonusbonds.co.nz
More from consumer.org.nz
Report by Susan Guthrie.