Irish eyes are smiling

Country profile: Ireland

Recent strong growth in sales of tracker bonds – capital-protected products with equity upside – has pleased Ireland's distributors no end. The Irish Association of Investment Managers reports that sales of the bonds grew by e1.85 billion in 2004 compared to 2003. And Karl Symes, investments marketing manager at Irish Life, says tracker bonds accounted for 40% of the institution's sales in 2004.

Despite their success, concerns remain over the ways in which tracker bonds have been marketed in the past. The nascent Irish Financial Services Regulatory Authority (IFSRA) recently put forward a draft Consumer Protection Code. Whatever the final shape of the code, which is due in September, it will include rules insisting that the marketing of tracker bonds and similar investments contains a 'key features' document which clearly outlines levels of risk, and a lengthening of the 'cooling off' period for investors.

An IFSRA official pointed out that previous solicitations were "not as fully transparent as we would have liked", and the press has been quick to highlight instances of mis-selling. In March, for example, The Irish Times cited a case where a 73-year-old retiree had sought investment advice from his bank, and was apparently advised to put money into a bond that fell in value over a three-year period from €400,000 to €370,000.

However, it is important not to overstate the regulator's concerns. The predominance of capital-protected, vanilla products in Ireland has meant that the market has avoided the problems associated with 'precipice bonds' in the UK. Most participants do not see the new rules as a burden, but rather welcome them as confirmation of best practice. "Clearly, some investors are happy to rely on their adviser's knowledge and expertise and don't want to look under the bonnet of every investment. But we work on the assumption that every investor wants their investment explained in as clear and simple language as possible – so there are no surprises at any stage," Symes says.

Gareth McQuillan, head of marketing for sales and investments at Bank of Ireland Life, agrees that the new rules could be beneficial but cautions that regulation can be "a real overhead to implement… I'm not sure whether a cost/benefit assessment of much recent legislation would demonstrate that consumers are genuinely better off."

Beyond the capital guarantee

For most Irish investors, structured products are synonymous with capital guarantees, and growth in the market has mirrored changes in their appetite for risk. Last year, a Hibernian Life survey revealed that 36% of Irish consumers were looking for more financial security than had been the case five years previously. Accordingly, the company was quick to offer a guaranteed option on its underlying Spectrum Fund.

While caution remains a watchword for most Irish investors as far as their capital is concerned, the 'big three' institutions – Allied Irish Bank, Bank of Ireland and Irish Life and Permanent – are noticing a more adventurous attitude towards underlyings. These organisations and their subsidiaries are estimated to command between 60% and 70% of the structured products market.

Nicholas MacShane, retail portfolio manager at Irish Life Investment Managers (ILIM) speaks of a "huge appetite for property investments". Much of this is expressed through traditional channels, there has also been interest in structured products linked to the European Property Real Estate Association (EPRA) index. AIB's Property Sector Tracker Fund, for instance, links returns to the performance of EPRA.

And while most tracker bonds to date have been fairly simple affairs, with embedded capital protection, products that use constant proportion portfolio insurance (CPPI) are also starting to emerge, although their relative complexity has restricted take-up.

Irish distributors have also been astute enough to offer combinations where returns are linked to both equity and property sectors. For instance, First Active's Property and Equity Investment Bond currently offers investors a five-and-a-half-year capital-guaranteed product where the return kicker is split between the Eurostoxx 50 and the EPRA.

Alternative asset class

Another approach, in the midst of this challenging pricing environment, is to look at different asset classes. IIB Bank has been testing the boundaries of investor acceptance in Ireland with hedge-fund linked products such as a recent six-year instrument. This offers a capital guarantee, and additional performance linked to a tailored fund of hedge funds. The degree of participation depends on the performance of the underlying fund – the better the performance of the fund, the more benefit an investor receives.

Mark Donnelly, structured product manager at IIB, believes it is appropriate for select areas of retail, and the top end of the IFA market, but points out that there is a large element of education required from high-calibre advisors.

The products seem to have sold well, however, and acceptance in the hedge-fund space seems to be growing. Donnelly notes that this was IIB's second offering in this area – the first was a fund-of-funds product in February 2004 – and that IIB plans to enter the sector again. After that, he anticipates a pause while it is digested – but says this is unlikely to be the last we'll see of hedge fund products in Ireland. Donnelly also predicts that investors will soon progress to other assets. He highlights commodity-linked products and emerging markets as fertile areas for growth.

However, ILIM's MacShane sounds a note of caution. He agrees that the alternative market is growing but sees these as small niche areas – for the moment at any rate.

Distributor profile: Bank of Ireland's Gareth McQuillan

Gareth McQuillan has been with the Bank of Ireland group since leaving school in 1988, rising through the ranks to become head of marketing for Bank of Ireland Savings and Investments. Pensions, insurance, and most forms of deposit accounts fall within his remit and he runs a 12-strong marketing team, four of whom specialise in sales and investments.

Structured products are particularly important for the archetypal Irish customer who wants both exposure and an investment guarantee. Bank of Ireland has focused on these concerns through its series of Smart Combination Bonds (formerly Combination Equity), which split returns between a deposit account and a structured equity investment.

Currently, the average tranche size is about €10 million, but McQuillan points out that in previous years there have been tranches with sales as high as €40 million plus.

He sees the Bank of Ireland brand as crucial to their sales. As well as independent IFAs, product distribution leverages off the bancassurance model utilising both Bank of Ireland's branch network and the New Ireland Assurance operation.

McQuillan says that although the structured products market in Ireland has been around for some time, for the most part he sees Irish consumers as followers rather than leaders – though this is not necessarily a bad thing; "I look at some of the more complex product structures from other markets and wonder whether customers in those countries genuinely understand the products they're being offered," he says.

Accordingly he tries to stay ahead of the competition by reducing complexity. "Keeping it simple is very important – whether in terms of product structures, literature or sales processes, simplicity is always going to appeal.

He is also keeping an eye on the maturing of many investments which were formed under the Special Savings Incentive Scheme five years ago. Under this scheme, the government boosted certain deposits made with financial institutions by 25%. Around €14 billion of accumulated savings will hit the market next year, and a portion of this will be ripe for reinvestment in new structured products, he predicts.

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