Bonus Bonds hold a truly unique place in New Zealand’s investing landscape, like many new Zealanders, I myself have held them (courtesy of a gift of my parents) when I was a child.
A Little History….
Bonus Bonds is actually a unit trust founded in 1970 with a reward scheme based on cash prizes. The New Zealand Government launched bonus bonds under the Unit Trusts Act 1960 through the Post Office Savings Bank (which later became PostBank) with the goal of encouraging New Zealanders to save.
It transitioned under the FMCA Act 2013 to a managed investment scheme in late 2016.
When ANZ acquired PostBank in 1989 from the New Zealand Government it also acquired management of the unit trust, which subsequently became the scheme under recent legislation. It is managed by ANZ Investment Services (New Zealand) Limited and the independent Supervisor and custodian.
Size of the Scheme
It is the country’s largest retail unit-trust, with around one third of New Zealanders owning bonds. For the year ending 31 March 2016, the total bonds on issue amounted to in excess of $3.2 Billion.
Return on Bonus Bonds
The Return from Bonus Bonds is calculated on the basis of each Bond providing the owner with to one entry into a monthly prize draw, with prize-winning Bonus Bonds at random. The first eligible Bonus Bond selected wins the first prize, the second selected receiveds the second prize and so on. The size of the prize pool is determined by considering realised and unrealised scheme returns, fees, expenses, tax and the level of reserves needed to maintain the price of a Bonus Bond at $1.
What happens to the money I invest in Bonus Bonds?
The investment strategy for the funds deposited in Bonus Bonds is to:
- invest conservatively in fixed interest assets and cash and cash equivalents, and
- ensure that at least 15% of the scheme’s assets can be liquidated quickly at, or very close to, their prevailing market values.
The scheme is only permitted to invest in fixed interest assets and cash and cash equivalents, issued in New Zealand dollars, by certain issuers. Typically, these investments include:
- for fixed interest assets – debt securities issued in New Zealand by a government, corporation, local authority or bank, and
- for cash and cash equivalents – deposits, short-term debt securities, or floating rate notes issued by New Zealand-registered banks.
At 31 March 2016 money in the Scheme was invested as follows:
New Zealand Registered Banks: $3,085,725
New Zealand Government Stock: $364,401
Local Authorities: $7,560
So what is my actual return on Bonus Bonds?
Your actual return, as a scheme member, is made up of two main elements:
- Firstly, any payments as prizes to bond investors are limited to the net return on the scheme’s investments, after all costs, expenses, tax, etc. are taken out. This is the effective prize pool.
- Then, from that prize pool, it is the likelihood that an individual bond will win a prize. This is a ratio of the size of that Net Return/Prize Pool as calculated above divided by the amount of bonds eligible for a prize.
Summary of Historic Bonus Bond Scheme Costs vs Returns
The attractiveness of the Bonus Bonds Scheme as an Investment Option
The returns are frankly not that great. Removing the sentiment, history, and clever marketing, an investment in Bonus Bonds is in reality an investment in NZ bank term deposits and cash, as well as government stock and a small proportion of local government authority bonds and corporate bonds. For that privilege, investors get charged 1.28% p.a by ANZ.
With interest rates close to all-time lows, the returns generated by the scheme have also dropped, meaning the prize pool has fallen by 27.3% since 2012. The Net return on the Scheme has fallen as well, from an already paltry 2.5% in 2012 to 1.83% in 2016.
The real effect of this has meant that the likelihood of winning a prize has almost halved. In 2012 it was one in 12,882. In 2016 it was one in 19,731, and the guidance for 2017 is that the chances of winning a prize are now as low as between 1 in 20,000 to 1 in 35,000.
To give some relevance to that figure, the chance of getting 5 out of the first 6 numbers in Lotto is 1 in 19,386, and how often does that happen?
Who is the real winner from Bonus Bonds?
Investors have received an average of 2.07% p.a from Bonus Bonds over the past 5 years to 31 March 2016. During that time ANZ has charged 1.28% p.a. Furthermore ANZ invests a significant portion of the scheme money into its own term deposits and cash, helping its liquidity ratios and giving it the ability to on lend to borrowing customers and increase its earnings.
The biggest cost to investors is opportunity cost
Investors in Bonus Bonds are obviously forgoing the opportunity to invest those funds into potentially more productive areas. There are many high yielding investments available in the New Zealand market with favourable low risk characteristics. Some examples of these are the electricity retailers (Genesis, Meridian, etc.) which regularly yield north of 7% p.a and the listed property sector (such as Goodman Property and Argosy) boasting yields in excess of 6% p.a.
Investing in well-established NZ companies with strong fundamentals has the potential to provide returns well in excess of the sporadic returns enjoyed on your bonus bonds. We advise that clients seek advice from their financial adviser who can assess your tolerance to risk and determine if these bonds are meeting your goals and objectives.
Alternatively, if you enjoy a return based on chance (of in excess of 20,000 to 1!), buy a lotto ticket.
Written by James Smalley, Investment Advisor.