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Knocked for 60

Eurolife&#39s international zero-risk capital bond is a tradi tional offshore

bond registered in Gibraltar which invests in the technology-orientated

Nasdaq 100 index.

The panel disagree on how well the product fits into the market. Davies

says: “It fits in well. This is a niche market and there are not many other

products offering a no-downside guarantee.”

Gaunt says: “It offers a limited but attractive upside and little

downside. It also compares favourably with bonds which can restrict returns

if indices underperform.”

But Divers says: “Which market are we talking about – the high-tech stocks

or guaranteed bonds market? If the former, it is a good way to hedge your

bets on the technology sector but the whole point of investing is to take a

risk to get the reward and this exercise seems a little pointless.”

McCrory says: “I feel that it does not fit into the market particularly

well. There are other bonds which are UK-based which offer higher

percentage returns based on the performance of the FTSE 100. Possibly,

someone wishing to hold a small portion of their portfolio, say, 5 to 10

per cent, in this product might wish to use it.”

The panel also disagree about the type of client for whom the product is

suitable. Lewis says: “It is for those seeking to pursue a high-risk

approach as part of a portfolio. I would be uneasy about rec- ommending a

client to place all their available cash in this bond.”

Divers says: “This will appeal to many who want to take a risk but who

really do not have the capital or courage to do so. So it will probably

take a few million pounds or dollars and will probably appeal to

higher-net-worth individuals although there is a tax sting for UK


However, Davies says: “I feel this product could be suitable for the

risk-averse investor who is prepared to commit their capital for at least

five years and would like some exposure to a market that they would not

normally consider because of the perceived risks involved.”

Gaunt says: “This is for the lower-risk, medium-term investor who

understands the medium-term nature of the bond as well as the early

encashment penalty and is attracted to the potential of a reas- onable


McCrory says: “It is designed to suit the cautious investor who wants to

protect his capital. However, the Nasdaq index has performed poorly

recently. A client looking for capital growth might well find very little

after five years.”

Looking at the strong points of the product, Lewis points to the

guaranteed return of capital. Divers says: “The strong points include the

fact that it is from Eurolife, which seems to be well positioned in this

market, and the fact there is no capital risk.”

Davies says: “Words such as &#39no risk&#39 and &#39guarantees&#39 are perceived as

being strong selling points. Throw in favourites such as &#39bonuses&#39 and

&#39offshore&#39 along with &#39gross roll-up of interest&#39 and I am sure that

Eurolife will have little difficulty in filling its subscription.”

McCrory says: “The protection of capital is obviously very useful but to

say &#39in the unlikely event that the index were to fall over the next five

years&#39 in the product literature is, I feel, being very optimistic. I feel

the underlying assets of the information technology companies are so

nebulous that a rapid decline in some of their share prices could trigger

off a stampede.”

Turning to the drawbacks of the product, Gaunt says: “The disadvantages

include the volatility of the Nasdaq 100 index, the risk of lower returns

if it underperforms and if it does not perform at all, you only get your

original capital.”

McCrory says: “The guaranteed rate at encashment does not make provision

for a crash just prior to this date. There is no smoothing effect by which

some guaranteed equity bonds average the last six months&#39 returns to offset

a sudden crash. Also, there is no income facility.”

Lewis says: “It has a high-risk link to the Nasdaq and is not for the

older client. A 60 per cent return is, I think, relatively poor,

considering the return of other technology stocks in the past few years.

Davies says: “The client has to commit capital for five years to secure

any guarantees. If it is encashed before the five-year period, a fairly

hefty 2 per cent charge on underlying assets is levied. If the index

performs at more than 60 per cent over the five-year period – which

historically it has – the client will not see any gain above this amount.”

Looking at the bonus rates payable on maturity for investments made before

May 16, 2000, McCrory and Lewis regard these as being acceptable.

Gaunt says: “The bonus rates are good if the Nasdaq 100 performs over 60

per cent.”

Davies says: “For smaller amounts, the bonuses are roughly equivalent to

that paid by high-interest deposit accounts.”

Turning to the reputation of Eurolife, Divers says: “Eurolife takes it as

read that it has the good standing of the investor. The product literature

says nothing about who or what it is. I had to look it up on its website

but found the company&#39s UK page unavailable. A further search tells me it

is part of the Bank of Cyprus group, not somewhere I am likely to look on

behalf of clients.”

McCrory says: “Eurolife says it has been in existence for &#39a quarter of a

century&#39 in the product literature, which sounds better than 25 years. It

does not have the reputation or name awareness of the bigger companies and

this must be a disadvantage. I would like to see its Standard & Poor&#39s

rating on the literature.”

Davies says: “It has built a reputation as a company that offers a variety

of guaranteed-type bonds.”

Looking at the charges, Divers says: “The literature says there are no

explicit initial or annual charges. On the face of it, this seems good


The panel agree the commission is fair and reasonable.

Turning to the product literature, the panel are lukewarm. McCrory regards

it as very poor while Davies says:

“It is uninspiring and not hugely informative.”

Divers says: “It is plain, simple and straightforward – a bit like

white-label goods in the supermarket.”

Gaunt regards it as being good for this type of product, while Lewis says:

“It is fairly bland and not very imaginative or eye-catching.”

Divers sums up: “In spite of recent market corrections, the Nasdaq is

still too high and I would suggest that now is not the right time to link

to the index. Although others will feel that the Nasdaq is the new economy,

we do not see sufficient value in Nasdaq stocks at this time.”

Broker Panel

David Divers l Principal, Sandringham Investments,

Keith Lewis l Principal, Hartley Greatbatch & Co,

Alison Gaunt l Partner, Gaunt Hall,

Alun Davies l Financial planner, Cavendish Financial Management,

Nick McCrory l Partner, Armstrong McCrory Financial Services


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