Bonus bonds, the 'pretend' investment, is dead.

Bonus Bonds were never a real investment, more like a perpetual Lotto ticket than a stake in a diversified investment portfolio.

A pretend investment. 

Originally, Bonus Bonds were government guaranteed, but when they transferred to ANZ in 1996 that changed to a mere AAA credit rating. It is the largest unit trust in New Zealand consisting of bank, corporate and government bonds.

The entertainment value of Bonus Bonds was understandable; it was marketed as a ‘fun’ investment by ANZ, but I always recommended my clients sell them and invest properly, unless they really did want the fun aspect. I could not argue with their wish to have fun!

I could always see the dollar signs in ANZ’s eyes. Their management fee of 1.28% per annum (until recently) on such a huge pool of money of more than $3 billion amounted to over $40 million a year to ANZ. Plus, and this is the bit I don’t like, they had up to a third of that fund invested in their own products. Looked like double-dipping to me.

An ANZ insider complained to the ANZ Board describing the scheme as the biggest rort in financial services in New Zealand, according to the ODT on 26 August 2020, in their article ‘Bye bye Bonus Bonds: Dunedin-based scheme to shut’.

It is sad to lose the Dunedin connection. The original computer used to select winners at random, Elsie, is proudly housed in the Toitū Otago Settlers Museum.

What about staying in to wait for your share of reserves?

Has the Bonus Bonds windup turned into a potential winner for bondholders with the ability to stay in until windup and receive a share of the reserves?

Owners of Bonus Bonds can elect to redeem their bonds before the scheme starts to wind up or stay in the scheme and be entitled to a share of the remaining reserves, according to Ben Kelleher of the ANZ.

There will be some winding up costs, of course, and ANZ will continue to collect its fee, but any prudent manager of a scheme such as this is likely to have a decent level of reserves and I would suggest that taking the risk of staying to the end might be a worthwhile punt. Again, not really an investment. More of a one-sided punt. Take the $1 a bond now, or $1 a bond plus a share of the reserves later, although that eventual $1 per bond will not be guaranteed.

What could go wrong? If interest rates were to rise unexpectedly between now and final windup that might affect the value of the fund. That scenario is unlikely, but possible. The fund may have longer-dated bonds that they have to sell on the market, and they might not be able to wait for the return of the underlying capital on maturity.

If bond holders stay to get their share of the reserves they could be locked-in for up to a year, according to the ANZ spokesperson.

No more chances of winning anything other than the October 2020 draw and then the unknown share of the remaining reserves. One could redeem some and keep some as a two-way bet, assuming they would let you do that. It might be an option to consider.

Keep asking great questions …