ING's capital note counter

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ING has decided to take on the capital notes and debenture offerings that currently dominate the investment market with a diversified yield fund.

Tuesday, June 24th 2003, 7:30AM

by Philip Macalister

The fund is designed to beat the gross 90-day bank bill by 2% after tax and fees.

While the fund is competing against the popular income producing investments it is described by ING senior investment manager, Jim Reardon, as a growth product.

He says there are a number of reasons for developing this fund.

“Investors want a high-yield product which earns more than the interest rate market in its vanilla shape had to offer,” he says.

Also investors are increasingly recognising that the corporate bond offers are not fairly rewarding them for the risks they take on.

He says investors may not have a strong basis on which to make such a a valuation decision, but they are hearing the arguments enough to understand there is an issue.

Reardon says the fund offers similar return levels to some of these other investments, but the risk is significantly lower, particularly due to the fund’s diversification.

He describes the fund as having: “Similar rewards, but very dissimilar risks.”

One of the big benefits is that that fund invests in a diversified portfolio of investment grade offers.

Reardon believes it is quite possible at least one of the high-yielding offers in New Zealand will fall over, and investor will lose all their money.

A single default in the fund will impact returns by less than one percent.

Another key issue in the fund in the fund’s design is how it will perform when interest rates start picking up.

Readon says the fund is benchmarked to 90-day rates. By being such a short duration term rates can essentially be reset every three months.

He says the risks of capital losses from a rising interest rate environment aren’t present. However, there are credit risks.

“If we got things terribly wrong in terms of the investment and we got supernatural default levels or catastrophic global credit events then there is still the potential for capital losses.

“Returns don’t come without risk.”

The fund, like most new ones rolled out in New Zealand these days, is done as an Australian unit trust to improve tax efficiency for the investor.

Instead of being paid a regular income stream investors will receive tax-free bonus units.

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