Okay, this one created quite a stir in financial circles. ANZ Investment Services (New Zealand) decided to stop Bonus Bonds and wind up the investment scheme by the end of October and return funds to bondholders.
Set up in 1970, Bonus Bonds was dreamed up by the New Zealand Government as part of the Post Office Savings Bank in an attempt to get Kiwis to save more. Rob Muldoon was the Minister of Finance when bonus bonds were created, and one biography of Muldoon credited the idea to his English chauffer.
Unlike standard forms of savings or investments where interest or returns are paid out to bondholders, each eligible Bonus Bond gave one entry into the prize draw to win a share of cash prizes each month, with a maximum prize of $1 million.
So, when you buy a bond (minimum purchase is 20 bonds at $1 each), the money goes into a managed investment scheme, which invests in low-risk fixed interest assets, cash and cash equivalent and the earnings are distributed to unit-holders in the form of a prize draw, like a lottery. Punters can redeem their bonus bonds any time at the same price, $1 each.
In less than 24 months after launch, the scheme received inflows of $400 million. It is the simplicity, thrill, capital security and tax-free payout that attracted the Kiwi flutter psychology, tapping in the 'rugby, racing and beer' mindset and long since supported by those of that generation.
Back in the day, when taxpayers owned post Office Savings Bank, the Government guaranteed the money in the fund. But in 1989, the Post Office Savings Bank was sold to ANZ Banking Group and government guarantee was removed.
Three decades later, in the 2000s, Bonus Bonds were still the country's biggest and arguably the most successful managed investment. And more recently, in the 12 months to the end of March 2019, Bonus Bonds paid out $39.6 million in prizes on the $3.3 billion of $1 Bonus Bonds on the issue while the fees and expenses paid out on the scheme to ANZ was $40.7m.
The proceeds for the draw are derived from surplus funds, after expenses and taxes.
As per data published in 2018, the total investment income had declined from $124.0m to $101.0m since March 2014, and prizes from $54.8m to $45.9m. Meanwhile, fees and costs have risen from $41.5m to $43.8m.
The Bonus Bonds scheme is a cash cow and undoubtedly profitable for its owners, as opposed to bondholders. Yet, bonus bonds continued to be so popular that in 2020, almost half a century since its launch, more than a million New Zealanders collectively hold $3 billion.
The genius of Bonus Bonus marketing is the normal “risk premium” rules are reversed: normally if you take risk, you expect to earn more. Here people seem to be happy to earn less or nothing to gain a gamble.
I don't deny that there is a certain thrill factor involved. As per the commercial on the bonus bonds website, people are breathlessly excited when they received their $1 million phone call. But what about those who won nothing or maybe an odd $20 here and there over the years?
Let's do a simple calculation. $10,000 saved between 2009-2020 at an average of 1.25% in a bank should earn $125 a year, before tax and inflation. Whilst the same money invested in an average diversified global equity fund over that same period earnt $1,117 per year, pre-tax and inflation.
So unless a bondholder is fortunate, bonus bonds earn less than a term deposit (and that's comparing with the poorest things out there in terms of long-run investment returns). The safest and the only bet one should have taken is to divorce them before the scheme is aimlessly wound up because it is no longer juicy enough to continue.
Slammed by many academics, financial columnists and fund managers, Bonus Bonds scheme is often dubbed a massive "gravy train" for ANZ. The most recent annual report from ANZ in 2019 described the bonds as "an incredibly popular iconic investment for New Zealanders".
But suddenly there is not enough gravy to run it! What changed?
"Low-interest rates have reduced the investment returns of the scheme which affects the size of the prize pool" as per the ANZ's official announcement.
A Bond-holders who shared his feeling with a media house said it doesn't worry them much as it never produced any money and another said the news came as a shock as he has always given bonus bonds to his grandchildren for their birthdays for 15 years.
Here is a thought for those who feel disheartened: put it in a globally diversified KiwiSaver fund with the help of a financial adviser and watch it grow. It might seem boring compared to the possibility of becoming a newly minted millionaire, but the odds of success are much higher.
It’s important to remember that we shouldn’t confuse gambling with investing. Investing gives you ownership of an asset with a potential to increase in value over time and in most cases, this asset will provide some sort of income while you wait – stock dividends, interest, or even rental income.
The understanding of what investing is and isn’t has the potential to significantly limit or boost wealth accumulation.
Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
