Apart from providing ANZ with what must surely be its easiest $37 million income over the last financial year, the Bonus Bonds scheme is crying out for a behavioural finance investigation (anyone interested in crowd-funding that?).

This bizarre mix of gambling and ultra-conservative investing has been a feature of New Zealand's financial culture for generations (as the Bonus Bonds ad campaign boasts) and it will take more than mathematical logic to kill it off.

In fact, the latest Bonus Bonds accounts, which you can find in this just-released prospectus, reveal the investment pool topped $3 billion at the end of March 2012, up about $200 million compared to the previous March.

The Bonus Bonds fund, structured as a unit trust, reported net earnings (after fees, expenses and tax) of $74.8 million over the period an amount that was topped up from the reserve pool to bring the total 'prizes' distributed during the March 2012 financial year to $76.4 million.


According to the report, the Bonus Bond pool returned a net 2.53 per cent for the year, down from 2.73 per cent in the previous period and significantly less than the 4.27 per cent return recorded in the 2009 financial year (times have changed).

Despite reducing its management fee from 1.33 per cent to 1.18 per cent of gross assets under management in July 2011, Bonus Bond's underlying money-handler ANZ, maintained a respectable income of $35.7 million plus $2.7 million in other operating expenses (the comparable figures in the 2011 tax year were $37.7 million and $3 million).

ANZ invests the money in the safest of places such as government bonds and banks (including over 11 per cent in itself): it's vanilla without the flavour.

But why do Bonus Bond 'investors' still salivate? I suppose a 2.53 per cent return after tax doesn't sound too bad in the current economic climate. However, that's not the return most unit-holders will see. If you subtract the top prize-winners (at least one millionaire a month is created) the returns will look very different.

I couldn't find this probabilistic per-unitholder return analysis in the Bonus Bonds prospectus (maybe it's in the trust deed) but this link includes a useful approximation for a similar Irish product, Prize Bonds.

According to the Askaboutmoney site, the chance of winning one of the 12 million Euro Prize Bonds payouts is about 1 in 14,000 years. Prudent investors should discount that from their expectations. Excluding the million-Euro prizes, the expected return (on a total pool earning 3 per cent) for most investors would equal about 1.86 per cent after tax.

Would it make a difference if Bonus Bond investors knew the true odds rather than the bogus marketing? Maybe there's an outside chance.