All gain and no pain - for a price

By MARK FRYER

All gain, no pain - that's the fashion in the managed investment business.

With investors running scared of fickle sharemarkets, several managers have responded with investments that provide the opportunity to profit from shares without running the risk of a loss.

The latest variation on this theme comes from Westpac, which is offering what it calls its "Expand 11" investment.

Unlike the typical unit trust, this is described as a deposit with the bank, but a deposit where the returns are linked to the performance of international shares.

Investors put in their money - minimum stake $10,000 - with the promise that they will get it all back at the maturity date, July 28, 2009.

They may also get a "performance return", depending on what happens to international share prices in the meantime.

If share prices double, for example, investors will get back twice as much as they put in. If share prices fall, or go nowhere, they still get back their initial stake.

The performance return is based on the average increase in four sharemarket indexes, covering the US, Europe, Japan and Britain.

Westpac is also promising to "lock in" returns after three years. If the share indexes in question are up at that point, investors will be guaranteed at least that increase, even if share prices fall after that time.

Investors also have a choice between putting all of their money into the market-linked investment, or putting a quarter or a half of it into a standard fixed-interest deposit. That part of the investment won't qualify for the market-linked return but will earn 5.1 per cent a year.

As always with "capital-guaranteed" or "capital-protected" investments, the protection comes at a price.

In the case of Expand 11, there are no explicit fees, but potential investors need to bear in mind that, while they stand to gain from any increase in share prices, they won't share in any dividends. Only time will tell how big a sacrifice that is but, based on the present dividend yields on the indexes the investment will follow, dividends could easily add up to 15 to 20 per cent over the six years, before tax.

As well as the financial cost, there is a considerable cost in lost flexibility. This is not an investment for anyone who thinks there's a chance that they may need the money some time over the next six years.

The guarantee applies only if the investment is held for the full six years, and Westpac warns that investors who pull out early could receive much less than they put in.

The bank is not obliged to allow early terminations, but if it does it will do so only on four dates each year and you will have to pull out all your money; partial withdrawals are not allowed.

The investment statement says only that payments for early withdrawals will depend on things such as the date and the level of interest rates at the time. Investors seeking early withdrawal would be well advised to first seek guidance on how much their investment is worth at the time.

The performance return paid at maturity will be taxable, as will any interest payments.

Like many capital-protected investments, this one is available only for a set time, until July 21.

Pros:The guarantee will be comforting to nervous investors, as will the fact that this investment is backed by a bank. It's also very diversified, covering the vast majority of the world's sharemarkets. The fact that the returns are in NZ dollars removes the risk of fluctuating exchange rates eating up any sharemarket gains.

Cons: Investors don't benefit from dividends and sacrifice flexibility. Tax will reduce the value of any performance return.

Alternatives:Put some of your money into the bank and some into a fund that invests in international shares, such as a passive fund that avoids tax on capital gains. You won't have a guarantee against losing, or against currency movements, but the fixed-interest component and dividends will cushion any losses. And, in exchange for giving up protection, you'll have much more flexibility.