23rd August, 1995.

The Editor,
Personal Investment Magazine.

Dear Sir,
         I would like to submit the following letter to your
column.  I am also attaching some other documents that you
might find interesting, which are totally unrelated to this
letter below.  Would you kindly inform me which, if any, of
these documents you plan to publish.


I would like to warn readers about a severe trap you can fall
into with at least one managed fund.  In 1989 I took out two
policies with AMP.  One of them was an insurance bond where I
paid $10,000 up-front, the other was a regular premium, where
I paid $5,000 per year.  The regular premium had an obligation
to contribute on year's worth of funds, but after that, you did
not have to contribute any more money if you did not want to.
As it was, this was exactly what happened to me, my circumstances
changed and I ceased contributions after the first year.

A couple of years later, my $10,000 bond was going along at a
reasonable rate (around 7%), but my $5,000 one was performing 
incredibly badly, and I was waiting to see what sort of percentages 
they were going to publish for the fund, and to my shock I found 
that they were also claiming around 7%, but my money was flat out 
doing 2% by my calculations.  I rang up AMP about this, and then
I found out that the first year's contributions performed at 5%
less than the subsequent year's contributions.  To put in another
way, they are taking out 5% commission not just once in the first
year, but EVERY SINGLE YEAR.  ie, for the 10-year plan, that's
10 bites at the same cherry!!!  The $10,000 bond on the other hand
was just one 5% fee up-front.

Naturally I wanted to get my money out when I realised this, but
unfortunately they have that end covered as well, where if you
take your money out after the first year, they take a whopping
35.5% out of your money, a figure which decreases by a little under
5% each year, to become 0% after 10 years.  In other words, you're
between a rock and a hard place.  It is quite incredible that
anyone can justify a 35.5% slug.  A 5% commission/management fees 
is high, 35.5% is ludicrous.

An additional point to note is that the majority of AMP advisors
I have spoken to (when they have attempted to sell me policies
themselves and I have explained why I don't want to take them
out), have never heard about this 5%-underperformance of the
first year's contributions, and don't really believe me!  Some
have even wet their pants when they realised their own money was
in the same boat.  

If you can guarantee that you will be able to continue the level 
of payments for the next 10 years, then the effect of the 
initial-year's underperformance is watered down.  However, you 
must be able to guarantee that you will either never be in a
position where you can't make the payments, or be in a position
where you need the money back.  In reality, there is NO REAL
ABILITY to be able to stop the plan with changing circumstances.

My advice to anyone who wants to take out an insurance bond, is
to only ever go into the lump-sum type.  They only ever have the
one bite of the cherry.  You still have the flexibility to make
additional payments into the bond, as your circumstances allow,
and they only ever take the one bite of that too.  You also have
the ability to withdraw at any time, and you won't be slugged
any massive charge like the plan.

However, I would recommend against insurance bonds altogether.
I found out that if you make a capital loss on an insurance bond,
you cannot claim this as a deduction against a capital gain on
another insurance bond.  I am going to be making a large capital
loss on my $5000 bond (after having the money in for 6 years, I
will be getting $4300 back, despite the ~6% performance claimed
by the fund), but I cannot claim that as a deduction against the
$3683 I am going to make on my $10,000 bond, which has performed
at around the same rate.  So I will be paying tax on my $3683
gain, with no compensation for my loss!  Not only that, but in 
neither case is inflation going to be taken into account in 
determining my gain.

I would advise that direct investment is best, where the fund
managers don't get a chance to leech off the income stream, and
failing that, get into unit-trusts.  In both cases, inflation 
will be taken into account, and you can offset any capital loss 
against a capital gain.  And under no circumstances should you
ever get into a regular-premium fund.  They are FAR too risky.
Compare the difference, a 17% loss compared to a 37% gain, for
two funds performing at the same approximate rate, ~6%!  And
that's before taking inflation into account.  If we were to do
that, the real figures are closer to 21% loss and 30% gain.
Be afraid, be very afraid.
@EOT:

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