x Abu Dhabi, UAEFriday 28 July 2017

Lack of transparency underlines bond risk

What's down National bonds. The fact the company has not announced its returns for last year is a reminder that its investment strategy is not entirely clear.

An investment in National Bonds has always been advertised as low risk, not no-risk. But the fact the company has not announced its returns for last year is a reminder that its investment strategy is not entirely clear. There is no doubt that people across the country find the bonds alluring. Not only do they carry the appeal of a possible Dh1 million (US$272,000) prize and other smaller prizes every week, but they gave investors a more-than-healthy return in the two previous years in which National Bonds was operating.

Bond holders received profits of 6.03 per cent for 2007 and 7.07 per cent for 2008. Those enviable returns caused some to overlook the company's non-disclosure of where it invests. National Bonds executives insist that they do not risk the fortunes of those who invest with them, but the fact that the company invested in two large property projects, Flamingo Creek and Skycourts in Dubai, illustrates that the company did take chances. Property prices in Dubai have sunk by more than 50 per cent from their peak in 2008, and developers across the sector are struggling with weaker demand for housing.

At the same time, National Bonds aims to be the preferred savings strategy of people in the region. The company says it puts half of the money it raises into short-term, Sharia-compliant investments and the other half into infrastructure and development projects. For instance, it owns the grocery chain SouqExtra, which is in an industry that tends to be stable in recessionary times. The investments are overseen by a chief investment officer and a three-member Sharia board.

Still, if there is one lesson to be learnt from the financial crisis that has gripped the world in the past two years, it is that individuals should not blindly trust powerful financiers to make prudent investments. It is a core rule of personal finance that you should be wary of investing in things that you do not fully understand, because you cannot adequately gauge the risk you are taking. No matter how many precautions National Bonds takes, it is still ultimately a shot in the dark for investors until the company begins providing more information about its methods and holdings.

@Email:bhope@thenational.ae