After successfully launching its first retail investment trust for developing-country sovereign bonds, Van Kampen Merritt Inc. is gearing up for another.
Jack Tierney, vice president and product manager, said Van Kampen hopes to bring out its second such trust after the first closes in December.
He added that the the Oakbrook Terrace, I11.-based trust company is prospecting the market for sovereign bonds from countries other than the six included in its first Emerging Markets Income Trust.
Via Banks and Brokers
The trust, marketed through banks and brokers, comprises so-called Brady bonds issued by developing countries to banks in exchange for loans the governments couldn't repay. It includes bonds from Argentina, the Philippines, Nigeria, Mexico, Uruguay, and Venezuela.
The unusual trust gives retail investors a crack at a type of security that only big-time players, like banks, brokerage houses, and institutional investors, have had access to until now.
"The problem with Bradys is that they trade in blocks of $250,000 minimum and some traders won't touch an order unless its for at least $1 million," Mr. Tierney said.
Stocks and bonds issued by corporations and countries in so-called "emerging markets" in Asia and Latin America have become increasingly popular among investors unwilling to settle for a 2% yield on their certificates of deposit.
However, Bradys are less risky than other types of corporate debt and equity or sovereign debt from developing countries because the principal - and up to 18 months of interest payments - is collateralized by 30-year, zero-coupon U.S. treasuries.
Mr. Tierney says another advantage of Brady bonds "is that they are sold at a deep discount with a good current return and no currency risk."
Investors buying into the trust need to purchase at least five units, or around $3,500 worth currently. The trust has so far accumulated $24 million and he expects it will reach $36 million when it closes out in December.
Annual Return Around 7.4%
Investors have done handsomely so far. Originally launched at a price of $660 per unit, it now brings $720 per - including the 4.9% sales charge to brokers who sell the units.
Current return, according to Mr. Tierney's estimates, is around 7.4% annually, but he says that will climb to around 8.6 because of the way interest on the bonds is structured.
Investors also have the possibility of additional gains as the underlying value of the bond appreciates as it moves toward maturity and the discounts decline.
"It's not triple A insured, it's long term, and it's not for every mom and pop investor who doesn't like his CD rate," says Mr. Tierney. "It's for the investor who's willing to take a little more risk with his income portfolio."