Getting to grips with the mysteries of Pibs: Buyers should be sure what they are getting, says Christine Stopp

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The Independent Online
After reading about permanent interest bearing shares (Pibs) in Money last month, John Patmore, an economist and active private investor, decided to find out more about them, with a view to investing up to pounds 50,000.

However, the in-house brokers at his bank could only suggest that he consult the Standard & Poors credit ratings for an indication of soundness. Building societies that issue Pibs were of little help, though a couple eventually sent him 40-page, highly technical offer documents. He kept being referred to the brokers who sponsor the issues, but they are not allowed to deal direct with the public.

Given that they offer high fixed yields - currently 9 per cent gross or more - Pibs have been popular with the income-seeking investor. Simon Mozley, assistant director at the stockbroker Hoare Govett, says that 'thousands' of calls asking for information prompted his company to produce a free investor fact sheet. This explains how Pibs work, but does not give current prices and yields and so on for someone trying to choose between the available issues. The best place for this sort of help is a private client stockbroker who specialises in Pibs.

Robin Boyle of Dunbar, Boyle & Kingsley recently studied the accounts of all the main issuers, and concluded that some issues were much more secure than others. Stockbrokers like him can give information and views on specific issues over the telephone and then put a deal through for a standard charge. But without a full interview and fact-find they cannot advise an investor on the suitability of Pibs in his or her circumstances.

DBK charges 1 per cent plus pounds 20 to buy on your behalf if no advice is given or 1.85 per cent plus pounds 20 with some advice. It is offering Independent readers a special rate of 1 per cent even where advice is given.

Some independent financial advisers offer 'packaged' deals on Pibs, though these will usually cost a lot more than a simple purchase through a broker. Fiona Price and partners has an income portfolio that includes Pibs, gilts and other fixed-interest vehicles. The front-end charge is 1 per cent and there is also a 1 per cent annual management charge.

Johnson Fry Asset Managers offers two portfolios of Pibs, both with pounds 20,000 minimum investment. They invest in a spread and hold the stocks in a nominee account, paying income quarterly. Both have a 4 per cent front-end charge. There are no further charges for four years, after which an administration charge of pounds 20 per quarter is levied.

Should private investors try to buy Pibs on their own behalf? The brokers we spoke to all made the point that you have to know what you are buying. Pibs are shares in the building society itself with a fixed dividend. If the society went bust, the Pib holders would be at the back of the queue for repayment.

Pibs do not have a redemption date like gilts, so if you want to sell you must depend on a healthy market in this type of share. Mark Sullivan of BWD Rensburg thinks that 'though liquidity will be more difficult than for gilts and other fixed interest investments, this is not a valid reason not to buy'.

The price goes up and down like a gilt, largely reflecting changes in interest rates. Because of the steep fall in interest rates since its launch in September 1991, the Bradford & Bingley Pibs has gone up in price from its nominal pounds 1.02 at issue to pounds 1.403 4 this week. This means that investors who bought at the issue date have received a dividend at the coupon rate of 13 per cent and capital growth of about 40 per cent.

Pibs can only be bought in round thousands of nominal stock. The Bradford & Bingley minimum is pounds 10,000 - at current price levels this means an outlay of almost pounds 11,400 Most Pibs have a minimum of pounds 1,000 nominal, though several have a pounds 50,000 minimum.

If interest rates rose sharply again, the price of the shares could fall sharply back to - or below - par.

Mr Mozley feels there is 'merit' in Pibs as a relatively secure investment for the private investor, 'as long as he appreciates what he is buying'.

Contacts: Hoare Govett (for free fact sheet) 081-847 7730; Dunbar, Boyle & Kingsley 071-247 8898; Fiona Price 071-430 0366; Johnson Fry 071-321 0220.

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