Societies offer a permanent income haven as rates fall: With yields averaging 9.5%, the Pibs market is worth investigating

Investors looking for a high permanently fixed income in the face of tumbling building society returns could consider permanent interest- bearing shares.

Pibs are shares issued by building societies which offer a permanently fixed income paid twice a year plus the possibility of capital growth.

At the moment they offer yields averaging 9.5 per cent, compared with 5 per cent from an average building society account.

The prospects of continued low inflation and the possibility of further interest rate cuts add to their appeal.

The price and performance of the shares depends on the financial strength of the building society itself, in the same way as ordinary shares are linked to the financial position of a company.

Pibs have only been available for about two years, but the total market is already worth about pounds 840m.

The performance achieved by the first shares issued has been very good, reflecting the fact that building societies have been recovering from the worst of their problems caused by mortgage arrears and bad debts.

For example, the first shares were issued by Leeds Permanent, paying a fixed income of over 13 per cent. The value of these shares has risen by about 47 per cent.

Simon Mozley, assistant director of the stockbroker Hoare Govett, points out that yields have been falling, and that capital gains are unlikely to stay at that level.

The latest Pibs offer is from the UK's biggest building society, Halifax, which currently yields 8.79 per cent.

Initially, the shares were aimed mainly at institutional investors and had a high minimum investment of about pounds 50,000.

However, of the 13 societies now offering Pibs, seven have a minimum investment of pounds 1,000, and three have a minimum of pounds 10,000. Some societies have issued more than one tranche of shares.

Pibs can only be bought through a stockbroker or a financial adviser and their prices are quoted weekly in the Financial Times. The average commission charged is 1.5 per cent.

Investors who want to spread their investment among different society shares have two products available. One from the financial adviser Johnson Fry offers investment in a portfolio of Pibs.

The portfolio gives the option of investing in shares from the top 10 or top 20 building societies. The top 10 portfolio offers a yield of 9.1 per cent, while the top 20 portfolio gives 9.52 per cent.

Charlie Ricketts, Johnson Fry's investment director, said: 'Pibs have risen extremely strongly over the last few months. However, it's our view that interest rates will fall further and inflation is relatively stable.'

The second product investing in a range of Pibs is a unit trust from Exeter Fund Managers. The trust is 70 per cent invested in Pibs with the rest invested in other types of share aimed at giving an increasing yield.

----------------------------------------------------------------- PERMANENT INTEREST-BEARING SHARES ----------------------------------------------------------------- Society Offer Yield Minimum price investment p % pounds Bradford & Bingley 125.50 9.26 10,000 Bradford & Bingley 139.00 9.35 10,000 Bristol & West 133.25 10.04 1,000 Britannia 135.75 9.58 1,000 Cheltenham & Gloucester 126.50 9.28 50,000 Coventry 126.00 9.62 1,000 First National 113.75 10.33 10,000 Halifax 99.50 8.79 50,000 Halifax 134.00 8.90 50,000 Leeds & Holbeck 135.25 9.89 1,000 Leeds Permanent 147.50 9.24 50,000 Newcastle 113.75 9.45 1,000 Newcastle 132.75 9.51 1,000 North of England 130.75 9.66 1,000 Skipton 128.75 10.00 1,000 ----------------------------------------------------------------- Source Hoare Govett -----------------------------------------------------------------