Despite puny bond yields, options exist for nervous advisors and clients.

In tense times, investors often turn to safe havens like Swiss franc investments and gold. Who can forget the late 1970s and early 1980s, when U.S. inflation soared as a result of rising energy costs, the dollar plunged, and money moved into Swiss francs? And in the late 1970s, the price of gold hit $800 an ounce. Although today's economy isn't like the 1970s, geopolitical risks are driving money back to Switzerland, as well as the nearest gold dealer.

"Swiss bonds and currency have been two of the best performers," says Michael Smith, director of Avebury Asset Management in London. "The Swiss franc and bond markets have traditionally been considered a safe haven in uncertain times like today."

Swiss francs, Smith says, can be a safe haven for a couple of reasons. Switzerland historically has run budget surpluses. That creates a stable currency. The Swiss also have a tradition of secrecy when it comes to dealing with investors' money.

Smith says that Swiss francs and bonds typically trade in line with other European bonds and currencies. Currently, the yield curve on Swiss government bonds is steep. Interest rates at the short end are almost zero, while 10-year Swiss bonds yield just 2%. Although rates are even lower than in the United States, Smith thinks the Swiss franc will continue to appreciate against the U.S. dollar, which is likely to be buffeted by huge federal budget deficits. The greenback rallied briefly after the war with Iraq broke out, but many question whether the gain is sustainable.

If investors want higher yields, he recommends euro bonds. Government bonds are safer than stocks. The yields are similar to those in the United States, but European interest rates should fall below U.S. rates, boosting prices higher than bonds in the United States. The reason: Europe's economies are weak and central banks will cut rates.

A recent report by Swiss Life Asset Management in Zurich says there are strong asset flows into safe havens due to the worries about the war with Iraq and problems with North Korea. "Since December 2002, the U.S. dollar experienced a massive devaluation," the report said. Worries about war in Iraq even before the conflict began and a potential war in North Korea led to additional flows into safe havens such as the Swiss franc and gold, the report says.

Overseas investment advisors say money is finding its way not only into Swiss bonds but also into Swiss franc annuities. "There is a lot of money going into Swiss annuities due to uncertainty around the world," says Rolf Wittwer, vice president with JML Portfolio Management Limited in Zurich. "U.S. investors are looking for currency diversification and asset protection."

Investors look to Swiss investments for more than just safety. In Switzerland, there are no foreign reporting requirements or forced repatriation of funds. Under Swiss law, an annuity cannot be seized by any court-ordered collection procedure instigated by creditors. There also is no Swiss tax.

Swiss franc deferred-fixed annuities yield 2.5%. They typically pay about 35 basis points more than Swiss bonds. Swiss bond funds wrapped in variable annuities are yielding over 2%. That may not look like much compared with U.S. investments. However, over the past year, Wittwer said, the Swiss Franc has appreciated 20% against the U.S. dollar.

Unfortunately, U.S. investors in Swiss franc fixed annuities must pay ordinary income taxes on their interest earnings due to 2001 changes in U.S. tax laws. Howard Rosen, a Coral Gables, Fla.-based asset protection attorney and adjunct professor at the University of Miami School of Law, says IRS rule 1.1275-1 was amended in November 2001. As a result, offshore annuities that guarantee principal are not considered annuities but Original Issue Discounts. In other words, the annuity income is taxable every year.

However, Swiss variable annuities that do not offer guarantees and meet other IRS guidelines remain tax-deferred, Rosen says. Taxes are only due when policyholders receive income from the variable annuities. The Swiss government does not tax fixed or variable annuity earnings.

Wittwer said that savvy investors are putting money into Swiss variable annuity bond funds to avoid U.S. taxes. "People are still investing in fixed annuities for safety, asset protection and diversification," Wittwer says. "But money is going to variable annuity income accounts because they are tax-deferred."

Major players that accept U.S. clients include: Pax Life Insurance and Helvetia Patria Insurance, both in Basel, Switzerland, and Generali Group in Adliswil. Swiss Partners in Zurich also offers an offshore variable annuity that is underwritten by the insurer's subsidiary in the Cayman Islands.

Gold bullion is another attractive safe investment option because it is a hard asset. It can be used as a medium of exchange. Gold bullion prices are up 25% over the past year through mid-March and almost 40% from its low in 1999.

Historically, gold has performed well in times of war and crisis. "During periods of occupation by a foreign power or the collapse of a monetary system, gold's liquidity, acceptability and portability have been particularly important," said Stephen Harmston, an economist with Bannock Consulting in London, in a recent research report. But, he says, gold has not always maintained its purchasing power during unstable times, such as World War I, World War II and the Gulf War. The reason: prices of other commodities needed for war rose more than gold prices.

From 1991 through 2001, gold prices and U.S. stock prices were not co-integrated, says Graham Smith, in his study, "The Price of Gold and Stock Price Indices for The United States."

Gold-linked notes and bonds are another way to play the gold market. Earlier in the year Charles de Vaulx, manager of the First Eagle Gold Fund, invested 7% of the fund's assets, or $10 million, in gold-linked notes for liquidity.

Major bullion dealers, commercial banks and governments issue gold-linked notes. Depending on their structures, investors receive interest income similar to bonds. Gold-linked notes can protect an initial investment against the fall in the price of gold, while allowing investors to benefit from higher total return on the upside. For example, the Hong Kong Shanghai Bank and Barclays Bank London have issued gold-linked bonds with prices tied to the performance of the bullion market. North American mining companies also issued gold-linked notes at high interest rates. The bonds are linked to gold warrant calls on their future production.

Many financial advisors can also look to stable-value funds as a safe place to earn higher yields in their clients' retirement savings accounts. Stable value funds are modern-day versions of Guaranteed Investment Contracts (GICs), which are issued by insurance companies. For clients who want more income than Swiss franc-linked instruments but may view moving money abroad in times of war as unpatriotic, stable value funds' appeal is undeniable.

An insurance company guarantees a stable value fund principal and interest. The funds own GICs, high-grade bonds and asset-backed securities. They come with a guarantee, known as a "wrapper," that the principal value and interest rate payments remain stable for a specific time period no matter how the financial markets perform. The insurance company absorbs any gain or loss in the stable value fund's net asset value. The reason, says Kelli Hueler, president of Hueler Companies, Minneapolis, is that insurance companies use book value accounting. In other words, the fund's value is based on what it paid for the assets, not what they are worth on the secondary market. Typically, however, the return on a stable value fund may fluctuate about 25 basis points during the year.

Currently, stable value funds found in 401 (k) pension plans yield 6%, according to Hueler Companies. Over the past three years, stable value funds have grown at a 6% annual rate. Money has been flowing into stable value funds at a rapid clip. Total assets now stand at $55 billion. Twenty-five percent of all 401 (k) pension plan assets are invested in stable value funds, Hueler adds.

"We've seen a pick-up in money flowing into stable value funds over the past year," Heuler says. "There is a definite change in market sentiment since last March and assets are continuing to increase."

There is no free lunch with stable value funds. There are redemption fees if the investor cashes out early. Also, unless interest rates rise, stable value funds are apt to pay lower yields in the future.

Cash flows also affect the yield on stable value funds. Large cash inflows may result in stable-value funds investing cash at lower rates. And if rates shoot up, investors may switch to higher-yielding investments. So the funds may be forced to sell securities if they don't have enough cash on hand to meet redemptions.

The safety of the stable value fund is only as good as the financial strength of the insurance company backing it. Despite large capital losses in the insurance industry and recent downgrades in the financial strength ratings of some firms by A.M. Best, Standard and Poor's and Moody's, Heuler says the insurers issuing stable value funds are the financially strongest in the industry.

"I haven't seen any defaults of stable value funds in the 20 years I've been following the industry," Heuler says. "Executive Life and Mutual Benefit did default on their GICs years ago. But the problems were worked out. There was a delay in interest payments, but no one lost principal."