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.

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