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German bank West LB innovates with index basket

Performance seeker is a capital protected bond designed by German bank West LB and administered by Keydata Investment Services. It is linked to the performance of a weighted portfolio of three stockmarket indices – the FTSE 100, S&P 500 and Nikkei 225 over a six-year term.

Investors will receive a full capital return regardless of the performance of the indices and will also get 100 per cent of any growth in the portfolio.

Although the portfolio will be weighted, the exact nature of those weightings is not known at the outset as they will depend on performance at the end of the term. The best performing index will represent 50 per cent of the portfolio, the second best performing index will represent 30 per cent and the remaining index will make up 20 per cent.

To calculate the returns the closing level of each index is recorded on February 7, 204 and compared with the closing level on February 7, 2011.

This product is unique and offers a new approach to structured products that offer exposure to a geographically diverse basket of indices. Products which are linked to more than one index tend to be based on the average growth across the basket of indices. so each index is weighted equally. The drawback to equal weightings is that the poor performance of one index will act as a drag on the performance of the other indices, thereby diluting the best performers when the overall returns are calculated.

The West LB product goes some way to solving this problem as the weightings retrospectively provide higher exposure to best performer and limited exposure to worst performer. However, the strategy is less effective where there is not much difference in the performance of the indices over the term.


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