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HSBC creates a new foundation

HSBC Bank International has brought out Foundation 2 – the healthcare bonus fund.

This capital-protected fund is linked to the performance of a basket of 18 healthcare-related stocks for a term of three years. Examples of holdings include AstraZeneca, GlaxoSmithKline and Johnson & Johnson.

According to HSBC Bank International, an ageing population will increase the need for healthcare and pharmaceuticals and it believes the stock basket will benefit from this.

The fund, which can be denominated in a range of currencies, will pay out a bonus each year as long as the performance of the basket of stocks is positive. To calculate the returns, each stock price is recorded at the start of the term and again at each anniversary.

The growth in each stock is measured as the difference between the two values but this is subject to a 14 per cent cap for sterling investments, an 11.5 per cent cap for dollar investments and a 9 per cent cap for euro investments. This calculation produces 18 performance figures that are added together and divided by 18 to produce an average for that year. This provides the level of bonus that will be paid and investors also get their original capital back in full at maturity.

While some investors may welcome the fact that they do not have to wait for the full three years to receive a return, the potential drawback is that investors will not know at the outset the level of return they will receive at the end of each year.

The use of a cap to limit returns from each stock may also put some IFAs off recommending this to their clients. The maximum returns can only be achieved if every stock reaching the cap. If some stocks exceed the cap, investors will not benefit from the full level of growth.

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