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HSBC creates solid foundation

HSBC Bank International has introduced the Foundation 1 resources bonus fund, a capital-protected fund that aims for annual income over a three-year term in the form of bonus payments.

The fund is linked to the performance of an equally weighted basket of 16 mining and energy related resources stocks. The stocks comprise a global mix of traditional companies and new companies exploring alternative energy sources.

According to HSBC Bank International, demand for traditional energy sources is exceeding supply, which is forcing prices higher. Oil prices are still relatively high and the company believes they are likely to stay that way for the rest of the year due to the problems in the Middle East, including Iran. It says that in February 2007, attacks on oil companies such as Shell caused Nigerian oil production to fall to the lowest level since July last year. This reduction in supply could drive prices higher by putting more pressure on an already constrained supply.

Much of the energy used in the world comes from coal and gas but new oil sources are less accessible and difficult to access, which also puts pressure on oil prices. This has led to governments and consumers looking for renewable energy sources and this fund aims to take advantage of these trends.

At the start of the term, each stock price is recorded and these are recorded again at each anniversary during the term. The growth is calculated as the percentage change in the stock price within each period. The growth within each stock is subject to a cap, which differs according to the currency denomination. The cap is 14 per cent for sterling investments, 11.5 per cent for dollar investments and 9 per cent for euro investments. At the end of each period, the growth in all 16 stocks is added together then divided by 16 to produce an average, which forms the final bonus figures. Capital is also returned in full at the end of the term regardless of the performance of the underlying investments.

According to the Structured Retail Product adviser website, this product is unique. While it may be attractive to investors for the reasons outlined by HSBC Bank International, the cap on growth within each stock is a potential drawback, as any growth above the cap will not be passed on to investors. There is also a risk that investors may not receive a bonus payment in any given year or end with up only their original capital at the end of the term.


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