Nationwide has unleashed another issue of its guaranteed equity bond, which is linked to four stockmarkets over a six-year term.
The bond returns the original capital to investors whatever happens to the FTSE 100, Nikkei 225, Eurostoxx 50 and S&P 500 indices. The original capital is exposed equally to the indices, which were chosen to provide a wide geographical spread, rather than concentrating growth potential in one region.
To calculate the final returns, the closing level of each index is recorded at the start of the term and again each year. During each anniversary, any rise or fall in each index is added together to produce an average. There is a 15 per cent cap placed on gains and losses each year. A maximum of 15 per cent each year for six years gives a maximum total return of 90 per cent, so investors must give up the remaining 10 per cent growth potential to pay for the capital guarantee.
The bond is likely to interest cautious investors who are wary of direct stockmarket investment because of the risk it poses to capital and who are willing to tie up their capital for six years. Growth potential of 90 per cent is high compared to similar products, such as Bristol & West's six-year guaranteed equity bond. This offers 80 per cent growth across three indices, the FTSE 100, Nikkei 225 and Eurostoxx 50 indices.
However, Nationwide's linking of returns to four indices may increase the risk of an underperforming index pulling down the returns produced by the others and some investors would feel more comfortable with linking returns to a single, familiar index such as the FTSE 100.