Newcastle Building Society has established a second edition of the guaranteed five star bond.
This guaranteed equity bond has been designed for the current environment of volatile stockmarkets and is linked to the performance of five actively managed funds. These are Credit Suisse US$ bond fund, Fidelity Funds European growth, Franklin Templeton mutual beacon, GAM UK diversified fund and Schroder ISF Japan equity fund. All funds carry an equal weighting and all have Standard & Poor's five star ratings.
The bond offers 75 per cent of the average growth in the funds over a five year term, which is 5 per cent lower than the first issue offered. Investors will also get their original capital back, regardless of how the funds perform.
To calculate the returns, the average monthly value of each fund is recorded during the first year of the term. This is compared with the average monthly value of each fund during the final year and investors get 75 per cent of any growth.
Some investors may feel the bond's use of actively managed funds is more appealing than products which track an index because of the ability to outperform an index rather than follow it. However, returns will be affected by stockpicking abilities of the fund managers which represents another type of risk.
Calculating the returns on the average values of the fund in the first and last year mean that investors are protected to some degree from dips in performance. However, if the performance of one or more funds peaks during the middle of the term and then falls back during the final year, the period of peak performance will not be reflected in the returns.