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Three and easy

Over the last 10 years, the American Health and Personal Care index has

risen by 444 per cent against the World index return of 206 per cent and

the FTSE All-Share index return of 289 per cent. The outlook for the future

is even better.

Schroder is now launching a Medical Discovery fund to take advantage of

the profit potential of this sector. Its fund manager, Kristine Bryan, is a

top equity analyst who for the past nine years has been covering US and

European pharmaceutical and healthcare stocks.

She will invest in companies which have excellent products likely to sell

well in the growing markets across the world. The fund will mainly invest

in the bigger pharmaceutical companies already established in the industry

such as Glaxo Wellcome.

The fund will also invest in smaller growing firms where the discovery of

a new successful drug could have a dramatic impact on profits. There are,

however, risks in investing in the healthcare sector because some drugs

never make it to the market.

An ageing population has meant that the demand for drugs and treatment has

increased enormously. Because people&#39s expectation of receiving treatment

more quickly and more effectively throughout the world is also expanding

hugely, demand for drugs is likely to be unlimited.

Unlike many other technology sectors, results are much more predictable

and there are no cyclical effects – demand is continuous.

The secret is, of course, in finding the right shares and I have every

confidence that, with Bryan&#39s experience, she will find many of the right

ones and avoid the duds.

I have just retired with a fairly good occupational pension and personal

pension. I have over £30,000 derived from the cash lump sum.

My wife is slightly younger than I am and intends to take early

retirement. We have both worked hard all our lives and would like to spend

the next three years travelling around the world.

In total, we have £100,000 to invest and would like to get as high an

income as possible from this, in addition to our pensions. What do you

recommend?

There are a number of issues to consider here. Most important, you need to

think about what might happen at the end of your three years of travelling.

It may be, for instance, that you would like to continue travelling for a

while or perhaps to settle somewhere abroad. Alternatively, you may simply

want to return to the UK.

To keep your options open, you need to retain control of your capital.

First, it should be accessible at the end of your planned travel period, so

any investment should have a three-year horizon.

Second, while you want as high an income as possible, you also want to

keep your capital wholly or largely intact.

There are a number of investment products that offer a better yield than a

deposit account while retaining a good measure of capital security.

Examples are cash unit trusts, local authority bonds, guaranteed income

bonds, gilts and permanent interest-bearing shares.

The first three are capital-secure, while gilts and Pibs may be regarded

as low-risk investments. But while the yields beat a building society, they

are still relatively mod-est at around 5 to 7 per cent a year before tax.

Assuming you are prepared to take a degree of risk in order to maximise

your income, it is worth looking at a high-income bond. These are designed

to provide a high level of income, while providing some underpinning for

the capital.

Bonds run for a set period of time, typically between one and five years.

The income level is fixed throughout, while the capital return is linked to

a stockmarket index.

Recently, the general format has been that capital will be returned in

full provided that the index does not, at any time, fall by more than a set

percentage from its initial level. Alternatively, if it does fall that

much, capital will still be returned in full as long as the index recovers

to at least its initial level by the end of the term.

If neither of these conditions applies, the capital return will be reduced

according to a pre-set formula.

In selecting a bond, there are four main factors to be considered:

The level of income offered and its tax treatment.

The term of the bond.

The volatility of the stockmarket index it is linked to.

The conditions for the capital return and how much you could lose if they

are not fulfilled.

Of the high-income bonds available at present, one that looks particularly

suitable for your needs is NDF Administration&#39s Extra Income & Growth Plan

3, which is backed by Abbey National Treasury Services. The term is three

years, which is ideal, and the income offered is 10.25 per cent gross. This

is taxable but the structure is such that the tax due is only 10 per cent

for basic-rate taxpayers meaning that the effective gross yield is 11.53

per cent. Moreover, you can invest the first £7,000 in an Isa for tax-free

income.

The bond is linked to the Eurostoxx 50 index, which is based on 50 of the

biggest companies in Europe including household names such as Unilever and

Philips Electronics. This means it should generally be quite stable.

In the recent market disturbance, it has dipped by only 0.5 per cent

whereas the Nasdaq index, to which some other bonds have been linked, has

fallen by over 30 per cent. The Eurostoxx 50 can fall by up to 25 per cent

during the term and you will still get your full capital back.

There are no initial or annual charges on the bond as these have been

taken into account in fixing the returns.

An extra feature that you may find useful is that you can opt to take

income quarterly at a rate of 2.37 per cent before tax, equivalent to 2.69

per cent gross for a basic-rate taxpayer.

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