Capital-secured or guaranteed funds have grown increasingly popular as investors seem desperate to avoid losing their money. Although there are signals made every day that this time the recovery is for real and global markets have risen considerably since lows in March, investors don’t seem to be fooled this time. As a result, a number of major offshore banks have recently launched a guaranteed product and will continue to offer such products.

Most are easy to understand as they are often linked to indices that people are familiar with, and investors are ready to place their money knowing the worst thing that can happen will be that they get their money back and see none of the potential gains. One of the largest range of this type of investment is the Capital Secured Growth Fund (CSGF) series by HSBC, which recently launched two funds, one linked to the Nasdaq and the other to the Euro Stoxx 50 of Europe’s 50 leading companies.

The funds are the latest in the series started in 2000, which has already seen funds tied to a wide range of world stock markets and has gathered investments of around $150m on each tranche. Different from most secured offerings, HSBC’s CSGFs always offer two approaches. The latest Nasdaq Bonus Fund offers higher minimum returns, and the European Growth Fund suits a more cautious approach with a lower minimum return
The minimum investment for the fund is $/£5,000 and EUR5,000 on the European fund. Both funds invest in the shares of HSBC International Capital Secured Growth Funds plc, an umbrella-type open-ended company domiciled in Ireland.

Darren Wilson, senior manager of global funds and insurance at HSBC, says: “We always offer two approaches: investors can choose to go for a more secure lower minimum return with the Euro Stoxx-tied, and go for the Nasdaq option if they want the possibility of higher growth.”

Both funds run for four and a half years, something that may suit investors who at present feel uncomfortable with the performance of the indices mentioned, but nevertheless feel positive about potential gains over the medium term. Wilson says: “The demand for these products is still out there as people understand the indices we use. In the short term, investors are more cautious and are watching things to see how markets perform. But there is a belief that markets are starting a sustained recovery and most feel that markets have now bottomed out. We are positive about the expected growth in the two indices used for these funds. We know that markets are volatile, and that’s why we have lock-in features to take advantage of any upturns.”

Both funds have different lock-in features. The European fund offers a maximum of up to 6 per cent per month on the sterling class, 5.25 per cent on the dollar and 4.75 per cent on the euro. If at any point the index has grown by 25 or 50 per cent then this level will be kept and will form the minimum return. This means that should the index shoot up in the first months of the investment by 25 per cent or more and then perform badly over the rest of the investment then investors are still assured of the 25 per cent rise.

On the Nasdaq fund, the minimum return to investors will be the initial sum invested plus 11.5 per cent on the sterling class and 9.5 per cent on the dollar. The maximum is an unlimited return based on four annual and one semi-annual locked-in potential bonuses plus the lowest monthly growth over each annual and semi-annual period.

The structures of these funds are clear and HSBC has been bold to link to indices other than the FTSE. Wilson says: “Our last Nasdaq-linked fund was launched in September 2001 and we expect this latest one to perform even better as the Nasdaq has rallied and more and more data points to a US recovery. We are always trying to diversify our product range and are planning and researching other indices for future launches. We try to innovate and take a new look on capital-secured products with each release.”

Mark Osland, director at IFA Fidelius Ltd, wonders how well the indices will be received by investors, but sees good potential. “The key point here is whether linking to the Nasdaq or Euro Stoxx 50 offers better potential than the more prevalent FTSE 100 alternative. Euro Stoxx may remind people of the earlier problematical ‘guaranteed’ offerings so may in itself put them off, and Nasdaq has unfortunate connotations of the tech stocks crash. However, over the four-and-a-half-year terms, they do offer interesting prospects, and there is an attraction in the combination of a capital guarantee and a volatile index.”

The CSGF series is praised by advisers, though it is felt by Carlton Crabbe, financial adviser at Chase de Vere, that investors could be looking towards slightly more risky products. “This a good product, but now that we are seeing stock-market recovery, investors may prefer an accelerated fund that offers greater potential returns, such as the Insight Accelerated fund. I think most investors could tolerate more risk than this fund has. The lock-in steps, though reassuring, may not necessarily be needed and in fact may hold back growth potential. However, it’s a really advanced product within the capital-secured field and there are not many funds out there linking to the Nasdaq that are guaranteed as well. Although this latest launch hasn’t been approved yet by Chase de Vere, I’m sure we could recommend it as part of a really diversified portfolio.”

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