Investec Asset Management is rolling out a new guaranteed fund to Hong Kongers but with an innovative structure designed to be more readily grasped by novice investors. Mainly thanks to low interest rates, guaranteed funds have been a massive hit this year, generating over $2 billion in sales and making bank deposits unattractive. With the United States Federal Reserve Bank slashing rates further in the wake of the September 11th terrorist attacks, Hong Kong annual deposit account interest rates have fallen to 0.5%, driving even more first-time users to the mutual funds market.

While many fund management companies have offered guaranteed funds this year, Investec believes the sometimes technical nature of the guarantees can confuse investors, says Stewart Aldcroft, managing director. So Investec has come up with what it hopes is a very simple idea that investors, particularly worried newcomers to the capital markets, will understand.

It works like this. The fund begins with a notional starting 'bonus' of 98%. That is, for every $100 an investor puts in, he/she has an automatic return of $198 upon the fund's 45-month (3.75 year) maturity. If the Nasdaq-100 Index rises or remains unchanged on a month-to-month basis, then this 'bonus' remains unchanged – the investor is still good for $198.

But if the index falls in value during any month, that percentage loss is deducted from the bonus – so if in one month the index falls 3%, then the investor's return will be $195. After the 45th month, the investor's principal is 100%, and the return is 98% minus the cumulative losses. The investor can work out for themselves exactly what the return will be if by simply following the index.

In addition the annual 1.73% management and custody fee, which is cumulatively paid up front, is returned. There are no redemption or subscription fees.

With markets at a low, particularly for tech stocks in America, Aldcroft says this vehicle is well designed to take advantage of an L- or U-shaped recovery.

The main risk in these funds – which is not stated in the Investec promotional literature – is that if over the next 45 months the Nasdaq experiences a W-shaped recovery. While over a nearly four-year period the Nasdaq-100 Index may ultimately perform well, it is an extremely volatile market. The chances of having several months of negative performance – or perhaps just one month of dreadful performance – seem great.

Aldcroft says Investec has examined the index's performance in depth over the past 11 years and has found that for any consecutive 45-month period, the average return was 31%. But most of those gains took place during a bubble, which is not likely to recur, even if Nasdaq stock prospects look good overall; and certainly with terrorists lurking about, gains will not be made without bumps along the way.

In the meantime Investec will invest around 85% of the assets into zero-coupon fixed instruments and about 8% into leveraged options on the index, plus it gets to invest the fees as it sees fit over the life of the fund.

One of the fund's distributors, Hamish Arnold, senior manager at Standard Chartered Bank, argues, however, that this critical assessment misses the point. He agrees this product is not for experienced investors, who are more likely to find better value in, say, a straight Nasdaq or tech fund. Arnold says the ultra-low interest rate environment is driving savers out of the banks, and these people don't know where to go. They are not people who intuitively understand investment, but realize bank savings cannot keep up with inflation. They want to protect their money, and perhaps realize a modest gain, but find other guaranteed products rather technical.

Arnold argues the Investec product is, relative to other guaranteed funds, easier to understand and more likely to result in at least some kind of upside. And, he adds, offering these kinds of structured products, while they may not benefit investors as fully as a more naked exposure to equities, they are ultimately helping savers face the capital markets – something they would never otherwise do. He hopes once these savers are investing in mutual funds, they will gradually learn more about them, and in the coming years graduate to more sophisticated – and more beneficial – products.