The conventional tracker bond market has served its target audience well these past five years. Aimed mainly at cautious and relatively modest investors, it has provided the sort of capital guarantees and minimal exposure to international stock markets that this group has wanted. Steady sales of £300 million or more each year indicate the popularity of these bonds. Independent financial advisers have been saying for some time that conventional trackers have traded too much market growth and fund management flexibility in exchange for the capital or growth guarantees. The tracker, they say, is unsuitable for more sophisticated investors and should only represent a small part of a valuable portfolio of products. A new investment fund from Scottish Equitable International, based out of the strictly-regulated Luxembourg Financial Services Centre, behaves like a tracker bond by tracking indices, but has fewer of its restrictions.

The `Global Security Plus Funds' are being promoted by independent financial advisers, Buggy McCormack Asset Management, and require a minimum £15,000 investment. They are aimed at a higher net worth investor than the conventional tracker, but one who may still be unwilling to invest directly in more potentially volatile share funds. The Global Security Plus Funds are linked to a basket of international stock market indices including the FTSE-100, S&P 500, the Nikkei, Hang Seng, DAX 30 and CAC 40 with funds denominated in either US dollars or sterling.

The investor can choose an option which provides a 100 per cent capital guarantee in which the unit price will not fall on one quarterly date compared to the last, or a second option in which 97.5 per cent of the capital is guaranteed with the unit price never falling by more than 2.5 per cent on one quarterly date compared to the next.

This represents a lower level of protection, but a greater opportunity for growth since more of the fund is being allocated to tracking the growth of the indices.

Unlike conventional trackers, in which options in the indices are purchased for a set period of time, usually four-six years, the Global Security Plus Funds are gross rollup funds with no specified maturity date.

In other words, there is no locked-in investment period and the funds, which roll-over from quarter to quarter are not taxed at source the way most conventional

trackers are. According to Mr Sean Buggy: "The compounding effect of no loss to tax on an ongoing basis establishes a major advantage over many of the present trackers on the market. Without a specified maturity date any eventual tax liability may be deferred indefinitely."

Because these funds are written as a single premium life assurance bond, there is no income tax liability, but profits at maturity are liable to 40 per cent Capital Gains Tax, less annual CGT exemptions of £1,000 for an individual and £2,000 for a couple.

Early encashment of this fund - that is in the first five years - will result in what is known as back-end loaded penalties of 5 per cent of the fund in the first year, 4 per cent in year two, 3 per cent in year three, 2 per cent in year four and 1 per cent in year five. The fact that the fund managers are not constrained by having to reserve profits each year to pay internal withholding tax and profits are not subject to DIRT suggests a better long-term return, even with a CGT liability.

Nor are the managers constrained by having to lock their funds into one or more indices. Instead, they can vary their exposure to the six listed indices by a range of 0-40 per cent at any quarter.

Any performance growth is locked in at any quarter, eliminating the need for the controversial growth `averaging' clauses that apply in conventional trackers.

The entry charge for this fund is 1.5 per cent of the total capital being invested (which Scottish International describes as an `establishment charge') and an annual management charge of 1 per cent. There are five free switches a year, if you decide to instruct the fund manager to track a different index than the ones being managed. However, Mr Buggy says he doubts whether most investors would be interested in taking such a hands-on approach. Scottish Equitable International, is wholly owned by Scottish Equitable plc, which has a AAA credit rating from Standard and Poor and is one of 35 different fund managers used by Buggy McCormack Asset Managers.

Investors should seek independent advice in order to compare this product to other international fund options which will not carry these sorts of capital guarantees, but which may pay higher returns, before making any final commitment.