A little risk may pay off

Some fund managers have of late decided to push the boat out and bring something new to Irish investors

WHILE INVESTORS remain rightly nervous about the ongoing European sovereign debt crisis, inflation is another threat that is getting less attention. Despite historically low interest rates in Europe, for many, soaring inflation is seen as a very real risk in the short term.

In Ireland, inflation is currently running at more than 2 per cent, thus meaning a deposit account earning 2.5 per cent is doing little better than breaking even. Indeed, a recent research report from State Street showed that investors who remained entirely in cash in the first half of 2012 saw the value of their investments decline in real terms.

The message coming out of the State Street report – unsurprisingly perhaps, for a fund manager, but one worth noting all the same – is that investors who are willing to take on a little risk through an allocation to the stock market are doing better than those who remain stuck in cash.

Unfortunately, however, if you are in the market to invest, you’ll find there aren’t many new options out there. Managers have shied away from launching new products due to limited interest, as investors seek out conservative, risk-free options in order not to repeat the mistakes of the past.

In addition, the market has seen some high-profile departures of late. AXA Financial, which had developed a decent product offering for Irish investors, decided to close its Irish operation to new business as it struggled to gain a foothold in the market.

Moreover, the market has further contracted due to mergers like that of Quinn Life, which has been subsumed into Irish Life – although thankfully for investors the larger entity has committed to maintaining the old fee structure of Quinn Life, at least in the short term. Nonetheless, a number of managers have of late decided to push the boat out and bring something new to Irish investors. And if there is a common theme among them, it could be diversification, as managers respond to investors looking to learn from the past by not over-investing in a small market like Ireland again.

Remember, if you are looking to invest money, you can expect your adviser to spend some time assessing your risk profile in order to comply with the new consumer protection guidelines emanating from the Central Bank. Given the number of complaints the Financial Ombudsman receives each year over risky investment products that were sold inappropriately to people, this is a timely development.

GLOBAL FUNDAMENTALS FUND

Manager: Bank of Ireland Private Banking

Available: Bank of Ireland Private Banking, in Dublin, Cork and Galway

Minimum investment: €100,000

Performance: +17.5 per cent (From 09/11-03/07/12)

Fees: 1.1 per cent

Pros: A global allocation hedges against geography-specific risk, while a focus on dividend-producing stocks will help protect returns.

Cons: The minimum investment might be out of the reach of many.

In brief: This fund, which will be actively managed by Bank of Ireland Private Banking's Leona Nicholson, is made up of 65 global equities. Its focus is selecting equities that deliver "quality returns together with sustainable dividend income".

Nicholson joined BOI Private Banking last year from the group’s old fund management arm, Bank of Ireland Asset Management, which was sold to US fund manager State Street as part of the bank’s deleveraging process. She says the response to the fund has been “very positive to date”, despite the challenging markets.

“Many investors agree that quality global companies look cheap relative to their own history and to other asset classes. My focus in this fund will be on stock selection using fundamental valuation criteria and where I see sustainable growth in terms of stock price and dividends over the next few years,” she says. Some of the fund’s top picks include Pfizer, Unilever and Wal-Mart.

FRONTIERS MARKETS FUND

Manager: Templeton

Available: Rabodirect

Minimum investment: €100

Performance: -2.59 per cent (one-year); 9.22 per cent (annualised three-year as of 21/06/12)

Fees: 0.75 per cent (entry), 0.75 per cent (exit) and 1.6 per cent (annual)

Maintenance charge: 0.5 per cent

Pros: Available until July 27th with no entry fee

Cons: Not for the risk-averse

In brief: Managed by global manager Templeton, this fund's focus is on new or younger emerging markets, and as such is really only for investors who have a healthy risk appetite. It became available through Rabodirect in June.

The fund invests predominantly in “frontier markets” located throughout Asia, Africa, the Middle East, Europe and South America. These markets are often in a much earlier stage of economic development than larger emerging markets and many have only recently opened to foreign investing.

According to Rabodirect, these markets have high growth potential because “they represent what emerging market countries like Brazil, Russia, India and China were 20 years ago”. They also have high risk potential, however, and you might need your wits about you to invest in countries such as Nigeria, Kazakhstan, Qatar and Vietnam – although some might say the same about Ireland!

For Dr Mark Mobius, executive chairman with Templeton Emerging Markets Group, the rapid advance of many frontier market countries toward emerging market status gives their investors economic opportunity for three main reasons: “growth potential, attractive valuations and a low correlation with emerging markets and with developed markets”.

The fund’s largest portfolio weightings are in banks (34.8 per cent), energy (16.4 per cent), telecommunication services (15.8 per cent) and materials (8.7 per cent). The two largest geographical positions are in Nigeria (13.28 per cent) and Kazakhstan (9.5 per cent).

MYFOLIO

Manager: Standard Life Investments

Available: Brokers/Standard Life directly

Minimum investment: €175 a month

Performance: 3.48 per cent (MyFolio Multi-manager III: 01/7/2011 to 30/6/2012 )

Fees: 1.15-1.35 per cent annual fee

Pros: Offers an easy way to match your risk profile with an appropriate investment

Cons: If you're very risk-averse it might be an expensive home for your money

In brief: MyFolio, a major new launch from Standard Life, consists of a family of five multi-asset funds which invest in a wide variety of assets including equities, bonds, property and money market instruments (including cash).

Its selling point is that it aims to offer an investment that matches your attitude to risk. So, if for example, you’re very conservative with your money, and only prepared to take on a small amount of risk in order to achieve modest or relatively stable returns, MyFolio I is possibly the best investment for you.

At the other end of the scale is MyFolio V, which is suitable for people who want high long-term returns and are prepared to accept “the full extent and frequency of stock market fluctuations” in order to achieve this.

A Standard Life spokeswoman said most investors to date have opted for MyFolio III.

The product hopes to manage investors’ risk expectations by focusing on diversification, with the potential for each fund to invest in a wide variety of assets. You could expect the mid-risk product, MyFolio III, to invest less than 10 per cent of its assets in money market instruments, and 42 per cent in equities, and the rest in property, bonds and absolute return strategies, such as Standard Life’s GARS fund.

MyFolio V on the other hand can have up to 99 per cent invested in “growth assets” such as equities. The product comes with a risk questionnaire which you can either complete with your broker or online.