Financial advisers and investors enjoy mutual feeling for managed funds

With interest rates hovering at record lows, many investors are looking for a new home for their cash. The investment funds industry has been stepping into the breach, increasingly providing a higher-yielding alternative to the traditional deposit account.

Mutual funds - better known here as unit-linked funds or trusts although the US name is being used more frequently - are so-called because investors pool their money together to buy investment expertise and to allow for greater diversification. Each investor buys units in a fund which is managed by a professional fund manager and the value of their investment rises or falls depending on the performance of the underlying asset.

Financial advisers say money has been flooding into the variety of products on offer in the sector which accounted for nearly one-fifth of the Irish personal savings market at the end of last year. And, according to the Irish Association of Investment Managers, cash should continue to flow into the area with a projected 20 per cent growth in flows to £1.2 billion (€1.52 billion) in 1999. This optimism appears to be borne out by those on the ground.

"The only people in Dublin busier than us are car dealers," says one investment funds adviser.

Among the factors attracting investors to such products are the strong returns - which are well above deposit rates, their tax efficiency and simplicity, the fact that they allow small investors to diversify and the flexibility they provide across the risk range.

The high-flying investor, who is prepared to risk losing money to make it, can plump for high-risk investments such as equity-only unit-linked funds while the cautious investor can opt for guaranteed products such as with-profits funds or guaranteed bonds.

Unit-linked funds remain one of the most popular investment options, accounting for 41 per cent of the investment funds market at the end of 1998. Such funds can be invested in everything from cash to gilts and property to equities or a mixture of all four as with the managed growth fund.

Among the more popular managed funds at present are commercial property funds as Irish investors demonstrate their predilection for property yet again. "There is a huge chunk of money going into property funds, not residential but commercial," says Mr Trevor Cullen, director with BCP Stockbrokers. "There is a lot of security in bricks and mortar and the qualities of the buildings in these funds tends to be very high."

Such funds tend to close almost as quickly as they open with demand far outstripping supply. Irish Life's property fund has just closed but both Friends First and Canada Life still have such funds on offer while a number of other institutions are looking at launching them.

Financial advisers say there is some reluctance among investors to go into equity funds at the moment with stock markets at record levels and in light of recent volatility.

However, one trend that is emerging in terms of equity funds is a move toward index-tracking, a concept that first emerged in the US. Index tracking funds are invested in the shares quoted on a given stock market index, such as the FTSE 100 or the Eurostoxx 50, with each stock in the fund given the same weighting as in the index. Thus, the fund matches the performance of the index exactly with no need for active decision-making by a fund manager.

At present, Ulster Bank offers a fund which tracks the ISEQ index while Irish Life's indexed fund follows the fortunes of the Eurostoxx 50 and more such funds are expected to make their way to the market. "Indexed funds have all the good parts of a tracker bond and none of the bad. They are open-ended so you can come and go as you please," says BCP's Mr Cullen.

Also likely to appear in greater numbers are specialist funds, financial advisers say. To date, Hibernian's Euro Banks fund is the only one on offer in the Irish market - providing exposure to financial services firms across the euro zone. But advisers believe funds specialising in areas like telecoms are likely to become increasingly common.

However, for those averse to risk, more and more products with guarantees are arriving on the market. The with-profits products offered by the life assurers all come with a capital guarantee and while they do not boast the stellar returns achieved by some equity funds, they do not suffer the losses when times are bad either with returns generally in the 5 to 14 per cent bracket.

Guaranteed managed funds, which tend to return less than their non-guaranteed counterparts, but involve less risk are also available, while distribution bonds, which pay out the income from dividends on shares and coupon payments on bonds at regular intervals, are proving popular with those who need an income stream from their investments.

Those who do not find what they are looking for locally could always look overseas to the larger global fund managers like Invesco, Flemings and HSBC.

Asset Management, which provides advice to investors on Luxembourg-domiciled funds, says that for the same price, investors can tap into the global fund management expertise on offer from these firms.

However, Irish investors in unit trusts - which are generally domiciled overseas - should be aware that they will be taxed differently to holders of unit funds. Unlike unit-linked funds, the investor in a unit trust is responsible for settling his own tax bill and pays capital gains tax at the higher rate of 40 per cent. By contrast, tax is deducted from the unit fund at source and is paid at just 24 per cent.

There is a cost for investors in buying into such funds. This usually takes the form of an entry charge based on the bid/offer spread or the difference between the price at which an investor can buy units in the fund and the price he will get when he sells them. The charge typically varies from 2 to 5 per cent, depending on the amount being invested. The more money being invested, the lower the charge is likely to be.

However, more and more firms are moving to a single pricing policy - allowing investors to buy and sell units at the same price.

Instead of an entry charge, investors may be charged an early encashment penalty for leaving the fund before a certain date.

This type of charging structure is generally welcomed by financial advisers who point out that it focuses investors' attention on the need to invest over the medium to long term and does not punish those prepared to stay the course with high entry fees.

Most funds also charge an annual management fee, which ranges from 0.75 per cent at the lower end to 2 per cent at the higher end of the scale.

"Charges vary from company to company. This is a serious issue for the customer to look at," says Mr Conor Murphy, director with financial advisers, National Deposit Brokers.