INVESTMENTS: New inflows into Irish retail funds tumbled 36 per cent in 2001 and money that was invested sought out lower-risk options like with-profits funds, writes Una McCaffrey

Irish private investors are a cautious bunch, preferring guarantees to risks and putting the security of their nest egg before promises of sky-high returns in the future.

Such is the profile that emerged last week when the Irish Association of Investment Managers (IAIM) held a mirror up to the Republic's 2001 retail investment market, a market in which new business was down more than one-third on the previous year.

The IAIM's look at 2001 investment trends found that new inflows into Irish retail funds fell by 36 per cent between 2001 and 2002, with private investors putting just less than €1.3 billion into investment funds in 2001, compared to €2 billion in 2000.

The fall-off was attributed to the volatility that affected global markets for most of the year and, in particular, after September 11th.

Investors were "speaking with their money", reacting to flighty stock markets and talk of recession by keeping a tight hold on their cash, according to Mr Dara FitzGerald, chairman of the IAIM retail committee.

"Irish investors are generally cautious by nature," says Mr FitzGerald.

Even the money that did make it into the investment system was treated with great care, the figures showed. IAIM members recorded an 82 per cent jump in new investments in with-profits products - traditional beneficiaries in times of market uncertainty because of their low-risk character and capital guarantees.

Of all the money put away by Irish retail investors last year, a massive 46 per cent, or €601 million, went into these kinds of funds, a jump of 16 per cent on 2000.

Interest in unitised products fell over the same period, with unit trusts suffering an 86 per cent fall in new investment flows.

This is indisputable proof that Irish private investors are fans of the with-profits model and, when pushed as they were last year, will choose it above the many other options available.

While this popularity is understandable in light of prevailing market conditions, other issues are less clear, such as whether or not investors are fully aware of the ins and outs of the investment model they have so energetically favoured. While with-profits funds are among the most secure investments to be found in the market, they are also among the most complex.

The complications come in two areas: how the fund's assets are allocated and how exactly investors are paying for the capital guarantee that has presumably drawn them into the fund in the first place.

Mr Douglas Farrell of financial advisers National Deposit Brokers says that many with-profits products suffer from a lack of transparency, making it hard for investors to "get a handle on" how their fund works or how it compares to alternatives.

"The cost of the guarantee is often not being disclosed in any shape or form that is discernible for the public," he says.

With-profits funds tend to invest in a mix of equities and "safer" investments such as bonds, cash and property, with a typical equity allocation varying between 50 and 80 per cent. Mr Farrell says that many investors are unaware of their fund's asset mix and how that mix may affect the price they are paying for their guarantee.

"Too much stuff is at actuarial discretion," he says. "Take a fund that has a lot of equities - one could argue that it would have a more expensive capital guarantee so you could end up paying through the nose for poor performance."

Mr Farrell advises that the term of a with-profits investment should also be considered closely, with three or four-year terms naturally producing lower returns than longer-term investments.

"There are short-term policies on the market but they usually have a fairly high gilt and cash content, and that dilutes or compromises returns quite a lot. You're effectively only getting half-way into the market."

Mr Farrell argues that the best way to ensure investors truly understand where their money goes is to disclose the cost of the capital guarantee in the fund's annual management charge. Otherwise, he says, "you really have to pull them apart".

This complicated face of with-profits funds is under scrutiny in Britain, where regulatory body the Financial Services Authority (FSA) has said insurance companies may not always take the interests of policyholders into account when selling this kind of product.

The FSA is conducting a review in the with-profits business and is set to recommend regulatory change in the area in coming months.

It is expected that greater transparency and clarity will result.

"The UK stuff is good," says Mr Farrell, who believes that the developments in Britain will eventually force change in the Republic too.

In the meantime, he says that the association's reported increase in with-profits business continues to be reflected in his advisory role, despite the complexity of the funds.

"There's a much higher demand for with-profits products," he says. "They still make sense for anyone who's slightly nervous about putting their toe into the water."