INVESTMENTS & RISK

In developing any business strategy, it is essential to develop suitable loan and investment strategies also. Hence it is important to seek professional investment and mortgage financial advice. There is the need to plan ahead to maximise growth on existing investments, gain future assets (both now and for future retirement), and reduce outgoings on all existing loans.

In developing a suitable investment and loan strategy, it is important that issues such as your business and personal situation, your attitude to investment risk, existing climate of your investments (if any) and loans, family circumstances, and all other relevant details, including your aspirations and goals, are taken into account. Then sound financial planning can commence, and benefit you, your business, and your family.

The main factor in any investment growth is risk. Risk can provide huge rewards. Guarantees provide smaller growth but with security.

Risk versus reward has often been analysed, and one must come to terms with what each individual will expect, tolerate, and accept. Can you have both? Generally, yes, if you are prepared to invest over longer terms of a few years, diversify your investments, and let Fund Managers undertake the movement of group investments, and hopefully alleviate you of any worries.
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A new type of investment fund:

Research

A major research project was recently undertaken by Irelands largest investment company. The study was to gauge the level of interest and knowledge the average person has in shares. The findings were as you may have expected. Some of the comments, most frequently quoted, were as follows :

'I don't understand them'
'Shares are risky'
'They're only for wealthy people'

For many, the concept of shares is alien and frightening. However, share ownership is becoming much more broadly acceptable, fuelled by the gains people made on recent demutualisations e.g. Irish Permanent and Norwich Union, but not so for Eircom/Vodafone. There does appear to be a rapidly escalating appetite for more information in relation to stocks and shares.

Investments in shares has been especially fuelled by interest rates remaining fairly low, as a low interest rate environment is generally good news for stockmarkets. Average deposit rates are only paying about 3% after DIRT (20%). Irish inflation is currently at a medium level. Also, it is always a good time to invest in shares since they do generally offer better rates of return than any other asset, in the long term. Market timing for investment is not easy. A better approach is to let time, not timing, be your motto!

Investment Funds

For many people the main indirect way to access shares was through managed funds and trackers .The managed growth fund is the most popular type of unit-linked fund among Irish investors. These funds provide an attractive asset mix, combining Irish and international shares with the other main asset classes, that is, fixed interest, property and cash. Average returns from managed funds have been very good in the long term, comfortably outperforming deposit accounts and, as the figures in the chart below show, which is based on figures compiled by the Irish Association of Investment Managers, these show representative returns from different types of investment product over five years. Investors who had chosen a managed fund got a return of 11.5% per annum, compared to only 2.4% per annum from deposits.

However, not all managed funds gave the same return. Some were better than average and some were worse. Everyone would like to be invested in the best performing fund, of course, but it is not possible to predict which managed fund is likely to prove a winner in the future. Looking at past performance is not necessarily a good guide since fund managers tend to have good periods and bad periods. Yesterday's winners can easily become tomorrow's losers.

Picking the right company

Trying to pick a managed fund that will deliver good relative returns is very tricky. The risk of choosing an underperforming manager is called manager risk.

Managed funds already expose the investor to market risk. That is how they generate such good returns. But there is no reason for you to take on additional manager risk. Why put yourself through this? Smart Funds Balanced Funds or Security Managed, and Wisdomscope are newer types of managed fund, which will hopefully provide you with the returns you want - that is, managed fund returns - with low to medium manager risk. For example wisdomscope is a consensus fund, which is already hugely popular with Irish pension fund trustees and members. Wisdomscope is Ireland's only consensus fund for ordinary (non-pension) investors.

How does it work?

The idea behind consensus fund management is clear - it is simply to perform in line with the average return of managed growth funds. In fact, experience has shown that the performance outcome of this process can be better than average as a result of transaction cost savings. Consensus funds do not trade their assets as actively as conventional managed funds.

Consensus fund management eliminates the manager selection risk and avoids the violent swings from the top to the bottom of the performance league tables. Wisdomscope adopts the collective wisdom of all the investment managers who offer managed growth funds.

It is a straightforward and effective process. Asset allocation replicates the average weighting. Then, having eliminated asset allocation risk, we track the relevant index in each market. For example, if the average allocation in UK equities were 10%, Wisdomscope would exactly replicate this weighting. Within the UK portfolio we would then track the FT All-Share index. If BP Amoco represented 7% of the index we would hold exactly 7% of our UK portfolio in this share. Wisdomscope is therefore non-judgmental in asset allocation as well as stock selection.

How Can I Reduce the Risks?

You can reduce risk by diversifying your portfolio across a range of shares, sectors and countries. When investing remember not to put all your eggs in one basket. Hence don't invest all your funds in one asset. For example, if you're putting money into shares, buy a selection of companies so that if one performs badly, you won't lose as much of your money. Alternatively, with diversified investments you're more likely to pick up the companies that exhibit high growth.

Funds such as Smart Funds and Scope, for investments into shares. Both Scope and Smart Funds have many options for investment with a range of risk-rewards. Options have built-in diversification and a mix of options, which provides even further diversification. Further protection can be available in the form of capital guarantee for investors.

High risk-reward funds such as Smart Stocks and Telescope allow investors to access into Europe's top telecommunications companies, while Techscope investors can exploit the enormous anticipated growth in the world's largest technology companies. These options provide an affordable way to buy into these exciting sectors, but carry high short/medium risk levels. The other important tool for reducing risk is time. Time smoothes out the up and down nature of stockmarket returns.

Guaranteed Smart Mix or Wisdomscope may solve the problem by providing average returns. These funds can be used as a core holding in putting together an investment portfolio.

Contact us for a personal investment report.