Searching out the rock-solid funds in an age of uncertainty
In the second part of her series on the safest investments currently available on the market, Louise McBride takes a look at the investment funds, the stocks and the shares that will not let you down
IT'S exactly two years since the Anglo Irish Bank saga first unfurled. It was an innocent time.
We had no idea back then just how much our banking and investment landscape was about to change. The nationalisation of Anglo in January 2009 rendered its shares worthless. Since then, shares in AIB, BoI and Irish Life & Permanent have plummeted to record lows.
A few years ago, Irish government bonds were considered amongst the safest investments around. But now international investors are running scared of those bonds. So if you've money to invest, get ready to shake off any age-old investment traditions -- while still keeping your head of course.
"Cash deposits and government gilts are traditionally considered non-risk assets," says Rory Gillen, founder of the investor website, www.investRcentre.com. "But I believe government bonds in the developed world -- such as US, British and German bonds -- are grossly overvalued. Investors should also avoid guaranteed products from Irish banks or other product providers like the plague. Eight times out of 10, guaranteed products reward the seller -- not the buyer."
FIND A GOOD HOME FOR MY MONEY
Property, equities, commodities, hedge funds, absolute return funds, and balanced asset funds are all investments which carry an element of risk. "With money so cheap, most risk assets have performed strongly over the last two years; if you're looking for a low-risk investment, actively managed balanced-asset funds are probably the best option," says Gillen.
Gillen recommends two actively managed balanced funds, RIT Capital Partners plc and SVM Global Fund plc. "Both can be bought just like a share as they are quoted on the London Stock Exchange," he says. "Both have excellent long-term track records, both negotiated the global credit crisis reasonably well and have minimal holdings in government bonds -- which is what I like to see. If invested in for between three and five years, an annual return of 7 per cent to 8 per cent is a realistic expectation."
Another fund that is recommended by some of the financial experts is the Standard Life Global Absolute Return Strategies (GARS) Fund. The GARS Fund is an absolute return fund -- which means that it aims to deliver to you an investment return regardless of any frustrating stock market movements.
"We like Standard Life's GARS Fund," says Alan Fearon, head of investments with the wealth managers, Helvetia Wealth Ireland. "One of the largest insurance companies in Europe is behind this fund. Although past performance is no guide to future gains, this fund has achieved an annualised return of 7.7 per cent since its inception in 2006."
Another advantage of the Standard Life GARS Fund is that it is covered by Britain's Financial Services Compensation Scheme, so 90 per cent of your investment (without any upper limit) is guaranteed by the British government.
"Absolute return funds are good if you're looking to get a reasonable return on your investment but don't want the volatility," says Vincent Digby, founder of financial advisers Impartial, and a former head of funding with Bank of Ireland Global Markets. "The Standard Life GARS fund has about half of the volatility of the average managed fund."
Remember however that the returns on an absolute return fund are not guaranteed -- and management charges are usually higher than on standard funds.
THE GOLD RUSH
In recent weeks, fears of a spreading European debt crisis have prompted many investors to pour money into precious metals, such as gold.
"Investors fear for the solvency of several countries and believe that money printing is the most likely answer," says Gillen. "With that threat hanging over the dollar, sterling, yen and euro, gold as a hard currency that cannot be increased at will, has reclaimed its 2,000-year-old position as the currency of choice."
However, as gold prices have soared in recent years, it is no longer a cheap commodity. Gillen warns that gold "may well already be overvalued".
It is also important to remember that most sellers of gold investments are not regulated by the Financial Regulator.
"It would be well to recognise that a strong rise in the gold price from here is more likely to signal the end than any new beginning in this gold bull market," adds Gillen.
If investing in commodities, remember to only put a small fraction of your investable wealth into such assets, and to keep an eye on interest rates.
"When interest rates are very low, as they are now, that can also be a driver for commodities as the cost of holding them is virtually zero. If interest rates rise however -- or more importantly, if real interest rates rise, you need to be careful with commodities and precious metals."
DON'T PUT ALL YOUR EGGS IN ONE BASKET
The one bit of advice that you should never forget is not to put all of your eggs into the one basket.
Pat McCormack, head of Barclays Wealth Ireland, steered clear of recommending any single investment product. "It's very difficult to consistently pick the best returning investment from year to year," says McCormack. "We encourage our clients to diversify their investment".
Most of your investable wealth should be invested across nine types of investment over five to 10 years, according to McCormack. These are cash and short-term maturity bonds; developed government bonds (such as gilts); investment-grade credit (corporate bonds); high-yield and emerging market bonds (such as Asian government bonds); developed market equity (such as S&P and FTSE shares); emerging market equity (such shares and stocks can bring a higher return but carry a higher risk); commodities (a range of commodities -- not just gold); real estate, and alternative trading strategies (such as certain hedge funds).
"You can get exposure to all of these by investing in tax efficient, EU-based UCITS mutual funds," says McCormack.
These are funds that can be marketed across all EU countries.
"Try to avoid getting over exposed to the next big thing -- such as gold -- when investing," warns McCormack. "Get your foundations right and then you can start taking short-term opportunistic investments. In general, clients should go for the less sophisticated, less fashionable investments. Take advice and invest with a reputable provider in a regulated environment."