Wednesday 24 April 2019

Where's the best place to invest €100,000 as uncertainty reigns?

It's hard to decide where to invest any major lump sum in today's jittery investment climate. Funds that track the performance of the biggest companies in the United States could make you money over the coming years. So too might Irish property

The Sunday Independent lined up some top investment experts to get their advice on the best places to invest a lump sum of €100,000. The advisers have assumed that the investor has this €100,000 to spare - that is, they have no outstanding mortgage or other major financial commitments.
The Sunday Independent lined up some top investment experts to get their advice on the best places to invest a lump sum of €100,000. The advisers have assumed that the investor has this €100,000 to spare - that is, they have no outstanding mortgage or other major financial commitments.
Louise McBride

Louise McBride

With inflation expected to tick up under Brexit and the reign of the new US president Donald Trump on the horizon, leaving a wad of money in a deposit account is not a runner. Inflation will eat into the value of that money over time, particularly if deposit interest rates are low - as they have been for some time.

With this in mind, the Sunday Independent lined up some top investment experts to get their advice on the best places to invest a lump sum of €100,000. The advisers have assumed that the investor has this €100,000 to spare - that is, they have no outstanding mortgage or other major financial commitments.

Cautious investor in his mid-50s

Exchange-traded receivables (ETRs) can be suitable for a cautious investor seeking an alternative to deposits, according to Ross Curran, managing director of financial advisers Curran Financial Services.

With ETRs, you are essentially buying a company's invoices for a certain amount of time. You can earn almost 4pc interest a year - if you invest in an ETR for about three years, according to Curran. You could lose money if the company or companies whose invoices you have bought don't settle their bills - however, such defaults are often covered by an insurer.

"Cautious investors need to beat the interest rates on offer from the banks and match the rate of inflation so their money doesn't lose its real value over time," said Curran. "To do this, you would need to achieve a return of more than 2pc a year."

One company which offers ETRs and which is usually recommended by Curran is Credebt Exchange.

"The underlying instrument is insured by the insurer, AIG, and this gives reassurance to clients who are nervous about putting their money anywhere other than the bank," said Curran.

Another advantage of ETRs is that you pay Capital Gains Tax (CGT) of 33pc on any returns - as opposed to the higher 41pc tax currently charged on the interest earned on savings. (The tax rate on savings interest will fall to 39pc next year - and eventually to 33pc by 2020). With ETRs, you can also make returns of €1,270 a year tax-free - because under the CGT annual exemption, the first €1,270 of an individual's annual gains are exempt from CGT. This means that your gains from an ETR could be tax-free - depending on how much money you make.

Be sure you understand and are comfortable with ETRs before investing in them. Be aware too that Credebt Exchange and other firms that offer ETRs are not regulated by the Central Bank as there is no requirement for them to be authorised. You therefore won't be entitled to any investor compensation from the Investor Compensation scheme (which was set up by the State) should things go wrong.

For this reason, should you be considering ETRs, it would be prudent to invest a fraction of a €100,000 lump sum into one - rather than the full amount. The minimum investment in an ETR is typically around €20,000.

For a cautious investor who would like to dip his or her toe into equities, Davy's GPS Cautious Growth fund and New Ireland's iFunds 3 are worth considering, according to Rory Nelson, founder of the Galway investment advisers, Nelson Life. Nelson advises putting half of a €100,000 lump sum into the Cautious Growth Fund and the other half into iFunds 3. Both funds are targeted at investors who don't want to take too much risk with their money.

It is important to check the performance and track record of an investment fund before putting any money into it - but also to remember that past performance is no guarantee of future returns.

Davy's Cautious Growth Fund made a return of 8.8pc in 2014 and 3.5pc in 2015. However, it made a return of only 0.34pc in the first 10 months of this year which is weak and lower than what a €100,000 lump sum could earn in an ordinary deposit account. iFunds3 made a return of 2.4pc in 2015 and of around 1.5pc so far this year.

One of the reasons Nelson recommends Davy's Cautious Growth fund is that its losses have been a fraction of those incurred by other funds during market downturns.

Vincent Digby, managing director of financial advisers Impartial, believes cautious investors should sit tight for a few months - and leave a €100,000 lump sum on deposit until it becomes clearer what impact the election of Trump will have.

"The victory of Trump may have far-reaching consequences for US economic, fiscal and monetary policy," said Digby. "All of these could have a significant impact on stock market sentiment. Investors are operating in a vacuum until we get greater clarity on the details of the Trump administration's key economic policies. So cautious investors should hold their fire for a couple of months and see what the new US administration's actual policies will be."

Moderate risk taker in her mid-40s

For an investor who is willing to take a certain amount of risk (though not a huge amount) with his money, exchange-traded funds (ETFs) such as the iShares Core S&P 500 ETF or the Vanguard Small Cap Value ETF are good options, according to Curran. An ETF is essentially a basket of shares. The iShares Core S&P 500 ETF tracks the performance of the 500 largest companies in the US while the Vanguard Small Cap Value ETF tracks the performance of smaller US companies.

"My preference with stock-market based investments is to track the performance of a particular stock market index - rather than picking a fund which tries to beat the market," says Curran. "The iShares Core S&P 500 ETF costs just 0.07pc in fees and has delivered the best results of pretty much any fund over a long period of time - at just over 10pc per annum. The Vanguard Small Cap Value ETF also delivers pretty solid returns over time. Both funds are considered CGT instruments and so profit is taxed at 33pc rather than 41pc - after your CGT annual allowance of €1,270." Be sure, however, that you are comfortable with stock market volatility should you invest in either of these ETFs as you could lose money with them.

Digby also recommends ETFs as a way to get exposure to the shares expected to do well on the back of Trump's election. "Banks, pharma companies, and infrastructure companies with extensive exposure to the US are some of those which could do well under Trump - if his administration brings in a looser fiscal policy with higher inflation and higher interest rates," said Digby.

For those interested in investing in a specific investment product, Digby recommends a Standard Life investment bond or an investment account with Conexim. Both of these allow you to invest in ETFs.

Nelson Life recommends two funds to an investor who is comfortable with a moderate amount of risk - the Davy GPS Balanced Growth Fund and the Standard Life GARS fund. About 70pc of a €100,000 lump sum could be invested in the Davy fund, with 30pc invested in the Standard Life fund, according to Nelson. The Davy fund, however, hasn't performed as well this year as it did in 2015, 2014 and 2013. GARS is an absolute return fund, which means it aims to deliver positive returns for investors - regardless of stock market conditions. The Standard Life GARS fund hasn't performed as well this year as it has in previous years.

Before opting for an absolute return fund, remember that some of these funds are not delivering on their promise to make a positive return for investors. "Absolute return funds tend to be expensive as they are very actively managed, and unfortunately they simply do not deliver appropriate returns for the risk involved," said Curran.

Big risk taker in his early 40s

An investor with a big appetite for risk could consider investing in individual shares - though the potential to get burned is huge if the shares take a turn for the worse. Some shares that might currently seem appealing to investors include Google (now Alphabet), Apple and Bank of Ireland, according to Curran. Bear in mind that many people lost their entire life savings during the recession after pouring their money into the shares of one company or bank.

Another option is to invest in property - using the €100,000 as a deposit and borrowing the rest. "Anytime you introduce lending, you increase your risk significantly - although with good rental income, you can reduce the chances of losing," said Curran. So if investing in Irish property, choose a well located property which will be easy to secure tenants for - and to sell.

Another way to invest in property is through a property fund. Irish Life's Irish Property Fund is one tipped by Nelson for risk-takers - in conjunction with two Davy funds. Nelson recommends investing a fifth of a €100,000 lump sum in the Irish Property Fund, a fifth in Davy's High Yield Fund - and three-fifths in Davy's Long Term Growth Fund.

The Irish Property Fund largely invests in commercial property. "The strong growth is expected to continue in the rental market," said Nelson. "Property funds are high risk and can have restricted access at times when outflows exceed inflows. So ensure that you have other liquid assets available in the event of a need for emergency cash."

Get independent advice

A €100,000 lump sum is a lot of money so be sure to get independent financial advice before investing it. Be fully briefed too on any charges that could eat into your valuable nest egg.

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