Private investors seeking to weather the current economic downturn should consider putting their money into a diverse portfolio of funds and equities at home and abroad, writes Fiona Reddan.
WITH GLOBAL stock markets in freefall and the Iseq down by 40 per cent on this time last year, investors are, unsurprisingly, shying away from equity markets.
However, with stocks such as Bank of Ireland back to pre-Celtic Tiger levels, it might be time for investors to revisit the equity markets as part of an overall strategy for weathering the current downturn.
Kevin Quinn, a director with Bank of Ireland Asset Management, says that for most long-term investors, times like this can present great opportunity.
"Given the extent of the issues in credit markets, rising oil prices and inflation worries, it can be easy to turn away from stocks and shares. However, markets are forward looking and I'd argue that we are seeing markets bottoming - probably since St Patrick's Day - and as a consequence, there is good value to be had," he says, adding: "The instinct may be to sit in bonds or cash given the prevailing uncertainty but, for long-term investors, there is better value to be had elsewhere at present."
"Now is not the time to be ignoring the assets [equities] which have fallen so much in value," says Gary Connolly, head of funds marketing at Merrion Capital.
However, he recommends investors to stay away from tracker-type products offering the prospect of equity returns but with a safety net of capital back in five/six years time in the worst-case scenario.
"The reality is that it is exactly at times like this that the value [eg chances of you requiring a capital guarantee in five years time] of these products is at their lowest. So, in terms of weathering the downturn, this is not something I would recommend," he says.
Instead, his mantra for the current environment is "diversify, diversify, diversify".
This sentiment is echoed by Robbie Kelleher, head of global investment strategy at Davy Private Clients. "We continuously stress the merits of portfolio diversification across asset classes and across geographies. There is plenty of statistical evidence to show that the level of risk associated with any expected rate of return can be reduced by diversification," he says.
But what should investors diversify into? Allocating your funds across the following seven investments should help all investors weather the current downturn - and reap the returns whenever a bull market reappears.
1. BLUE-CHIP US STOCK FUND
ALTHOUGH the US is no longer as dominant a global economy as it once was, US stocks still account for more than 40 per cent of the world's equity value. So US blue chips need to be at the heart of a diversified strategy.
For Quinn, the reasons to look towards the US include the extent of the monetary actions taken by the Fed, the fiscal stimulus that has been injected and the dollar.
Some options in this area in the Irish market: AIB Select US Equity Fund; Irish Life's Indexed North American Equity Fund; Bank of Ireland Asset Management's North American Equity Fund.
2. BLUE-CHIP FOREIGN- STOCK FUND
EXPOSURE TO a basket of global or regional equities can help to smooth out the ups and downs in individual markets, and investors will still benefit from rising markets. By choosing a fund that focuses on dividend-paying shares, investors can also benefit from receiving dividend income, even during times when markets are falling.
Some options: AIB Select Eurozone Equity Fund; Merrion European Value Fund; BIAM Global Equity Fund; Elite Bloxham Global Equity Income Fund.
3. AN EMERGING MARKETS FUND
ALTHOUGH EMERGING markets such as India have also been hit hard by recent global turmoil, such economies can also show rapid growth and so future returns may be higher than those in developed countries.
Quinn recommends making an allocation to emerging markets. While he concedes they are more expensive than developed markets, they are taking on the leadership of world economic growth. Long term, Connolly agrees that some exposure to China or India is wise. However, while investing in emerging markets such as China, India, Korea, Taiwan, Poland and Brazil may offer higher potential than in developed economies, it does also mean higher volatility.
Some options: Fidelity India-China Fund; Quinn Life Emerging Markets Freeway; Blackrock India Fund.
4. PROPERTY
IRISH INVESTORS' love affair with property may be coming to an end, but there is still potential out there. "There are opportunities being created in international commercial property markets [still very selectively] right now, to which investors should be alert," says Quinn, although he adds the caveat: "Don't expect rapid recoveries from property. This is a time for a longer time horizon."
"Irish investors are significantly over-invested in property," says Connolly, although he would still recommend an allocation either to a commercial property fund or foreign property, but only with a small portion of the overall portfolio.
Some options: Canada Life/ Setanta Property Fund; BIAM Property Fund; AIB Select European Property Stocks Fund; Irish Life UK Property Fund.
5. A BOND FUND
Bonds, along with cash, provide a safety net in any portfolio. While bonds may never produce the momentous returns equities sometimes offer, they can provide an upside when equity markets fall.
"Always have liquid assets in the portfolio either to use to fund investment opportunities that arise, or to anchor the portfolio in troubled times, such as we are in at the moment," says Connolly. He recommends that investors keep at most 10 per cent in either cash or bonds, as "long term, cash is not a real asset, it has generally delivered very little in excess of inflation".
Some options: Robeco High Yield Bonds; Quinn Life Euro Bond Freeway.
6. COMMODITIES
FOR DIVERSIFICATION, commodities can be very attractive as they tend to perform at different times in the economic cycle. While global equity markets are suffering at the moment, commodities are at the height of a boom, as increasing demand for raw materials has helped drive commodity returns in recent years.
"In terms of a hedge against rising prices, food commodities and gold should be considered. As equities and property have been heading south, the prices of agri-commodities and precious metals has been very strong. Within this space, a diversified commodities vehicle can be accessed relatively easily through an exchange traded fund which would track the performance of a diversified basket of commodities," says Connolly.
Pramit Ghose, head of investment strategy with Bloxham Stockbrokers, also sees commodities as a hedge against inflation picking up and he sees the potential in oil, gas, metals and food.
Some options: ETF Securities All Commodities DJ-AIGCI; Irish Life Indexed Commodities Fund.
7. CASH
LAST BUT NOT least is cash. While cash may not be considered a true investment, it can offer a safe haven in times of uncertainty as well as easy access to liquidity.
And as the credit crunch has closed down some banks' funding methods, banks are increasingly looking to cash funds and deposit accounts as funding sources.
As Ghose says: "Banks are now focusing on deposit growth, hence there are very good rates on offer."
Moreover, with the current high interest rates offered by most financial services providers on deposit accounts, these can be an alternative to cash funds.
Some options: Quinn Life Cash Freeway; AIB Select Cash Fund; Canada Life/Setanta Cash Fund.
OTHER OPTIONS that investors should consider to weather the current upheaval in equity markets include alternative energy funds, such as the New Ireland/KBC Innovator Fund, which are becoming increasingly attractive as oil continues its upward trajectory, and mid-cap funds.
"Mid-cap non-financial stocks have been outperforming recently [a perhaps surprising phenomenon], as these companies keep growing due to niche franchises, and also are a better target for takeovers as private equity can no longer secure leverage to do the mega-deals and large companies with healthy balance sheets are looking to acquire smaller faster-growing companies," says Ghose.
Kelleher highlights other possible areas such as "private equity, alternative assets and exposure to fund managers that pursue strategies (eg, long/short) that greatly reduce the risks of falling capital values when markets are in decline".
