Investment advice
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General Investment information
Most investments such as Investment bonds, Pension plans and unit trusts are a form of collective investment schemes and can have many variants. Your money would form part of this scheme and you would own your share of it.
By collectively investing, a wide range of area’s can be invested in. This help’s create a dynamic portfolio beyond the normal investor, which is far more dynamic and adaptable to market conditions. The collective nature also allows for the employment of expert managers making sure your money works as hard as possible.
Funds usually are built around a mandate, which indicates the area in which the fund specialises. A good example would be a ‘US Growth’ fund, which invests in companies listed within US stock exchanges. Generally a funds mandate indicates a funds level of risk. Established markets are typically less risky (Europe, UK, USA) and more specialised funds offer a highly level of risk.
Risk
All investments can fluctuate in value. This is especially applicable with
market-based investments. Risk is the value which funds have attached on the
likely hood that will lose money. For some it is high. Other’s much less so.
An example of a relatively lost risk market is the UK stock market. There have been few periods of protracted (10 years or so) loss in the market. Time itself though cannot guarantee a gain in a fund’s value. Also if the investment is required during a drop in the market then its full value may not be realised.
Risk is something that is very hard to measure and many people aren’t sure of their own risk profile. Even if you are aware then rigidly sticking to it sometimes isn’t the best idea. We, at Wrightways, would aim to help you invest across a varied range of funds to help offset any loss and maximise possible gains.
The different sectors and their performance
As specified above funds tend to come with a mandate which determines the area
(geographical and business based) they angle their investment towards. From this
a risk factor can usually be roughly worked out.
Funds behaviour and performance is only really relative to other funds contained with the sector or with similar mandates. It would therefore be very misleading to compare two very different funds, for example A UK growth fund and an Asian Technology fund. Illustrated below are two reasons why this is so.
- The Asian Technology fund would probably be more risk
- If a fund is solely based within the UK it can’t be faulted for poor performance if the UK economy is decline (therefore the companies it has to invest in) at a time when Tech companies in Asia are performing well.
This leads fund managers to express their targets in terms of performance within their sector instead of aiming for certain level of growth. Again this is due to the limitations of the mandate. If the selected area is performing badly then all the fund manager can hope to achieve is outperforming the other funds in his sector.
Funds targets are therefore expressed in the following two ways:
- To be consistently in the top 10% -25% of funds within that sector
- To beat an index (for a UK fund, The FTSE) which has companies in a similar geographic region/business region
Past performance and future risk
There is a popular saying amongst Fund managers which simply can’t be
discounted. ‘Past performance is no guide to future performance’ is advice
simply forgotten by some financial advisers and investors who base targets for
growth on previous markets conditions.
Though this seems like a reasonable thing to do, Modern financial markets are
not predictable via past results. So if a fund achieves 40% growth over two
years then there is no guarantee it will achieve this in the future (Unless the
fund manager believes this is possible and offers this as a target).
For example a USA growth fund is restricted to US companies. If this economy does well then the fund performs well, however if the economy takes a downturn then the fund cannot be expected to perform at the same level as previously known.
There is also the factor of relative performance. If a fund performs well in the past it may not continue to do so. Rolling a dice 6 six times cannot be assumed to result in the result set 1,2,3,4,5,6. Therefore the chances of the markets moving in a particular direction are not weighted in any particular direction. This doesn’t mean fund management is a purely chance based profession but the highest performing funds in a section are not usually the highest performing fund from previous years nor will be in the future. Instead a good, consistent research and management policy with consistent returns should be factors when deciding upon a fund.
Inflation and its affect upon your money
Inflation is a factor which cannot be discounted when considering an investment.
If you invested 1,000 pounds in 1970 and received 10,000 now would you be
unhappy? You should be. Inflation rises would have wiped out the value (or
buying power) of this money so that it would in fact be worth less now then it
did in 1970.
This means what ever percentage you are quoted for an investment you may always want to take into account the effect of inflation and knock a few % points of the quoted returns.
Our industry has historically recommended specific fund managers or insurance companies such as, Axa Sun Life, Norwich Union, Scottish Equitable, Invesco Perpetual, Jupiter, M & G etc., but the market is now moving towards what is termed ‘a fund supermarket’ which gives you access to a number of fund managers and considerably more funds.
This enables you to cherry pick investment areas, making global investments much easier, and should you wish to switch funds also reduces the costs considerably.
These funds are run by ‘asset’ management companies and not insurers. Their sole business is investment management and over the long term we would expect these funds to outperform the majority of their life assurance company peer group. Many of the funds we look at exhibit two key characteristics :
- Strong Research Ratings – The way in which a fund manager carried out its research and its adherence to the processes are measured by external ‘credit’ agencies. The assumption being that if the research has been instrumental in [past performance and can be specifically attributed to that process, then as a guide to the future ‘research capabilities’ should be given greater emphasis in the selection of managers than pure performance.
- Reward for Risks Taken – In order to ascertain whether a manager takes the appropriate amount of risk for the investor to receive an appropriate return; volatility adjusted returns are used. These come in the form of a ranking system. This system filters out managers who potentially have historically produced better returns that the average, but have exposed investors to additional risk.
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