In our first article we looked at some of the broader investment challenges facing ARF investors.
Last week we looked at some specifics relating to traditional Deposit Funds, Bond Funds, Property Funds, Equity Funds & Commodities / Precious Metal Funds.
This week we will look at some of the more complex fund options available on the Irish Market. These are:
- Absolute Return Funds
- Multi Asset Funds
- Capital Secure Funds
- Absolute Return Funds – Absolute Return Investing aims to produce a positive return over time, regardless of prevailing market conditions. Even when markets are falling sharply, an absolute return fund still has the potential to make money. They are different to traditional funds in that traditional funds make money by generally buying an asset at a certain price and selling it at a higher price. Absolute Return investing also allows the purchase of assets in the expectation they may fall in value, and believe it or not it is possible to make money by betting on an asset falling in value! By their very nature Absolute Return funds will not make as much money for investors during a rising market but by their design they will also protect investors more during a falling market. Assets held in such funds can be varied and include equities, currency, cash, bonds and more. Absolute Return funds would generally have a conservative objective for investors – for example the aim of the fund might be to outperform the prevailing ECB Deposit Rate by 3% per annum over a 5-year period.
- Multi Asset Funds – Multi Asset Funds are funds which seek to invest in almost all asset classes in a single fund. A multi asset fund will have exposure to a wide variety of asset classes. Most Multi Asset Funds on the Irish Market are packaged by risk profile, so investors can pick a low or high risk Multi Asset Fund. For example, a low risk Multi Asset Fund might have a maximum allowed exposure of 20% equities with a minimum of 50% in cash at all times, but a high risk Multi Asset Fund may have a maximum allowed exposure of 80% equities with no cash holding allowed. Multi Asset Funds have become very popular with Irish investors over the past 10 years as investors now want to have greater control over choosing the nature of the risk associated with their investment, ARF or otherwise.
- Capital Secure Funds – Capital Secure Funds are generally fixed duration funds, for example 5 years, with the promise of a return of capital or the return of a set minimum amount of capital, for example 95%, at the end of the investment term. There is usually a bank underwriting the capital guarantee and the fund will track the performance of a stated Index. These funds are at the low risk end of the spectrum as they offer a high degree of capital security but the trade off for the high level of capital security is that investment returns can be quite modest. Capital Secure Funds should really be seen in the context of being an alternative for deposits. For example, when prevailing interest rates are very poor capital protected funds give investors some chance of beating prevailing interest rates. However, if prevailing interest rates are very good the modest returns on capital secure funds, allied to the fact that investors must commit to a 5-year term, may not seem as appealing.
Traditional Capital Secure Funds have begun to be replaced by a newer form called of funds called Soft Capital Protected Funds. These new Soft Capital Protected Funds are commonly referred to as ‘Auto – Callable Bonds’ or ‘Kick Out Bonds’. We will look at these in more depth next week as they can be quite complex, but also offer the potential for impressive investment returns with a degree of capital protection.
Thank you for reading,
Michael Coburn BBS, QFA, FLIA, LCOI, RPA, SIA
For any queries on your ARF investments, please contact me on 053 9170507 or email mcoburn@arfireland.ie
or call Joanne on 053 9170507 email jfenelon@arfireland.ie
