ARF Investment Fund Types

Cash & Deposit Based Funds

No surprise here, these types of funds invest only in cash and deposit based instruments. Such funds offer the greatest level of security in that they are typically the lowest risk funds available, so you won’t get any nasty surprises. Many ARF investors are now benefiting from recent interest rate rises meaning attractive fixed rate deposit options are now available for your ARF money

Government and Corporate Bond Funds

Government and corporate bonds are pretty straight forward. For example, the Irish Government or a major multi-national company decides it needs to raise 1 billion euro. They borrow money from investors with a promise to pay an annual income to investors of 1% and also a promise to repay the 1 billion in 10 years’ time. A bond is essentially an IOU with an annual income. The bond holder can sell the IOU if they wish to another investor. A bond fund then is just a collection of lots of different bonds held in a very large fund. High inflation and high interest rates during 2022 negatively impacted Bond but there may be a recovery in 2023 / 2024.

Equities
Equity or stock market based funds are plentiful and diverse. They range from equity funds that focus on a geographic region, for example US Equities, to funds that focus on an industry, for example ‘Green Energy’. Some would be considered riskier than others but they all have one thing in common – they have the potential to make and lose a lot of money in a short space of time, but almost all do and will produce a positive investment return over the long term. In fact, it is true to say that ARF investors seeking to make investment returns which would at least cover their annual fee, and inflation, will have to have some degree of exposure to equity based funds.

Commercial Property Funds

Most funds offered to ARF investors are commercial property funds (Office, Retail and Industrial) based in Ireland. Irish Property Funds have been performing very well over the past 10 years. Any property fund is essentially a collection of commercial property held in a single fund. It makes money when rent is paid by tenants and also by increasing property prices. Property funds work very well in a rising market but in a falling market they are possibly the worst type of fund to be invested in. This is due to the nature of the assets held. If for example the stock market starts to fall in value, you can always sell your shares at a moments notice. Property funds are different. If a substantial number of investors want to exit a property fund at the same time, there may not be enough cash held in the fund to allow all investors to exit. The property fund managers then must sell a property to raise more cash to allow investors out of the fund. Selling a property in a falling market takes time and the sale price will be compromised. It may take 6 months to sell a property so by the time it is sold investors in the fund will have seen a reduction in value of the fund. Rising interest rates also poses and problem.

Commodities and Precious Metals
Gold, oil, iron, grain and more. If you fancy a speculative gamble you might want to add some of these funds to your ARF portfolio. However, there are times when the argument for using such funds can be quite compelling. For example the price of oil fell in recent years from €100 per barrel all the way down to €40. It was probably a safe assumption that investing in oil

based funds at €40 per barrel was a reasonable call as the price of oil was most likely to move upwards from that very low point (which is exactly what has happened over the past 18 months).

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.

Traditional 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.