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From Accountingnet.ie In Practice
The traditional approaches to investing
Advocates will argue that in efficient markets, active management does not deliver the superior returns required to offset the higher charges. Therefore the recommendation is to choose a low cost investment vehicle, normally an index tracker and to a very large extent ignore the various swings or fluctuations in market valuations and prices. The benefits as I said may well be straightforward and intuitive. However, real life rarely fits any philosophy perfectly. Some of the drawbacks to this approach are as follows;
The second school of thought is the Active Management School. The principal belief here is that through the application of investment expert’s mental capital, one can produce superior returns, or lower volatility or indeed a combination of both. In return for this “superior” performance the investment charges are higher than is the case for passive investment. This approach is perhaps best typified in Ireland by the managed fund sector. Yet again real life can humble any philosophy. Here are some of the issues that Irish managed fund investors have experienced.
Absolute Returns investing - A new approach The current scenario when markets have moved beyond what is considered cheap and investors are looking for a reasonable return with limited downside, is leading many investors both institutional and retail to look to an Absolute Returns solution. What is Absolute Returns Investing? With the Absolute Returns approach investment managers aim to produce a positive investment return irrespective of underlying investment market conditions and direction. There are lots of different approaches that managers can use to produce the positive returns. They can invest in a wider range of assets such as, equities bonds, commodities and currencies. The key is the flexibility of their approach; they are not tied to a long only strategy, they can be short markets or if they are concerned that the market is going to fall, they can hedge core holdings. This is very different from the long only managed fund approach.
What Absolute Returns offerings can I choose from? There are several providers of Absolute Return funds in Ireland and I suspect that more will become available. Currently the following firms have Absolute Returns funds available on their platform. ·Aviva Ireland- via Blackrock Investment Managers
As the investment decision is very different from traditional managed funds, investors need to ask different questions to enable them to make a well researched and informed selection. Here are some of the things that I suggest you consider when reviewing Absolute Returns providers. 1. How do they invest and is it consistent with the objective of delivering the positive returns. Each of the different providers will have a different style or approach to meeting this positive return agenda. Some will be market neutral i.e buying one stock and selling a different one and profiting from the difference. Others will have an approach which is somewhat like the traditional managed fund with one key difference; they will actively hedge if they believe that the market is going to drop. Others will have a diversified portfolio of strategies which are constructed to perform well in current market conditions. The strategies can cover many different asset classes and the strategies dynamically change over time to reflect market conditions and opportunities. What is better, complicated or simple? When choosing an Absolute Return Fund manager some of the firms have prioritised an offering that has a simple approach to investing. The preference was for an approach that clients could easily understand. Given that we are looking to deliver long term consistent performance, I would not be concerned if a more complicated investment approach offers the best prospect for positive long term returns. Get your investment adviser to thoroughly research how each fund operates. That after all is what we investment advisers get paid for. 2. Track record Ideally you are looking for a long successful track record on both returns and volatility. Pay attention for stability of returns and how each fund operated in times of high volatility e.g post Lehman’s in September 2008. Whilst the past performance may not be replicated, a good long term track record gives some comfort on future performance. You should get both annualised performance figures and annualised volatility figures. A significant part of the appeal of Absolute Returns is lower volatility so don’t focus on performance at the expense of volatility. Ask how the fund has grown or fallen in size over the last 3 to 5 years. You can compare the performance of various managed funds versus absolute return funds to get a good feel for the differences in return and volatility.
As we are trying to identify which provider is likely to provide good long term performance it is worthwhile getting visibility on the investment team. You are looking for a broad team with good experience and a strong bench. I would have a preference for a team approach rather than a star manager.
Whilst it is not a necessity, I always take comfort if both the investment manager and investors share in the risk and return of the fund. This is not scientific, but if a company has their pension scheme invested in their own Absolute Returns fund, then this risk sharing with investors is a positive thing. There is a reasonable expectation that the fund manager will have their best managers working on that fund and that they will promptly pay attention to any underperformance. Make sure your own investment adviser is monitoring performance versus target and updates you if the performance is materially deviating from target. 5. Costs As part of the cost benefit analysis of Absolute Returns funds versus the traditional options, you will need to identify how much more Absolute Return funds cost in terms of annual management charges. Find out if there is a performance fee attached as this may well reduce the return you achieve. I have personal preference for funds that have an explicit performance target. Whilst there is no guarantee that the target will be met I feel that an explicit target of X% above Euribor gives more clarity and focus.
As an Investment adviser I see that there are strengths and weaknesses in all of the three investment philosophies. However as practitioners we are not meant to be believers in any one approach but to consider which approach is best suited to the current conditions and the client’s preferences. Absolute Returns investing is an option that you should absolutely consider. Get your investment adviser to help you review the current offerings and come to your own informed conclusions as to whether or not Absolute Returns investing suits your objectives and preferences. Who are Absolute Return Funds suitable for? With the objective of smoother returns and lower volatility, I believe Absolute Returns investing should be at least considered by the following investor types;
Impartial is an Authorised Adviser regulated by the Financial Regulator. Its principal adviser and owner, Vincent Digby is a Qualified Financial Adviser. In addition, he has more than twenty years of front line Capital Markets trading experience. From 1995-2007, Vincent Digby held senior management positions in Bank of Ireland Global Markets. As Head of Trading in Dollar, Sterling and Euro Money Markets, he had a 100% track record in exceeding targets. Before establishing Impartial, Vincent Digby held the position of Head of Funding Bank of Ireland Global Markets from 2003-07. Vincent Digby is internationally known as an expert in Irish Covered Bonds or Asset Covered Securities.
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