Sometimes plain vanilla is best

You’ve invested in equities and bonds, should you now consider alternative assets?
You may have seen funds advertised which sound more interesting and seem to offer better returns, such as investing in overseas property developments, student accommodation, timber and fine wine.
It can be tempting, but for most investors plain vanilla is best. It is not just a question of sticking to tried-and-tested investment assets, but also of investing in regulated products which do not have complex, hard-to-value structures.
Funds which invest in non-traditional scheme assets are known as Unregulated Collective Investment Schemes (UCIS).
A variety of these schemes have been on offer over the last decade or so, particularly in the offshore market.
Unfortunately, many of them have been suspended or liquidated, leaving investors without access to their funds.
Before the credit crunch hit, it seemed everyone was talking about student accommodation and ground rent funds. Many advisers sold them and they were on the panel of many life assurance companies. But being popular does not make them safe, and funds have failed.
For example, a well-known UK property investor suspended its eight funds in July 2013, citing market liquidity and pressure from investors wishing to redeem their investments. Around £1.5 billion was invested in total, domiciled in the British Virgin Islands and Isle of Man.
Another high profile case is that of an Australian firm which placed itself into voluntary administration in February 2013, and suspended its eight funds. One of them invested in Australian mortgages, with an estimated fund size of £2 billion.
The law firm Regulatory Legal Solicitors is already representing investors caught out in such funds. It is asking low/medium risk investors invested in offshore-based property investment opportunities to get in touch to help them recover their monies.
Tobias Haynes, one of its paralegals, said that investors are typically told of exaggerated returns, low risks and various guarantees. However, in fact, “funds in overseas schemes, which are unregulated, are high-risk, offer no access to redress for investors through regulatory means and are ultimately difficult to verify or value. Caution should always be taken when entering into such volatile products, and they are a definite no-go for retail clients.”
UCIS have been widely sold and have failed widely too. Other examples include funds invested in the build of holiday resorts; a legal financing fund and a fund which invested in Guernsey domiciled investments, and traded life policies funds.
The UK’s Financial Conduct Authority (FCA) has had concerns about a number of UCIS funds and how they have been marketed. Last year it reported that consumers have lost substantial amounts of money investing in UCIS funds and similar products in recent years, and found that three out of every four sales to retail clients were unsuitable for the investor.
It warned: “These assets may sometimes appear to offer better returns with less volatility than more usual investment types, but they are often actually higher-risk investments. For example, they may be illiquid, difficult to value and prices may be volatile.”
In the FCA’s view, UCIS and close substitutes are unlikely to be suitable for the vast majority of retail investors. Under new regulations from this year, they may not be promoted to the general public and can only be marketed where an exemption is available – for example, for individuals who are certified as sophisticated or high net worth investors.
Even if you fit these categories, caution is still advised. “Sophisticated” investor funds tend to be complex with inherent risks. The “sophisticated” element is not always made clear to investors, so they may have little idea of the real level of risk they are taking.
Regulation is very important when considering a fund. Look at what body is regulating the fund itself, and evaluate the regulation of the adviser making the recommendation – they should carry a high degree of regulation and only recommend authorised funds from reputable jurisdictions.
You should only use advisory firms which carry out due diligence on everything they consider recommending to their clients, and preferably have not advised clients to invest in funds that have subsequently failed.
In summary, if it seems to be too good to be true, it probably is. Don’t risk your wealth.
Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. This promotion has been approved and issued by BFFM.
ByGavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com