THE SEVERE downturn in world markets from 1990 to 1993 was not only a potentially catastrophic time for investors, but for their advisers as well. Imagine trying to sell investments that had been falling in value consistently and which were still headed further downwards.
In order to survive, some advisers turned their attention to what are generically known as ‘alternative’ investments. Two of the most popular of these are property-based investments, such as Student Accommodation Funds and Hedge Funds.
When all else was failing, property prices were continuing to rise and at an ever increasing pace. Here was an asset that was producing an almost guaranteed profit in a short space of time and so, quite naturally, billions of pounds poured into it and out of more conventional investments.
However, not everyone could afford to buy a complete property, or they wanted an income, but didn’t want the costs and the hassle associated with letting. So, the fund management industry got its collective heads together and came up with an alternative to direct property investment called the Student Accommodation Fund. The fund managers would buy or lease university halls of residence, transform them into state-of-the art apartments and then rent them to students. The rents paid would provide income for investors and the capital value of the property would provide capital growth. For a number of years that is exactly what these Funds did.
As with all investments, however, the key to success is knowing when to sell and then having the courage of your convictions to follow it through. A profit is not a profit until it is has been realised. Unfortunately, for investors in these Funds, the managers have been victims of their own success. Money poured into them at such a rate that they simply could not find enough projects to invest in. They, therefore, had to retain the excess Funds on deposit, which diluted the income yield, not to mention the overall return, and by the time that charges were deducted there wasn’t a great deal left for investors. This remains the case today.
In addition, one of the better known managers has admitted that they are concerned about future property prices. This means that as well as a diminishing income return, investors can probably look forward to capital losses as well. Certainly, the returns on the Student Accommodation Fund, available through the Friends Provident range of investment plans and advised on by Brandeaux, have been lower than were being projected by a number of advisers in the recent past. Despite this, some are still recommending these Funds today.
Over the 12 months to September this year the fund produced a total return, that is income and capital growth combined, of just 5.7 per cent. Over the last three years the compounded annual return has been only 6.3 per cent per annum and this takes no account of charges.
Another favourite of the alternative investment lobby has been the Hedge Fund. These are sophisticated, high risk investments that aim to provide positive returns whether the stock market rises or falls. The fund managers exploit arbitrage opportunities in equity, currency and bond markets across the globe. Charges on Hedge Funds are high compared to ordinary retail investment funds, because a large slice goes to the fund managers in performance related fees.
They were easy to sell when markets were inexorably moving downwards, as the Hedge Fund managers, who were betting on continuing falls, were able to make easy money and advisers could point to positive returns in falling markets. Now that the downturn has ended, and it is much more difficult to predict whether the next move in markets will be up or down, Hedge Fund managers are again finding it difficult, if not impossible, to live up to expectations.
Over the last decade, Hedge Funds have produced an average return of 11 per cent pa, but the average return this year has fallen to just 2.75 per cent, according to the CSFB Tremont Hedge Fund index. Since the start of 2004, around 43 per cent of Hedge Funds are showing losses.
Industry experts are now saying that, as with the Student Accommodation Funds, Hedge Funds have become a victim of their own success and there are no longer sufficient arbitrage opportunities to meet demand.
One major offshore firm of advisers, Towry Law International (TLI), offered a choice of Hedge Funds to their clients, and most of those who invested have lost huge sums of money. Indeed, it has been reported that this was the final nail in the coffin of TLI which has now ceased to trade.
Stocks, Bonds and Cash
It is my contention that now is the time to go back to basics and construct a balanced portfolio comprised simply of stocks, bonds and cash. The balance between each is something for you to decide with your adviser and will be dependent on your objectives and attitude to risk.
Stock markets made a substantial recovery in 2003, when a balanced spread of markets produced a significant positive return. This year has been more turbulent, but there has been a surge recently that, at the time of writing, has taken the FTSE 100 index back above 4,700.
High Yield Corporate Bond Funds provide an attractive rate of income and excellent prospects for additional capital growth in the current economic climate. These Funds should ideally be wrapped up in a Personal Portfolio Bond for maximum tax efficiency.
Cash doesn’t have to mean sterling, think about a spread between sterling, dollars and euros.
More conventional, proven investment assets are the way to make good, steady progress without the attendant risk of many ‘alternative’ investments. Diversification and asset allocation are the key issues. Do not be easily tempted by ‘flavour of the month’ offers. It is often a case of ‘now you see it – now you don’t’ and no-one but the foolhardy wants their money to be included in this risky opportunism!
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