Published: Wednesday, 8th September, 2010 3:24pm
Bonds and emerging markets add diversity
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What makes for a 'diversified' investment portfolio?
Many believed it was achieved through a traditional managed fund you bought from your favourite life assurance company that included stocks and shares, cash, bonds and property.
It was certainly the number one choice for a generation of parents trying to save for their children's college education and even for pension fund members contributing into the company pension scheme.
Sadly, these managed funds - or mutual funds as they are known in the US - have returned nil to very low performance figures over the past decade and their high charges and fees have also been a major drag on fund performance. These ubiquitous funds have gone some way to discouraging fund investment altogether in recent years.
Times have indeed changed. Many commentators and advisors are steering away older clients in particular from western stock markets generally, which they say are overpriced and unlikely to see any growth for many years.
Only specific stocks - 'global dominators' paying steady dividends are worth buying they say and even they will be subject to price falls.
Diversification of your investment portfolio, they say, has never been so important and it means spreading your exposure and your risk away from both single assets - like stocks and shares, property, cash (the subject of last week's column or the public companies of a single country) - but away from single sectors (like financial stocks or retail or high tech) and even from away from a single country or continent.
One investment advisor I spoke to recently admitted that Irish people, compared to others; "are probably the least knowledgeable or sophisticated when it comes to managing their money.
They swing from one extreme to another. We've seen this happen to our national detriment in the way people overloaded on property and bank shares. We are easily misinformed. And lazy. We want someone to tell us what to do, what to invest in and ultimately, someone to follow over the cliff."
You need to judge for yourself if you fit this very critical assessment.
The return you've secured might give you a clue about whether it does or not.
Either way, it is certainly true that two investment assets products - bonds and emerging markets funds should be part of a diversified portfolio and have been notable for their absence.
Yet the former provides a fixed income (from the annual interest or 'coupon') plus the return of capital after the agreed term and the latter is where the world's short and probably it's long term growth is coming from.
Both assets can be purchased as individual direct investments (though with some difficulty in the case of emerging market companies); in the form of ETFs (pooled Exchange Traded Funds) or in the form of investment funds from life assurance companies, banks and from specialist firms.
Ireland's top life companies - Aviva, Canada Life, Irish Life, Standard Life, Zurich - all sell both bond and emerging markets funds, some managed by global companies like Fidelity in Irish Life's case and Blackrock Global in Aviva's, for example.
The likes of RaboDirect sell such investment funds directly from other big international fund management companies and have nil to low set-up charges.
Bonds
Bonds are sold by government and corporations and can be purchased individually (through stockbrokers) or in the form of funds of bonds. The risk that bonds/ funds could be vulnerable to high inflation (which many believe is increasingly possible in the near future) means that you can also buy indexed or inflation linked bonds/funds. Aviva's international bond funds produces only a 1.4% annual return whereas Zurich's Long Bond fund offers 3.2%, but if high inflation returns, the Aviva bond will produce 1.4% plus the inflation rate, thus protecting your capital. Both have their place in a portfolio.
The price you pay for individual and even pooled bond funds depends on the strength of the issuing country or corporation and the term of the bond. A good advisor can help you choose the one that is also age-appropriate for you: older people should certainly hold a greater proportion of bonds in their portfolio than a young person.
Emerging markets
As for emerging markets, they too should be part of a diversified, longer term portfolio. The National Pension Reserve Fund has now put 10% of the nation's pension savings into the new developing economies of the world, like India and China, Korea, Taiwan, Indonesia, Brazil, Chile, etc. where the population is young, growing, and has growing incomes and savings they want to spend on consumer goods.
Again, check out the top life companies' emerging markets funds, which over the last several years have, cumulatively, produced sizeable double-digit returns, even if the ride has been pretty volatile. Compare them, and their charges, to similar ETFs (which carry cheaper annual costs but require you to buy them yourself through a stockbroker account).
Ask your advisor about the great Antony Bolton's new Fidelity China fund, in which he has targeted companies that will provide the things that the emerging Chinese middle class wants to buy. China's stock market has been sliding all year, but the China-India Fidelity fund produced a 39% return this past year to July.
How much should you buy of bonds and emerging markets? Many cautious advisors suggest as much as the equivalent percentage of your age in the case of bonds (60% bonds if you are age 60) and at least 10% in emerging markets.
But it all depends on your appetite for risk, how much time your have, how much patience and how willing you are to take control of every investment decision you make.
