Profit with no pain

Since my article The Basic Concepts & The Basic Products, markets have continued to tumble and I think it is topical and a very opportune time to look at two areas for investors who have suffered at the hands of the markets. We looked previously at the basic investment products available, but now I hope to cover investments that are suitable for an investor in the current economic environment.

Over the last eighteen months we have all seen headlines about speculation and fluctuation in the currency and stock markets and there is no doubt that Economies and Global stockmarkets have been having a very tough time indeed. We see headlines every day of large Global companies reducing their workforces and downgrading their profit predictions and a plethora of articles talking of a Global recession.

The reasons for this I do not intend to elaborate on here. However, given the economic fundamentals mentioned above, this should now be a period when you should consider investing in the major stock markets around the world. Individuals however, are reticent to do this. When you consider the following market statistics over the last twelve months, it is not difficult to see why

To use an analogy, if you were offered a car twelve months ago but you could buy the same car today at a discount of 29%, for a potentially limited period, would you buy? Or would you wait for the price to go back up before making your decision?

The main reason that people do not invest in periods like this is that the majority of people only invest on good news or when the market has gone up, when the real investment opportunities actually exist when the market has fallen. Indeed, even better to invest near, or at the end of a 'bear' market cycle. However, it is very difficult to predict when this may be.

Even though this is indeed an attractive time to invest in equity mutual funds (funds that invest directly into stocks and shares) there is still a great deal of uncertainty in the market. It is difficult to predict when the market will move in a positive fashion.

So what should they do with their money? Place it in a bank? It will certainly be safe, but there is a price to pay with only very low interest rates being offered. The investment opportunities that are proving very popular with international investors are those which offer guarantees and offer growth potential over and above what you could achieve on deposit.

One such investment is a With-Profits Mutual Fund, a very old and established type of investment offered by some of Europe's largest Insurance Groups. These funds offer a capital guarantee when you invest into them and pay an annual bonus to your policy, which once added, cannot be removed and that will not go down in value. On top of this the fund allows investors to participate in the profits of the fund by adding additional bonuses called 'Terminal Bonuses.'

These are not guaranteed, and are added according to how well the underlying assets of the fund perform. These funds are legally obliged to hold reserves back in order that the bonuses continue to be paid on an annual basis, despite what economic conditions may be. In essence the funds hold back profits from the 'good' years to give to investors during 'poor' years. The years 2000 and 2001 have been a very good example of this. The markets have performed badly as the previous figures show and have shown losses but the With-Profits funds have paid out these bonuses out of their reserves.

These investments are low risk investments because the value has no direct link to market conditions.

The other area that is popular with investors at the current time is alternative investment strategy mutual funds which invest in a variety of complex financial instruments and vary in degrees of investment risk ratings. There are many low volatility, low risk funds available and these funds aim to provide absolute returns (a stated level of investment growth each year) to investors. These funds thrive on market volatility as that is where the bulk of their gains are made. These gains can be achieved whether stockmarkets are rising or falling which differs greatly from equity funds or direct stocks and shares which, can only achieve gains when they rise in value with the markets. There are also funds of this nature that offer capital guarantees to investors.

As stated in my previous article, the key as always, is to have a spread of assets that seek different opportunities for investment growth. You will see me repeat this many times over the coming months.

Ivan Doherty
ipd@ifg-asia.com

Ivan Dohety MLIA (dip) is Chief Operating Officer of IFG Asia. Part of The IFG Group PLC and registered with the Ministry of Finance in Japan to give investment advice.

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