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THE IRISH TIMES

InvestmentToday

A SPECIAL REPORT

Friday February 15, 2008 Editor: Gary Quinn Telephone: 01-675 8283 E-mail: specialreports@irish-times.ie

Making waves in a global market Skilled investors will seize the opportunities being presented in our current weaker economy, writes Éibhir Mulqueen

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he credit crunch, slower global economic growth and a loss of business confidence would seem to be an inauspicious beginning for an investment management strategy for 2008. But as Ryanair’s Michael O’Leary reminded the world recently, some people would welcome “a good deep, bloody recession . . .” Cutbacks in some markets provide a ready opportunity for risk takers to buy in cheap. Whether a recession is imminent or not, the retraction in some markets has stimulated interest from people who believe they are getting bargain prices. According to Jennifer Richards, head of Standard Life Investments, investors are doing deals in Irish residential property at up to 20 per cent below peak prices secured in late 2006. “Residential and commercial property prices have softened here in recent months. Yields or returns have consequently improved, attracting bargain hunters with a medium to longterm view,” she says. Property abroad continues to attract investment and Richards says Irish investors are identifying buying opportunities in the UK against the backdrop of a falling interest rate there. Investment houses take the same tack as Ryanair when there is a downturn in the market, saying that this is when skill is separated from luck in making profitable investments. “The few skilled investors will seize the opportunities created

by this more challenging environment whilst the majority will wait and arrive to the opportunity too late,” says Davy Private Clients’ head of alternative investments, Paul Giblin. He cites as a recent example of this approach the setting up of “our current opportunistic property company”, established with Draco, the UK property investment specialist and long-term Davy partner. “The recent turmoil in credit and financial markets has helped push UK property yields out by approximately 2 per cent thereby causing a fall in value of between 20 per cent and 25 per cent,” adds Giblin. “However, the principal sellers of these assets at present are forced sellers and these sales are happening at a time when occupational markets remain strong. Davy and Draco believe that commercial property prices will recover as markets stabilise and that at current price levels prime UK commercial property represents good value.” HSBC Private Bank, has also taken note of the UK property trend, pointing out that there have been several requests from clients looking to gear up to go back into that market in the next quarter. However, according to the bank’s head of global strategy, Frederik Nerbrand, mature markets such as the UK and the US will continue to slow, “with a diminished appetite for real estate amongst institutional investors and debt-backed buyers.” “Distressed stock in these markets should provide some interesting opportunistic investments for those correctly placed and with the right local expertise. The main risk in our view is the potential indiscriminate foreign investment in the asset class which may cause overheating in the near term,” he says. He believes that despite earnings estimates expected to be cut over the next quarter, the US economy will avoid a deep recession, aided by its ongoing monetary policy support. “As such, we believe that investors will be rewarded handsomely for taking risks following the recent sharp sell-off in markets. Within our equity strategy, we focus on large

Jennifer Richards, head of Standard Life Investments

The race to grow: ‘The UN estimate is that between 2005 and 2025 some 673 million people will move to urban centres around the world.’ Photograph: Getty Images cap companies and healthy balance sheets, while we look for opportunities on weakness in the financial, healthcare and information technology sectors.” Nerbrand expects to see wider property opportunities in the major emerging markets of Latin America, India and China as urbanisation intensifies. The UN estimate is that between 2005 and 2025 some 673 million people will move to urban centres around the world. “This is more than twice the population of the US. Our expectation is that real estate prices will continue to rise steadily and it is clear that the key to successful investments will be the selection of the very best local developers and real estate managers to invest alongside,” he

adds. Although positive about investing in certain US-based equities, HSBC is less sanguine about European equities, not least because the European Central Bank is more restricted in its policy movements. “While rate cuts are already coming thick and fast out of the US, inflationary pressures mean the ECB appears less willing to come to the rescue of markets and risk falling ‘behind the curve’,” adds Nerbrand. However, he believes the eurozone bond market presents opportunities and HSBC is currently maintaining its strategy of accumulating bonds in the three to seven-year sector of the euro yield curve. Standard Life Investments is also plugging US equities over

Prepare now for smoother sailing in the years ahead Emmet Ryan In investment you have to take the rough with the smooth and right now there seems to be an abundance of rough. The investment market is far from confidence inspiring at present and the good times which have only recently past seem like a distant memory to the more pessimistic amongst us. Still, there is no benefit in being glum, times like this have come before and with the right moves they will pass once more. “We’re clearly in a very challenging environment right now,” says Noel O’Halloran, chief investment officer with KBC Asset Management. KBC Asset Management is a subsidiary of the KBC Group, which was formed in 1998 and operates in over 30 countries. As of the end of last year KBC Asset Management has over ¤17.1 billion in assets under management. The asset management side of the business employs 500 staff and is responsible for the group’s asset management activities in the Irish, British and North American markets. O’Halloran says the cyclical nature of markets is having a direct impact on the current state of affairs. “Investment markets are cyclical, they always have been,” he says. “They revolve around economic cycles, around cycles of risk and cycles of sentiment,” says O’Halloran. The current trends in these cycles bear grim reading for those with interest in the investment market. “Clearly now the economic cycle is downward, as is risk, which leads to fragile sentiment,” says O’Halloran. “You could have turned that on its head 12 months ago.” A year is a long time in the investment markets and the mood of misery that is overwhelming many was far from the minds of many investors not so long ago.

‘The general message that’s been happening over the last couple of years is diversification,’ says Noel O’Halloran, chief investment officer with KBC Asset Management “Everybody today is on gloom watch, this time last year they were all on opportunity watch,” says O’Halloran. The knock-on effects of global economic issues are the cause for so many investors to lose their smile in recent months. “The subprime issues and the losses associated with them are obviously partly to blame. That in itself though isn’t the major cause for the downward turn,” says O’Halloran. “The banking sector has repriced risk and it has become more difficult for people to borrow,” he says. “That is the broader issue that has concerned investors.” With borrowing becoming more of a trial for investors, the knock on effect is seeing the markets feel the squeeze. There are moves being made though to try and ease the pressure, or at least to prevent any further damage being caused. “Authorities have woken up to the problem and the markets are moving from reverse into neutral,” says O’Halloran. Focussing on the current woes

of the market is important but investors should have an eye on finding a route back to prosperity. The areas of the market that are falling may not return to their previous levels for some time. With this in mind it is probable that it will be a different sector that makes a move upwards. “Typically every new cycle is different to the one that went before it,” says O’Halloran. “I would expect it to be something new and not about real estate. The new cycle may be led by emerging markets,” he says. While these new areas of investment interest prosper, the picture may remain dark for the sectors currently on a downward curve. “A lot of areas of this downturn will still be going on when we’re in recovery mode,” says O’Halloran. There may be good times ahead in the medium- to longterm but, for now, investors must acknowledge that there is a lot of work to do to drag the market out of the mire. “In the short term we have to

recognise that we are in a very uncertain phase,” says O’Halloran. In order to get over this hump investors need to adopt a sensible approach which will not be overly cautious or overly risky. “It’s about structuring your portfolio in a balanced way,” he says. “It’s about not having major bets in place unless you have a strong conviction about something in particular.” By adopting this approach investors can be ready and in a solid position when the climate becomes more tolerable. “In the medium term that balance between risk and reward should relax,” says O’Halloran. While investors will have to wait for the upturn to occur, there is still something to take from the downward phase in the current cycle that can aid investors in the next one. As the saying goes, you can learn a line from a win and a book from a defeat, so investors in this current climate should try to take something positive out of the current downward cycle. Investors should look at the moves they made and figure out how to improve their performance in future and see what moves will result in them being winners next time out. One of the key lessons being learnt from this current cycle is the need for diversification. “The general message that’s been happening over the last couple of years is diversification,” says O’Halloran. “Clients are now focussing on more diversified financial products and are diversifying their portfolios,” he says. This move towards diversification shows that the current downward cycle may not have been solely punitive to investors. Many people have felt the pinch in recent times but if they can learn from this rough period it could help them enjoy some smooth sailing when the pressures on the market begin to ease.

European ones, saying that because US stocks in general have priced in more bad news than their European peers, they are offering better relative value. “Historically, global investors move into US stock during volatile markets, partly for defensive

reasons and partly for the transparency of the US market,” says Richards. “A further reason is investor anticipation of US interest rate cuts earlier and thus moving out of recession sooner than other countries,” she says.

Richards points out that the dollar has already traded up against the euro in recent weeks, a trend which she believes will continue and which will boost returns for euro investors in American assets. “We expect a dollar rally in 2008 as capital is

repatriated to the States,” she says. From a performance perspective, she says that single-theme asset classes such as property or particularly concentrated styles have suffered most recently. In contrast, most pension schemes have performed relatively well because of their diversified nature. “The big picture is that we’re very positive on pensions and investment sales in Ireland,” adds Standard Life’s chief executive, Michael Leahy. “Our demographics support continued growth until 2032. Irish baby boomers are roughly in their late thirties to early forties and will hit their peak saving and investment years in about their mid-forties to early fifties. This means that the life and pensions business is expected to grow strongly for many years. You may have the odd slow year predominantly driven by market sentiment which we’re probably witnessing now, but that will be counter trend.”

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A Supplement to THE IRISH TIMES

Friday, February 15, 2008

InvestmentToday 2

A SPECIAL REPORT Interview: Delta Index

Spread your wings in new directions Spread betting is now an established and effective way of tailoring your investment for real gain – but you do need to do your homework. Éibhir Mulqueen reports

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pread betting is now an established feature of the Irish investment market, offering a tax-free alternative to the traditional buying and selling of shares on stock markets. Since being established in the UK in the mid-1970s, it has been offered by some Irish traders to investors interested in an alternative form of investment that draws on much the same knowledge as equity investment. Delta Index has been trading in Ireland since 2002 after it was founded by actuary Conor O’Neill and technologist Michael O’Shea. “The growth in the business has been really encouraging and we have grown from 12 staff two years ago to around 40 today,” says Liam O’Gara, senior market analyst. He sees a big shift in attitudes as people realize that although using a spread betting company differs in some fundamentals to using a broker, “the positions are based on the same underlying asset”. One of the most significant advantages spread betting offers

is the tax free gains, he points out. “If you make ¤10,000 trading with us you keep it all. If you make ¤10,000 trading with a stockbroker you need to pay ¤2,000 in capital gains tax. The downside is that because you are trading outside the tax net any losses you make can’t be offset against other capital gains.” However, spread betting is also cheaper because there are no Stamp Duty charges or broker’s fees payable. “Our fees are in the difference between the sell price and the buy price, what we call the spread. In effect, a client who is buying, say, oil needs the price to go up by about 10 cent a barrel to cover the cost of the trade in full,” says O’Gara. Spread betting offers other significant advantages to share trading. If you take the view that something is overvalued, you can go ‘short’, making a trade that makes a profit as the price falls. In effect, you are betting on the price going down. “That’s especially important today as we are in a bear market,” says O’Gara. Delta also offers leveraged trading, meaning that if you want to trade ¤50,000 of crude oil, for example, you only need to deposit around ¤5,000 into your trading account to support that trade in case it goes against you. With access to a range of markets, such as the Dow Jones index, US shares and commodities like wheat, gold and silver, people can choose the asset they are most comfortable with to spread bet on. A graduate in management science and information systems from Trinity College, Dublin, O’Gara worked for five years as a research analyst with IIU Asset Strategies, researching trading models and trading both currencies and European equities. He moved to Delta Index in 2006 where he heads a team that looks after clients, showing them how to trade and how to use financial spread betting. “In addition, I am responsible for developing our products and services to help with this goal.

Liam O’Gara, senior market analyst with Delta Index

Even though people are betting on the same underlying asset in share trading, spread betting does involve a learning curve, involving a different way of thinking This includes offering education services and events with distinguished speakers. We are also increasing our offering with trading tools and calculators to help clients make their trading decisions. My background in the markets allows me to fill a knowledge gap for clients and provide regular newsletters on the current happenings of the worlds financial markets,” he says.

Despite the fact that people are betting on the same underlying asset as in share trading, O’Gara says that spread betting does involve a learning curve, effectively involving a different way of thinking. His advice for people who have not approached it before is: if they are readers of the newspaper business pages, have some appetite for risk and have self dis-

cipline, they can spread bet. Like share trading, spread betting involves risk. O’Gara says that for the long-term investor who many want to hold an asset for 10 years, “shares are a very valid instrument”. For spread bettors, the risks can be controlled and managed, he says, but they are still there. “With that accepted, any investors need to inform themselves of

the tools at their disposal. We are happy to answer any questions that people might have and support them in making their decisions. “We regularly run calculations for people who call us to see whether they should be using a spread bet or buying shares. But the facts around capital gains tax, breadth of markets and leverage mean that, often, a spread bet is

the only sensible answer,” he says. However, he cautions that clients need to be absolutely clear about exactly what they are doing when they make a trade because of the potential for accumulated losses. “Spread betting means that you trade on a small price movement, usually a cent, so every time a price goes in your favour you

gain the amount that you have staked per cent. If it goes against you, then you lose that amount for every cent move,” he says. In recognition of this danger for clients, in 2005 Delta developed one-to-one sessions to stop them getting it wrong. “Although this costs a lot of our time, it has meant that our clients are well cared for and know what they are doing before they put a trade on,” O’Gara says. He advises people to think about the risk and the potential loss of a spread bet rather than the upside before entering any trade. “There is a temptation to spend the proceeds of a trade before you have even put it on. We have a number of tools around managing risk, including automatic stop loss orders, and there is even a risk calculator on our website that people can download. “The one-to-one sessions that we do are mostly about risk management and, again, we would say to clients, ‘don’t press the buttons on any financial transaction until you are clear on what you’re doing. If you’re not, ask your supplier and they must explain it clearly, otherwise just walk away’.”

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The Irish market will rebound, says Alan McQuaid of Bloxham Stockbrokers, but perhaps just not with the ferocity of recent years. Christine Bohan reports

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or anyone planning on making an investment in the near future, there is good news and bad news. “With all the turmoil in the markets in the last few months, coupled with the credit crunch issue in the US, you’d have to be a brave person to say that right now is the time to be putting money in to equities,” says Alan McQuaid, chief economist with Bloxham Stockbrokers. At the same time, commodities such as gold and oil are doing well. “Commodity prices have risen in recent times so if you had bought a commodity, you’d be well in by now,” says McQuaid. It’s an interesting time for investors. The old adage says that when the US sneezes, the rest of the world catches a cold – which would lead potential investors to be wary as the US teeters around the brink of a recession. However, strong opportunities for good investments remain. “Traditionally equities have been the best performing assets over longer time-frames,” says McQuaid. “So for someone looking at a period of say five or ten years, there can be great value in shares. “But in the short term, say a three-to-six month period, it’s quite possible that stock markets will fall further given the current uncertainty about the credit crunch issue and how it will be resolved, and also whether the US is going into recession.” The current climate of uncertainty has led to a flight to safety as fund managers desert equities and opt instead for government bonds, which have lower yields but which are guaranteed. There are reasons for optimism in Europe, however. “There are signs from the European Central Bank (ECB) that interest rates are going to fall in Europe which would help the Eurozone economy and Ireland in particular,” says McQuaid. “Since Ireland is a property play, it’s a lot more exposed – if there’s a worldwide slump in property prices and in the construction sector, that will hit the economy and banks hard. “Now if we get a rate cut or indeed, rate cuts from the ECB, you would assume that consumers would become more confident about buying, house prices would start to pick up again and

The price of commodities, such as gold, have risen in recent times. Photograph: Getty Images construction activity would rise again, so it would be expected that Ireland would be one of the main beneficiaries of lower interest rates.” If there were to be a serious down-turn in the world economy, commodities would be a key play, and right now they are doing very well. “Gold has risen sharply,” says McQuaid. “It reached up to $915.00 (¤627.68) an ounce recently; and while it has come back somewhat because the dollar has strengthened, I think it’s inevitable that we will see $1,000 (¤686.10) an ounce or higher – gold is one area where there’s a lot of money to be made. “Also oil prices have come back recently, and I suspect oil is another one that will rise again in the coming years,” says McQuaid. One sector that may come in to play in the future is water. “There’s a scarcity of water in the world and it’s an essential resource for human beings. Whatever about oil, we need water to survive,” he says. “Whether it’s buying water shares or companies that manufacture pumps to get water out of the ground, these are areas that people should look at going forward.” While traditional safe investors tend to focus on the Irish, European and US markets, McQuaid suggests that there are strong opportunities for invest-

ment further afield. “There’s great potential in emerging markets such as Brazil or China, but people are often wary about their exposure to these countries because they’re not fully au fait with all the rules that are at play. “But China and India, for example, have been two of the powerhouses of the world economy in recent times and that trend is going to continue, making shares in those countries likely to be very attractive in the foreseeable future. “Professional investors and private clients will probably also be looking at the former eastern bloc European countries coming into the fold as a way of getting higher returns.” Even if the US goes in to a serious downturn, it’s likely that countries such as India and China would come through somewhat better than Europe. “There has been a decoupling in certain areas in recent years, so if the US was to go into a serious recession, while these countries wouldn’t be totally immune, they’d probably be better placed than most to cope with the downturn.” Small-scale investors in Ireland can often tend to be product-led rather than looking for the right product to suit them. However, it seems that the changing demographics in this country may be leading to a more

confident and dynamic type of investor. “Younger people now probably know more about what’s going on than their parents would – people now have laptops at home and CNBC on television, for example, so they’re able to follow the markets more than they would have done in recent years,” says McQuaid. “Whereas typically in stockbroking a private client would probably be in the older age-range and more likely to take advice from their broker rather than just doing their own thing, there’ll probably be a shift in this over the next decade. “Younger people are probably taking up a higher percentage of the investing portfolio in terms of equities. They themselves will have their own ideas and suggestions about what to do, as opposed to taking advice from the brokers.” McQuaid is pragmatic about whether Irish markets will resurge to the high levels they reached in recent years. “Ireland has had a rough time in the past 12 to 18 months, but it will rebound again. Whether it will get back to the heady days of high growth performance is debatable though. “The Celtic Tiger has roared – it is going to roar again, but probably not as loudly as it has done in the past.”


Friday, February 15, 2008

3 InvestmentToday

A Supplement to THE IRISH TIMES

A SPECIAL REPORT

New challenges: Surviving the rough

Diversifying investment options presents a simple means to manage risk

Finding ways to weather the storm Investors need to stay calm during economic hard times and re-assess their investment strategy, writes Emmet Ryan

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he current investment picture is not pretty and fears abound over the market’s future. A sensible approach in these tough times is necessary for investors to get through this rough patch. Times are tough, that’s not news, but the only way for the story to change is for investors to take the right steps now to ensure the health of the market in the medium to long term. “In all these markets where you have a correction it can be tough for investors,” says Alan Hickey, head of marketing with Setanta Asset Management, a wholly owned subsidiary of Canada Life. Setanta began life in 1998 and is exclusively focused on the business of asset management. Hickey says investors need to examine the markets to see where they can best achieve value from their investment. “They should be looking at equity market and investors prob-

ably should be wary of financials,” he says. Businesses such as Setanta are urging investors to keep a cool head in the current climate. These firms recognise that markets enjoy peaks and endure troughs. The key point to remember is that they do endure them. Markets take the beating, but eventually they climb back off the canvas, dust themselves off and get going again. “Now is not a time for panic; markets tend to be cyclical,” says Niall O’Callaghan, principal in Mercer Personal Financial Planning. Mercer is a consultancy firm that provides businesses with advice on human resources and on financial matters. The firm has more than 17,000 employees serving clients in over 180 cities and 41 countries worldwide. O’Callaghan says that rather than panic, investors should instead use this period to

During downturns, investors should remember that markets tend to be cyclical. Photograph: iStockphoto

re-assess their investment options. “Now is a good time to re-assess your attitude to risk and your investment strategy to ensure you are well positioned to achieve your financial goals,” he says. “Mercer Personal Financial Planning believes in a medium long-term approach to investing,” says O’Callaghan. “Unfortunately people tend to invest in the latest investment fad or in something that has a great recent track record,” he says. “This often leads to people investing in isolated pockets and towards the peak of an investment cycle.” Recent events can easily colour an investor’s view on the markets with some stock values

appearing to be bargains, but Hickey warns that there may yet be further pain in store for these supposed can’t-miss deals. “Stock markets are looking at better value than they were for quite some time,” says Hickey. “That said we’re not quite through the credit crisis yet and there are further earnings downgrades to come.” By taking a broader view investors can get a better understanding of what’s best for them. “Look at the medium- and longterm requirements of an investment, look at the risk-return profile,” says O’Callaghan. “Our philosophy is to encourage people to take a holistic view of their wealth and

Taking opportunities during the hard times Martin Cass, director of wealth management at NCB, talks to Peter McGuire about the future of the Irish investment sector

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he Irish investment sector is young and rich. The industry only really had an opportunity to flourish over the last decade, as a miraculous set of circumstances transformed Ireland’s economy and allowed enormous wealth to be generated. Now, as fears mount over a possible global economic slowdown, the Irish economy is facing into its biggest challenge in over a decade. The ability of firms at the cutting edge of Irish investment – such as KBC Asset Management, Pioneer Investment Management, Hibernian, Anglo-Irish Asset Management and NCB – to overcome these trends will have a direct impact on the economy as a whole. Irish investors in this dynamic sector are understandably concerned about stock market fluctuations. Martin Cass, director of wealth management at NCB, says that the company is well positioned to address the recent instability. “As regards current market turbulence, clients are understandably nervous. However, such volatility needs to be put in the context of a long-term investment strategy.” This long-term strategy is the focus of NCB’s Wealth Management division. Every year, it deals with vast sums of money. Presently, it has ¤1.7 billion under its management, covering the full breadth of the asset class spectrum. This includes stock market investments, property, private equity, structured products, cash management and investment funds. It offers custom built or bespoke solutions to meet the needs of individual customers. Like all investment companies, it has a simple mission: to protect and grow this money. It does so, says Cass, by marrying in-house expertise with third-party capabilities. The unit aims to preserve capital for clients. Like any other investment company, it aims to avoid stock-market losses. This has to be balanced, of course, against the need to grow capital and income by making strong returns on investments.

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Current trends have led to many investment firms placing a greater emphasis on the former. “There’s no such thing as a free lunch in any walk of life and any investment decision involves a trade-off between risk and return,” says Cass. “The prevailing uncertainty in the investment markets suggests that in the year ahead it might be tactically prudent to sacrifice some upside for an element of capital preservation. This would require giving a greater proportionate weighting than in recent years towards investments that achieve this goal.” Numerous asset managers, including the Irish division of international investment bank Merrill Lynch, have echoed Cass’s view that the investment market is facing a relatively poor performance in the coming months. The European Central Bank (ECB), citing inflation as a major concern, has been reluctant to cut interest rates – although it is expected that this will happen at some stage in the first half of this year. This has presented a problem for the European investment market. Irish investors have also had to contend with a major slowdown in the housing market, while consumer confidence has also been hit by a series of job losses in the manufacturing sector. Cass acknowledges that there are possible difficulties ahead, identifying two in particular. “Firstly, strange though it may seem, one of the biggest challenges for the wealth management industry in Ireland is awareness and client education. A lot of people are simply unaware of the methods that they can use to manage their wealth. For example, they don’t know about tax-efficient retirement planning. “Secondly, compared with their more experienced American and European counterparts, Irish investors are also very narrowly spread in terms of asset classes. These are, in particular, heavily ‘overweight’ property and ‘underweight’ equities. “Educating clients as to the merits of

having a diversified portfolio is another challenge for wealth management professionals,” he says. Recent trends suggest that, this year, Irish investors are looking at modest returns. However, Cass has cause for optimism. “Challenge equals opportunity and the current challenges mean that there are significant opportunities for wealth managers focused on building long-term relationships and growing with their clients,” he says. “Despite the current difficulties, the backdrop looks positive. Business owners and those who have generated significant wealth in recent years are seeking ways of preserving, diversifying, growing and passing on this wealth to the next generation.” Cass is confident about the future of the industry, suggesting that today’s successful entrepreneurs will inspire a younger generation to carry the investment sector forward. “This bodes well for the Irish economy at large in the years ahead. Indeed, it will provide investment opportunities in these private companies – a virtuous circle of sorts.” Identifying such opportunities is an area where NCB has been successful, he says, pointing towards its backing for Dr Eddie O’Connor, who established the renewable energy company Airtricity. This was recently sold to British utility Scottish and Southern Energy for ¤1.8 billion. Wealth management firms simply cannot afford to stand still, regardless of the state of the market. For Cass, there’s no doubting that the current turmoil will throw up many opportunities to make money this year. He suggests that, for long-term value, the local market is probably a good place to start, given its massive underperformance over the last year. “Though always vulnerable to the gyrations in sentiment on international markets, the underlying positive demographic story – the growth in the working age population – will provide strong support to companies in the financial services sector, for example, over the course of the next decade,” he says.

finances and to invest based on their medium- or long-term risk return requirements,” he says. “If they need access to the money in the short term then we would encourage them to hold the money in an interest paying deposit account.” Now is a time for investors to be choosy about what horse they back, says Hickey. They should learn critical information about the businesses they choose to invest in. “People need to be conscious of a company’s health on its balance sheet,” says Hickey. “They

should be conscious of matters such as where [the company’s] market is.” When assessing a potential investment it is important to think about what you are getting for your money, says O’Callaghan. “Question the promised level of return on an investment. Ask yourself how much risk you are taking to achieve this level of return,” says O’Callaghan. Investors need to look within themselves in order to understand their own capabilities for investment and what they require

from any investment. “The factors that should affect someone’s investment choices are their existing assets; their definition of risk; their tolerance for risk and their required return,” says O’Callaghan. “At various different stages there are certain asset classes that may look less expensive than others. However timing your entry into and out of different asset classes can be very difficult,” he says. “We recommend that people set medium- to long-term goals for their investment; decide on

their risk return requirements and create a portfolio that best meets their needs.” Now is the time for investors to step up and make the plans required to get them through the current rough patch. Diversifying investment options presents a straightforward means to manage risk. Investors should also look to take advantage of the tax incentives of pension investment and seek independent advice to help them create a portfolio that meets their needs. By taking these steps and setting out a plan with clear goals investors can get through the current slump in the market and come back brighter. In this game it’s not whether you get knocked down, it’s whether you get back up that matters.

Evolution in private banking comes from one simple philosophy. Assume nothing. At HSBC Private Bank Ireland we make no assumptions about you, your aims and aspirations. We are constantly evolving our services and accessibility to meet your changing needs. We’re opening offices to be closer to where you live and work. This way we can continue to develop a relationship based on mutual understandng, respect and trust to help achieve your financial goals. We are now open in Dublin at HSBC House, Harcourt Street, Dublin 2. For further information please contact Rory Quinlan +353 1 631 8300 rory.quinlan@hsbcpb.com www.hsbcprivatebank.com

About NCB NCB is one of Ireland’s leading investment firms, with interests in wealth management, institutional equities and corporate finance. Since its formation in 1981, the firm has always had an entrepreneurial ethos. In 2003, a management buy-out saw entrepreneur Sean Quinn become involved. He now holds a

25 per cent stake. “We have an added international dimension through our membership of the European Securities Network (ESN) – an alliance of investment firms across the continent – which enables us to apply our local knowledge in a pan-European context,” says senior market analyst Martin Cass.

HSBC Private Bank Ireland is the trading name of HSBC Private Bank (UK) Limited in Ireland

Martin Cass, director of wealth management at NCB


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Friday, February 15, 2008

InvestmentToday 4

A SPECIAL REPORT Getting started: A beginner’s guide

Know the basics before taking the plunge There are several basic decisions to make before you decide to invest your money. Caitríona McBride talks through what every investor should know before committing cash

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nvestment isn’t solely for the experts and whether you’re saving for a rainy day or a new Ferrari, if you follow the basics you can make a handsome profit on your investment. STARTING OFF The first thing to know about investing is that there is no ideal time or product to start investing in. The best investment choices are those you are comfortable with, so it’s important to be educated on what you are investing in. All investments involve taking on risk. It’s important that you go into any investment understanding that as well as making a profit, you could lose some or all of your money. DEFINE YOUR GOALS Decide what your goals are and what you are investing for. Ask yourself how much you want to

save or invest and what you want to get out of it; a new home, a new car, children’s education, retirement, and work from there. SORT OUT YOUR FINANCES The first thing to think about is whether or not you can afford to invest. If you are thinking of investing it is likely you have some surplus cash to spend. Sit down and take an honest look at your financial situation and work out what you earn, what you own and what you owe. To gain significant returns, consider your money out of reach for at least five years. SEEK PROFESSIONAL ADVICE The do-it-yourself approach may not be suitable for everyone and if you feel you could do with some guidance, then you should seek professional assistance. You can get investment advice

from most financial institutions that sell investments, including brokerages, banks, mutual funds, and insurance companies. You can also hire a broker, an investment adviser, an accountant or a financial planner to help you make investment decisions. Try to get several recommendations and shop around before making your decision. SELECTING AN INVESTMENT There are four basic assets you can invest in: cash, bonds, shares and property. Cash: This is considered the safest investment option, by investing your money into a deposit account where you have easy access to your funds, but it offers limited returns. Bonds: Government loans, or gilts, are the most common bonds

Before you make the leap of faith into an investment, know all your options. Photograph: iStockphoto in Ireland and are considered risk free. Corporate bonds are also an option, which are loans to large companies. Shares: You can buy shares in companies through your broker or through banks, insurance companies, or through a fund manager that invests in a broad range of companies on your behalf. The market can be a volatile place but you can make a significant profit and have the chance to buy and sell quickly. You have the option of joining an investment club, but do your research.

Property: This is a well-known investment option for Irish investors but in the current declining market one needs to tread cautiously. However, in the long term it can perform better than other investments and can offer tax incentives. Bear in mind it can be a slow process if you need the capital quickly. MANAGED FUNDS Managed funds are exactly that, an investment fund that is managed professionally by an expert fund manager who invests in groups of stocks or bonds. With managed funds, your money is

pooled with that of other investors to make one large single fund that gives an increase in buying strength. In exchange for an annual fee and other expenses, you get professional direction and instant diversification. Do your homework about the fees involved before buying a fund. HOW LONG? You can invest for the: short term, which is anything less than one year; medium term, which is between one and five years; or a long-term investment, which is anything over five years. It’s usually best to opt for a long-term

investment as it has the potential to make you the most money. DIVERSIFICATION Investors best protect themselves against risk by spreading their money among various investments, hoping that if one investment loses money, the other investment will more than make up for the losses. This strategy is called diversification or “not putting all your eggs in one basket”. If you are starting out with only a small amount of money diversifying your investments isn’t that important.

TAXES To maximise your returns, know the effect that taxes can have on what actually ends up in your pocket. Capital gains and Dirt tax, for example, could all have an impact on your return, so be aware of your own tax situation. KEEP EDUCATING YOURSELF Knowledge is a key to success in investment. If you’re going to invest in a company, make sure to do some research and reading about them, as it’s important you understand them. Business media and magazines can help you to identify opportunities.

Getting the skills to compete in the investment industry So you’ve watched Wall Street, got the sharp suit, the mobile phone and the investment instinct, but how do you break into the industry? Caitríona McBride examines the career path

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F you are thinking of a career in the investment industry, it’s highly likely you already know your stock from your bond and that the FTSE isn’t a form of flirting. But how do you go about it? Most of those who want to work in the investment industry have a business-based degree and go on to a specialised postgraduate programme. Others are already working in the industry and return to study

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to progress on the career ladder. There are also options available at third level if you don’t a have a business-related degree. Liam Gallagher is professor of finance in Dublin City University’s business school, and says that the financial services sector has increased significantly in the last decade. “Over the last 10 years the Irish financial services industry has grown dramatically, with the sector doubling in the last five years. Demand for courses that provide qualifications for the investment industry has increased from both students and the industry, and universities have responded to that need,” says Gallagher. But it’s a competitive industry to get into and when DCU introduced its MSc in Financial and Capital Markets, more than 300 people applied for the 35 places that were offered. “We look at a number of things when people are applying for postgraduate programmes. For the MSc in Financial and Capital Markets, which is a one-year fulltime course, we look at the degree the applicant has and the mark they got in that degree. “For the MSc in Investment and Treasury, which is a twoyear part-time course, you have to have worked in the financial services.”

Most graduates applying will have a degree in a business, quantitative or statistics related area. However, many universities consider people who don’t have a finance-based degree so those who have are qualified in an area such as English will need to prove an interest in the investment industry as well as, perhaps, a record of professional experience. You can then take a conversion programme like a postgraduate diploma before entering a masters. Prof Brian Lucey, associate professor of finance in Trinity College’s school of business studies, says that people are becoming more aware of the investment industry as a lucrative career and this is driving its popularity. “The industry has matured a lot and has grown outside Dublin to places like Cork, Galway and Belfast. Having finance as a profession can also open a lot of doors internationally and the majority of our graduates would go on to work in London and New York. “In Trinity, we are very aware of industry needs and bring industry experts and representative organisations, like the CFA and the Irish Association of Investment Managers, on board when we are developing new programmes.

“You have to give graduates the relevant industry skills, so we take industry feedback and academic feedback and there will be an overlap and we work from there,” says Lucey. He adds that people who want to get into the investment industry need three things: an ability to demonstrate analytical skills, numeral ability and to be comfortable with numerical content, and also to show some flair when it comes to their techniques. He says that the three courses Trinity offer that would be beneficial for a career in the investment industry are the Bachelor in Business Studies (BBS), the MSc in Finance and the MBA. The Chartered Financial Analyst Institute recently named Trinity its programme partner and recognises the industry relevant training provided by Trinity’s BBS. Dr David Edelman, academic director of the MSc in Quantitative Finance in UCD’s Michael Smurfit Graduate Business School, says that the investment industry is ideal for someone who enjoys solving puzzles and likes, and has an aptitude for, mathematics. “The Master of Business Studies (MBS) in Finance and, in particular, the Master of Science (MSc) in Quantitative Finance is

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A career in investment could take you around the world, but your journey will probably start in a third-level course at an Irish university, such as (clockwise from above) Trinity College Dublin, UCD or DCU

ideal for those who wish to get into the investment industry and for those who will be at the forefront of the next generation of strategies and products in the financial services industry,” says Edelman. As well as giving students a solid base in finance, Edelman says it is among the most rigorous MSc courses in the mathematical sciences programmes currently offered in Ireland. Gallagher says that he would advise somebody who wants to get into the investment industry to start off with a general business degree. However, if you’re certain of your career path, an undergraduate degree in quantitative finance is also a good option. “In the BBS undergraduate degree in DCU, students take a one-year placement, which is highly beneficial if you want to get a few years practical experience before going into a postgraduate programme. “If you’re a school leaver who is focused on a career in the investment industry, the BSc in quantitative finance is a fouryear degree including one-year placement where you cover a substantial amount of the skills you need for a career in this area.” Because the sector is becoming more competitive, a good qualification is no longer

always enough to guarantee a job in the industry. Many companies are now looking for employees that have good qualifications as well as professional work experience. “It’s very competitive out there and a lot of people who might go in with a broad degree that isn’t business-based might work for two or three years and find they cannot progress. A lot of employers are encouraged to support their employees if they want to return to study. “Employers are willing to accommodate employees because they don’t want to lose them. “Also, it’s of benefit to them because their employee will come back with more skills and will add value to the company themselves,” says Gallagher. For the future, Gallagher sees the sector continuing to increase and a continued demand for thirdlevel programmes, although Ireland’s financial services will have to compete internationally to secure their own graduates. “The Irish investment industry should continue to increase in future, although we are competing with London and New York to a degree, as well as Madrid, Berlin and Copenhagen. Finance is an international skill and you can travel the world with it,” says Gallagher.


Friday, February 15, 2008

5 InvestmentToday

A Supplement to THE IRISH TIMES

5

A SPECIAL REPORT

New trends: Looking further afield

New signs emerge of converging paths Fund managers are increasingly diverging into alternative investments, in the hunt for better returns. Christine Bohan reports

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here have been seismic shifts in the investment management world in recent years. In particular, the explosive growth in alternative investments since the start of this decade has fuelled an unexpected new wave of convergence and divergence within the industry. This growth can be seen in figures issued recently by the Irish Funds Industry Association (IFIA), which put alternative investment fund assets services out of Ireland at $700 billion (¤480 billion) – a 250 per cent increase since 2003. Among other effects, this boom has led to traditional long-only strategies converging with alternative investments, such as hedge funds, private equity and real estate, as managers diversify into new strategies outside their normal sphere of expertise. “If you go back even five years ago, there were no signs of convergence at all,” says Brian Clavin, leader of KPMG Ireland’s hedge fund practice. “It was very distinct and delineated businesses. It has become a lot more complex, however, and we’re now seeing the areas moving much closer together.” This new wave of convergence is one of the conclusions of a KPMG report produced along with consultancy firm Create, entitled Convergence and Divergence: New Forces Shaping the Investment Universe. The study was based on input from investment fund managers, pension funds and administrators from around the world. These were key players within the investment world; it was estimated that from just over 300 participants, the pension funds and managers who took part in the study had around $28 (¤19) trillion under management, while the administrators had $38 trillion (¤26 trillion) under administration. The report notes three principal convergence trends: firstly between long-only and alternative investments, as mentioned; secondly, between alternative investments, in a move known as “product widening”, for example, where private equity managers adopt hedge-fund techniques and vice versa; and finally within asset classes there is “product deepening”, where, for instance, a UK real-estate fund expands its portfolio into Europe. “The market is driving these different behaviours,” says Clavin. “There’s nothing like a volatile market place to make people examine the product that they’re offering and ask exactly what it is that people actually want from it. “Managers are looking at the different types of clients who want different products, and that is having a knock-on effect on how business is being done.” As long-only managers shift closer to the alternatives sector, that area itself is witnessing the convergence of hedge funds, infrastructure, private equity, real estate and structured products. This convergence has had an interesting development; while there have not yet been any major changes to the business model of either sector, it has led to the emergence of new types of products which are placed between hedge funds and active long-only, and which have the potential for significant growth. “The problem for the hedge-fund industry is one brand covers such a range of product and it’s not really fair in that regard that there’s such a massive range of options within the one definition,” says Clavin. Whether strategic or tactical, one in every

Five years ago, there were no signs of convergence in investments, according to Brian Clavin (below left), leader of KPMG Ireland’s hedge fund practice. Photograph: iStockphoto three alternatives managers and two in every five long-only managers report strategy convergence over the past three years, according to the study. The convergence process has been encouraged by regulatory changes aimed at increasing the levels of transparency in the investment sphere. “The long-only area was always highly regulated and transparent; however, the alternatives side would have been known for its secrecy and relatively low levels of transparency,” says Clavin. “This was generally because people were nervous about letting other people know what they were doing, what their secrets were and what their approach was. That has changed greatly, with much higher expectations of corporate governance. “Now, if an institution is investing in any investment manager, for example, there is going to be strong due diligence before they invest; and corporate governance of the manager and the levels of transparency will greatly affect their decision to invest. “They’re not just going to go on the basis of track record because you don’t know with the track record how many risks people were taking or what is the potential downside – you’ll want to know what you’re buying, effectively. And that’s something that in the last couple of years has come to the forefront.” However, convergence between different quarters of the asset management industry doesn’t always come naturally. In fact, convergence is far from uniform. The study suggests that it is characterised by what it refers to as purists, pragmatists and procrastinators. Purists remain focused on their core business, pragmatists see the writing on the wall and actively try to compete with previously indirect competitors, and procrastinators know they should do something to manage change but aren’t yet sure what to do. “One very interesting area of study is just how many people don’t want to converge,” says Clavin. “There’s a chunk of people who simply want to stick with what they know best and what they do well; there will always

The modern investment market

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be a space in the market for those managers who just want to do one product that they’re very good at.” According to the survey results within the KPMG report, long-only managers are least likely to be content to focus on their traditional business and most likely to either respond to new competitive pressures or to at least think about responding to them. Convergence has delivered mutual benefits for investors and fund managers; for the latter, it has delivered better returns and access to all-weather portfolios, while for fund managers, it has delivered improved profitability and enhanced ability to attract, retain and deploy talent. “From a management perspective, the trick is doing diversification well and managing to maintain quality and performance,” says Clavin. “It’s a juggling act but if it works, it’s wonderful because it reduces risk all round.” The ongoing effects of the current credit crunch is likely to slow down the pace of convergence, especially in the long-only sector – however, it is unlikely to reverse the thrust. Instead, the pace of convergence in future will rest on managers’ ability to deliver attractive returns, while ensuring that the nuts and bolts of operations are tight.

ecent years have been a testing experience for investment managers, as companies continued to face significant regulatory change and intense public scrutiny. Two of the biggest challenges this has thrown at managers has been learning how to respond to rapid change and taking advantage of the opportunities that change presents, according to a recent KPMG report titled State of the Investment Management Industry in Europe. “There has been an unbelievable sea change in the markets over the past 10 years which has led to business models being reshaped and adapted,” says Brian Clavin, leader of KPMG Ireland’s Hedge Fund Practice. “There’s a lot more money involved, there’s much higher standards of corporate governance and risk management and products are constantly evolving.” The KPMG study found that managers will need to focus on building the right product

set, securing the right distribution and creating optimal operating leverage to drive profitability in the future, with larger boutiques likely to become more mainstream in terms of investment and product returns, while the boutique business model remains a specialist niche provider. “It can be hard for managers to stay ahead of the curve,” says Clavin. “All they can really do is make their best guess based on the information available, stay up to date with what’s coming down the tracks and to keep focusing on risk management and product development to ensure that they’re going forward. Managers are continuously looking to improve their product and improve their systems. To that end, a lot of money is being spent on IT to make everything faster, better and to reduce the risk of human error. “As the products get more complicated, you need a lot more skills to actually be able to deal with the products. So while the market

is always changing and developing, the better people will always deal with that. There’s always space for people who are moving ahead and getting better at what they do.” The study describes a “war for talent”, as the increasingly competitive environment puts pressure on managers to attract, motivate and retain key talent. “The risk is more about people leaving the industry than moving on to a competitor because it’s an intense business,” says Clavin. “But it’s also a great career if you’re successful at it. Managers will always be trying to ensure that people remain happy so that they actually stay in the industry – so it’s about trying to find out what people are looking for, what kind of remuneration structure, what kind of work-life balance, for example, and trying to get all those things right.” – Christine Bohan

Self-investment to offer greater control of pensions New trends in the UK look set to change the scope of employee benefit packages in the future

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elf-invested personal pensions (Sipps) could become a normal part of employee benefit packages in the near future in the UK, according to pension experts, offering more individuals the chance to take greater control of their retirement fund and invest it in a wide variety of assets. Icap, the world’s largest interdealer broker, already offers its employees the opportunity to join a group Sipp through Standard Life, and in January GlaxoSmithKline, the pharmaceutical company, offered its employees the chance to take membership of a group Sipp. The Glaxo scheme is provided by Legal and General and allows members to take assets accumulated in the company’s previous pension schemes, and invest them in a large number of funds.

“There is a movement in pensions towards individual responsibility,” says Tom McPhail at Hargreaves Lansdown. “This is what both Sipps offer. I can see a point when Sipps and personal accounts are the only pension options.” Personal pension accounts are part of the government’s initiative to automatically enrol all employees into an employersponsored pension plan. They are due to launch in 2012. The accounts would contain a range of default funds and be priced competitively. But a group Sipp would offer the chance for wider investment opportunity and would sit at the opposite end of the spectrum, says John Moret at Suffolk Life. “Sipps are now well-established vehicles for pension savings,” says Moret. “Around

300,000 individual investors have one and post-simplification they have the ability to hold one alongside an occupational scheme. There is, therefore, scope to introduce Sipps to the workplace.” The costs and risks of trustbased occupational schemes have put increasing pressure on employers, says Andrew Tully at Standard Life. But group Sipps are a viable alternative. For companies, group Sipps offer the chance to provide a pension scheme that covers everyone, from general staff to executives. Individuals can choose with whom they wish their money to be invested. Sipps also offer companies the chance to offer share schemes that can be invested as part of a pension. Employees would be able to purchase subsidised shares in the company and over time roll this into their Sipp to make the investment tax-efficient. This, says Tully, could be a useful benefit with which to attract quality staff. Sipps can now be set up with small sums of money and advisers say they are no longer

limited to individuals with large pension pots to invest. For those interested in having more autonomy over their pension investments, they offer a wide variety of options. Standard Life says a quarter of the Sipps it sells are now group Sipps, and that more large companies are starting to make inquiries to see whether they could offer them to staff. One of the arguments used against Sipps was their inability to contain protected rights funds built up by the contracting out of the second state pension. But from October these will also now be permissible in Sipps. However, Tully says that the move to group Sipps will take time. “Companies won’t switch schemes necessarily straight away but, as a new scheme is set up, employers might consider it.” The benefit of a Sipp is very clear in the current market climate, argues McPhail. “As of April 6th, the tax relief available for money put into pensions will decrease,” he says. “So it makes sense to put as much as you can in now.” – Financial Times service

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A Supplement to THE IRISH TIMES

Friday, February 15, 2008

InvestmentToday 6

A SPECIAL REPORT The bigger picture: Global markets

Irish investors swim in a global bubble What impact can a small, wealthy country like Ireland have on international stock markets, asks Peter McGuire

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rish investors have a voracious appetite for growth. This country has the fourth highest gross domestic product (GDP) in the world. In spite of this, Ireland is a relatively small nation, hugely affected by international investment and stock-market trends. So, how much of an impact can such a small fish have in a global pond? Mark McNulty, head of Wholesale Business at Bank of Ireland Asset Management, says that while our effect on global markets may be small, Irish investors have been noticed across the world. “We don’t reckon on a major scale across the globe because we have a relatively small population. In certain pockets of investment activity around the world, however, we are influential. If you look at the headlines from the UK in the last few years, for example, you will see that Irish private investors have been taking up property investment opportunities in London and continental Europe, and even as far as Asia and parts of the US.” McNulty points out that Irish investors are major players in some of the world’s biggest companies. “Bank of Ireland Asset Management, for example, has significant investments in bluechips in the US and in Asia,” he says. “Financial officers and chief executives of some of the world’s largest corporations often visit us on world road shows, encouraging us to invest in their business.” According to Ronan Reid, executive chairman of Dolmen Securities Limited, Ireland has also

made an impact in certain other sectors where key companies compete, such as airlines and construction supply. “The Irish business community has carved out a good and separate niche and identity from other business communities,” he says. “In part, this is built on certain sector strengths, such as property and technology, and also traditional diaspora groups, such as the Irish in the US.” He adds: “The market has grown considerably in recent years. Through the growth of property assets and the growth in profitability, Irish firms have had more monies to invest both in organic growth and via acquisition, but this has equally been spread at home and abroad as many surveys show.” Regardless of how much of a niche the Irish business community carves out, it cannot escape the reality that we are at the mercy of global economic forces. That said, however, increasing globalisation of labour and capital means that even very large countries can suffer during economic recessions or slowdowns. “The American economy is very important to Ireland and Irish investors,” McNulty explains. “It is so large that what happens over there affects Ireland, the United Kingdom, and indeed Europe. The crisis in the US subprime mortgage market, which was followed by a credit crunch and rising interest rates, are outside of our direct control. These factors led to a certain nervousness and a slowdown in the American economy, which has affected

Outrunning the world Ireland may be small, but we can still outperform the best of global competition. The Bank of Ireland Sterling Liquidity Fund, for example, was ranked the best performing liquidity fund in the world for 2007. It beat off stiff competition from leading names such as Fidelity, Goldman Sachs and JP Morgan. Two other funds in the range, the US dollar and euro liquidity funds, were ranked second. This is the fifth year in a row that these funds have ranked in the top two globally. “Liquidity funds are popular with investors seeking a secure, well-diversified investment option for surplus cash,” Mark McNulty explains. “They deliver competitive deposit rates with the benefit of same-day access in an Aaa/MR1+ rated fund. These types of funds are all the more important in the current economic environment, where there are restrictions on liquidity.”

Foreign markets are proving lucrative for Irish investors. Above, investors monitor the stock market in Kuala Lumpur, Malaysia Photograph: AFP/Getty world markets. Irish investors invest across the globe so, of course, they would be exposed to these developments. At the same time, Ireland has had to contend with a decline in the property market, so there have been some difficulties.” It is possible to suggest that, due to the amount of Irish money tied up in property, Ireland’s economy may have taken a hit – even without a global slowdown.

“We are in the first generation of wealth in Ireland,” says McNulty. “It is entrepreneur generated, and large amounts of it are invested in physical assets. Ireland’s love affair with property is famous. We are among those with the highest property investments in the world. This differentiates us from other countries. In the future, I would anticipate a move away from property to a more broadly based portfolio.

This would be welcome as it would reduce our exposure to a decline in a single asset class.” The Irish obsession with property highlights one area where we stand out. How do we compare with other investing nations? Ronan Reid suggests that Irish investors are hardworking and creative. “Like all emerging countries, we tend to be more flexible and both creative and aggressive in the pursuit of opportunities,”

he says. “However, a number of our former competitive strengths remain under pressure: for example, the cost of living and cost of employees has risen and tax advantages remain under pressure.” International pressures are likely to continue to occupy the minds of Irish investors over the coming months – in particular the availability of lending from banks. The US sub-prime conta-

gion has made banks nervous about loaning money, which may threaten the availability of start-up capital for new business. While the sector is facing some difficulty, Reid advises investors to manage their balance sheets carefully. “Assume credit will remain tight for a few quarters,” he says. “Do not invest solely because assets and investments are less expensive – focus on relative returns against other asset

Time to fight back or face the consequences

Sitting on the ropes and hoping to weather the storms in the current markets is not an option for investors. Photograph: Reuters/Kai Pfaffenbach

Trying to roll with the punches is not enough in the current market situation. Investors need to take action or lose out, writes Emmet Ryan

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ou don’t need 20/20 vision to see that there’s an element of gloom around European and US markets at present, but that doesn’t mean the investment markets are devoid of opportunities. This current phase in the investment cycle is one that calls for thoughtful assessment of the market from a broader perspective, a perspective that analyses other opportunities that could come into play. Close to home, the picture is far from pretty but moving outside of these markets presents new investment opportunities. “There are of course areas of concern at the moment, mainly the US and Europe,” says Peter Howe, head of trading with Helvetia Wealth, a Swiss-based wealth management firm which has its headquarters in Zurich. “There has been a lot of news on the economic slowdown in the US and though we haven’t heard as much about Europe there is still cause for concern,” says Howe. The damage to the investment market

appears to be already done and Howe reckons that fears of a formal recession are largely irrelevant as there has already been significant damage caused to the market. “We are in a full bear market at this stage,” he says. “Whether we have a recession as such is immaterial because it won’t get any better any quicker.” “It is immaterial at this stage if there is a recession under the official definition of the term, which is two consecutive quarters of negative growth,” he says. “There has already been a big slow down in the market.” The likelihood is that we have yet to see the full extent of the damage to the investment market. Though plenty of harm has already been caused, there are still sectors with weak spots that have yet to feel the full brunt of the slow down. “Property prices are down, but we haven’t seen the credit crunch hit the car-lending or credit-card sides yet,” says Howe. “We

classes. It is important to understand the risk inherent in investments and ensure the absolute return has merit against the level of risk taken.” There is, however, reason to believe that an improved global outlook will bring relief to Irish investors later in the year, with strong expectations of interestrate cuts from the Bank of Ireland, the European Central Bank, and the US Federal Reserve. In the meantime, McNulty suggests that the sector can be driven forward as savvy investors use the current slowdown to pick up undervalued shares.

expect to have bright news out of those areas in the near future.” It seems the picture is as bleak as a Bergman film, but all hope is not lost. Through the fog of gloom that has enveloped Europe and the US, a light can be seen in the distance which may bring new life to investors everywhere. “There are bright spots. The major asset we’re bullish on is commodities,” says Howe. “Commodities are looking very strong at the moment. We’ve done well in gold and we’re moving into other precious metals.” The potential in the commodities market

has given firms like Helvetia confidence in the belief that there are opportunities for investment. “We prefer to look at agricultural products and precious metals but energy and base metals have shown some promise,” says Howe. “The commodities markets are five years into a 15-year bull run so that cycle has plenty of steam.” Regions far afield are also showing promise for investment as many have little ties to the troubles currently befalling Europe and the US. “We like Asia, specifically countries that are not so heavily dependent on

exports to the US and European markets,” says Howe. “Japan is very heavily reliant on exports to these markets,” he says. “We’re looking at countries such as Malaysia and Vietnam. We’re still bullish on China and you can put India in there as well.” While all the high-profile growth countries are still considered good bets by Helvetia, the firm is particularly keen on those based in Asia. “The old BRIC [Brazil, Russia, India, and China] are still good, but we are leaning more towards India and China,” says Howe.

Back at home, the picture remains murky as markets trundle along, but there is value to be found if money is invested in the right manner. “A four- to five-year play on these [US and European] indexes is required,” says Howe. The manner in which listed firms react to the current crisis is having a direct effect on who people choose to invest with. “We’re buying [shares in] Bank of Ireland at present. It’s a defensive bank and we don’t think it’s been as exposed to bad credit as other financial institutions,” says Howe. While there may be isolated pockets of promise at the moment, there are yet more clouds in the distance that could cause further pain. Looking ahead, Howe advises investors to be wary of how the euro performs over the next year of two. “The euro could be in for a bit of pain over the next 18 months to two years,” he says. The road to more stable investment markets is not short and requires steady hands to steer through the choppy waters. Helvetia urges a sensible but not overly cautious approach to investment. “We’d like to see 60 per cent of our portfolio in capital asset management but we still need 40 per cent [of the portfolio] to make growth,” says Howe. Whatever investors choose to do, it is imperative that they do something, as sitting idly will only lead to further losses. “One of the main worries is that people might choose to do nothing,” says Howe. “The do-nothing approach will see them lose, 20, 30 or 40 per cent of their investments and they may not come back to current levels for seven or eight years. This is something we don’t recommend. This is a time when you have to protect assets and savings.” The investment market may be taking a beating right now but, for investors, sitting on the ropes and taking it simply is not an option. Action is needed, and it is needed now.

Irish Times Investment Supplement  

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