---

Please find below my Investor News for Quarter 2 2014. I have titled the report 'Reckless Conservatism' and the first bit of the report deals with the results of an interesting study on investor behaviour carried out recently by a London University. 

In the second part, I have, as usual, selected my ‘Best Picks’ for investments in each category depending on your Risk / Return profile. I have listed some of my currently preferred funds, according to their risk profile. I am more than happy to provide additional information on these funds, so feel free to give me a call if you want more information. Many of these funds are also available to pension investors on a tax free basis.

Each fund is reviewed and rated (from one to five stars, one being poor and five being excellent) across 3 criteria:

• Security of capital
• Access to capital
• Growth potential

Reckless Conservatism? A recent report commissioned by the Pensions Institute at Cass Business School  of the City University London, found that there was a disconnect among savers between short term savings, long-term investments and the risk of falling short of planned saving goals.

This means, the report suggested, that people become reluctant to take the action required even if their savings fall short of their targets, for example after an unexpected life event.

Most people showed an attitude of "reckless conservatism" when it comes to investing, meaning they are happy to miss their long-term saving goals as long as they don't have to take increased investment risk, even in the short term, the report found.

On the other hand, only a third of people questioned were prepared to reduce current spending and save more if their savings looked set to fall short.

Key findings in the report:

• Half the population saves regularly but only 1 in 3 prioritise long-term saving,
• 6% of investors tolerate investment losses of more than 20%,
• 52% would prefer a shortfall in their saving goal to taking any risk,
• 10% would be prepared to increase investment risk for potential, greater reward,
• 50% are prepared to sacrifice real returns to avoid investing in assets with volatile returns which nevertheless have positive real returns in the long run.

With this report in mind, I thought about the number of people who are content to have significant long term savings sitting on deposit, earning no real return and having no potential to achieve a real return after tax / inflation. Surely this is not the place to have long term savings?

With interest rates at historic lows, investors holding cash have found themselves in a bind. Faced with low deposit returns, many investors should be looking for an alternative. There are many different solutions to this problem, but I think it makes sense to take a closer look at funds that pay a dividend and include exposure to equities.
 
Why dividends, Why now? 

• Over the long term, dividends have been the main contributors to total return in equity investments. In this period 1940 to December 31, 2011 dividends and dividend reinvestments accounted for over 90% of the total return for the S&P 500 index. If you had invested $100 at the end of 1940, this would have been worth approximately $174,000 at the end of 2011 if you had reinvested dividends, versus $12,000 if dividends were not included.*
•  Record level of cash on corporate balance sheets.** The recession caused some companies to struggle, but other companies used it as an opportunity to reduce expenses and strengthen their balance sheets to ensure they weathered the storm. 

I can't say exactly how all this cash will be put to use, but it won't sit on the balance sheet forever. It will be put to work somehow, and that could take a number of different forms. It could be invested in new factories or new hiring, which could help the economy expand and be a boon to equity investors. It could be used to buy back shares, which could also help equity investors. Or it could be paid out as new or increased dividends, which again could benefit equity investors who are the recipients of those dividends. 

• Dividend Payout Ratio is below the historical norms. The long term-average dividend payout ratio of companies in the S&P 500 Index, is 51%. However, at the end of fourth quarter of 2013, it was much lower at 38%***. 

If you're familiar with the expression "history favours a return to the mean" you understand why the current low dividend payout ratio is intriguing. With companies currently paying out a smaller percentage of their earnings as dividends, there may be potential for increases if the dividend payout ratio returns to its long-term average.
 
Such investments are not for the short term. I do not advise clients invest funds required for short term objectives in anything other than cash or cash-like holdings. Investing in dividend paying shares involves risks. Share prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. However, if you are looking to access potentially better returns than deposits, and you can invest for the medium term, then I think the case for investing in a fund which targets dividend paying shares is strong.
 
So if you feel like your cash is not performing as you would like in your bank deposit, and you are prepared to invest for the medium to long term, please give me a call. I would be delighted to discuss these investment strategies with you, whether you wish to invest via a pension plan or investment bond or regular savings plan. I hope you find this report informative and if you have any queries please do not hesitate to contact me.

Yours sincerely,

Gavin Gilmore
Gavin Gilmore QFA FLIA AITI Chartered Tax Adviser (CTA)
Principal
 
Sources;
City University Report commissioned by Pensions Institute
*Bloomburg, Guinness Atkinson Asset Management
**Ned Davis Research, Inc. Most recent data is through 31/12/2013.
***Compustat via Factset.
 

 

Low Risk – PTSB 12 Month Interest First Fixed Term Deposit Account

PTSB are covered by the government guarantee in relation to deposits and are currently offering a one year fixed term rate at 2.15%. Although the rate is the best in the market, it is difficult to get excited about a 2.15% return, when DIRT is at 41%, and for some investors PRSI will also be payable.

Security	*****
Access to Capital	**
Potential for Growth	*

 

Low / Medium Risk – Standard Life Cautious Managed

The fund aims to provide long term growth whilst investing in a diversified portfolio of assets (including equities, fixed interest and property) in order to reduce the risk associated with being solely invested in any one asset class. These assets can be from Ireland and overseas. It aims to be less volatile than traditional Managed Funds, investing a higher proportion in assets that are traditionally less volatile (such as fixed interest assets)

There is active asset allocation within the Fund with an emphasis on capital preservation and focused conservative stock selection. The Fund offers investors exposure to government bonds, high quality equities and cash.

Period (to 31st March 2014)	Return % pa	Sector Average %
1 Year	9.3	2.7
3 Year	9.2	4.3
5 Year	9.9	6.5

 

Security	***
Access to Capital	***
Potential for Growth	***

 

Medium Risk – Standard Life Global Absolute Returns Strategies (GARS) Fund

The key to understanding the GARS Fund is understanding the difference between relative and absolute returns. Most investment funds are managed on a relative return basis – a fund manager aims to beat a market index or average fund in its sector. It can achieve this even though returns may be negative.

Absolute return investing is different because the fund manager aims to produce a positive return over specific time frames.

Period (to 31st March 2014)	Return % pa	6 Month Euribor %
1 Year	2.7	0.4
3 Year	5.3	0.9
5 Year	8.6	1.0

This fund has a very specific target to produce an absolute return of cash + 5% per annum over a rolling three year period. This Fund will have a lower volatility rating than standard Managed Funds as it employs a more varied approach to investment strategies.

Security	***
Access to Capital	****
Potential for Growth	***

 

Medium Risk – Zurich Life Pathways 5

Pathways portfolios are multi-asset funds containing cash, bonds, shares, property, and alternative assets. The split across each of these asset classes is determined by the risk rating of your fund.

Pathways is an actively managed fund and the investment manager has a mandate to alter the risk level of the portfolio. Shares can range from between 30% to 80%, while Cash holdings can constitute between 0% to 30% depending on the Investment managers outlook. The charging on the Pathways funds is competitive for an actively managed, multi-asset investment fund.

Security	***
Access to Capital	****
Potential for Growth	***

 

Medium Risk to High Risk – M&G Global Dividend Fund

The M&G Global Dividend Fund offers investors the opportunity to gain exposure to a worldwide basket of shares. The simple premise of the investment is to choose large blue chip companies which have a history of paying above average dividends. Many of the stocks are household names with good earnings and whose outlook is believed to be still quite positive. The compounding effect of dividends on investment performance can be staggering.

Period (to 30th April  2014)	Return % pa	Sector Average
1 Year	7.3	8.1
3 Year	12.4	8.9
5 Year	21.9	13.5
10 Year	N/A	N/A

The performance of the Fund, when considered alongside its peers, is impressive.

Security	**
Access to Capital	****
Potential for Growth	****

 

High Risk – Irish Life Indexed Commodities Fund

This Fund is designed to deliver returns on a broad range of commodities, for example energy, metals and agriculture. The fund is suitable for long-term investors who already have assets such as shares, property or bonds and are looking to invest in something new.

In the past, commodities have provided similar returns to shares for investors. However, commodities tend to perform at different times in the economic cycle. This makes them very attractive because they spread the investment and therefore the risk.

Period (to 30th April 2014)	Return % pa	Benchmark
1 Year	-1.61	0.13
3 Year	-4.12	-2.63
5 Year	3.85	5.55
10 Year	N/A	N/A

Although the recent performance of commodity markets has not been stellar, commodities should form part of a diversified approach to investing.

Security	*
Access to Capital	****
Potential for Growth	****

 

High Risk – Fidelity EMEA Fund

This Fund offers exposure to the untapped investment opportunities of companies in central, Eastern and Southern Europe (including Russia), Middle East and Africa. The EMEA Area is an emerging economic region that has a GDP greater than China and India combined. It has experienced a sustained period of economic growth over the last decade three times that of Western Europe and the USA.

Period (to 31st Mar 2014)	Return % pa	Peer Average
1 Year	-6.67	N/A
3 Year	-1.11	N/A
5 Year	16.17	N/A

The Fund is denominated in the US dollar and so some currency risk / reward is applicable. Returns above are in US dollar. However possible high returns come hand in hand with the potential for significant losses and potential investors in this Fund must be comfortable with the risk and reward profile of such an investment.

Security	*
Access to Capital	****
Potential for Growth	*****

 

Alternative Funds – Zurich Life – Gold Fund

Gold has for centuries been revered for its unique blend of near indestructibility and beauty. Gold’s divisibility, portability and significant rarity led it to become a universal currency. This Fund is a unit-linked fund that gives you the opportunity to gain exposure to movements in the price of gold. It is denominated in US currency and so a currency risk arises to the Euro investor.

Period (to 31st March 2014)	Return % pa	Peer Average
1 Year	-25.4	N/A
3 Year	-3.4	N/A
Since launch (17/07/09)	6.6	N/A

Gold has taken a hammering in recent times, after a meteoric rise in 2010 and further rise in 2011. As investors have become more comfortable with risk, they have shifted away from gold and towards equities.

Security	**
Access to Capital	****
Potential for Growth	****

 

Aviva Life & Pensions UK Property Fund

This Fund is invested in UK commercial properties across the office, retail and industrial sectors. The fund gives investors access to a diversified portfolio of 61 UK commercial properties that are let on long term leases and are actively managed to generate a blend of rental income and capital growth.

Period (to 31st May 2014)	Return % pa	Peer Average
1 Year	16.5%	N/A
3 Year	4.4%	N/A
5 Year	7.0%	N/A

This Fund is managed by the Aviva Property Team in UK which manage €28.8 billion in assets making them one of the largest property fund managers in Europe. Selling property can be a lengthy process so investors in the fund should be aware that they may not be able to sell their investment when they want to.

Security	**
Access to Capital	***
Potential for Growth	****