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Asset allocation in 2006
This month's editorial looks at asset allocation.
A broad balance between asset classes has always been key to successfully managing an investment portfolio. While Irish investors have benefited enormously from the triple-digit growth experienced by the Irish housing market over the past decade, investors would be wise not to discount the importance of having a diversified investment portfolio.

William Sharpe, who devised the famous ‘Sharpe Ratio’ for investment performance analysis, says that, ‘asset allocation is generally defined as the allocation of an investor’s portfolio among a number of ‘major’ asset classes’1. As such, equities should play a significant role in any investor’s portfolio.

In this issue, we aim to assist investors with their asset allocation by enlisting the advice of 10 of Ireland’s top stockbroking analysts, who were voted in the most recent FINANCE Stockbroking Survey, which polled over 1,000 fund managers, both domestic and international, as being the top stock researchers in their sectors (see FINANCE, November 2005, and www.finance-magazine.com). On pages 4 and 5, they give advice on two fronts: 1) by giving a long-view forecast on what 2006 holds for investors in Irish stocks; and 2) by giving a break-down on what developments are likely within each of the stock sectors (i.e. biotech/financials/building & construction etc).

In 2005, the ISEQ index of Irish shares grew by 18 per cent, and according to the analysts, who have given their considered view in their forecasts, which were written in early January, a strong performance is set to be repeated with double digit gains in values into 2006.

For example, Robbie Kelleher, head of research with Davy Stockbrokers (whose views were notably bearish in the early years of the decade) says: ‘Overall ratings in the Irish equity market are a little lower than those in Europe and earnings growth is expected to be a little quicker. With the growth in the economy as strong as it is it is not surprising that the momentum in earnings revisions is also strongly upwards. Hence we believe the Irish market can at least match the performance of Europe in general and we have set a target of 8,500 for the ISEQ for the end of 2006’.

But back to property, equity investors can nowadays also make use of one of the greatest advantages of property investment ‑ leverage ‑ through Contracts for Difference (CFDs), available from all stockbroking firms. A CFD is an agreement to exchange the difference in value of an underlying security (typically a share or an index) between the time that the ‘contract’ is opened and closed. With CFDs, investors only have to put up between 10 per cent and 20 per cent of the principal amount at the outset, and hence can benefit from gearing of between five to 10 times. (It should be added that while CFDs can deliver similar leverage to property, that equities are significantly more volatile than property (equities have risen and fallen by as much as 50 p.c. within the past five years - a much higher variance (risk factor) than property - while ‘default risk’ with equities is also much higher).

On page 1, we also report on another way in which investors can diversify their portfolio ‑ hedge funds. In the UK, Barclays Bank recently launched a retail hedge fund, with minimum investment of just £7,000. In Ireland, retail hedge funds look to be on the medium-term horizon, say industry players, who say it will be an ‘evolution, rather than a revolution’.

1Asset allocation: management style and performance measurement, William F. Sharpe, Journal of Portfolio Management, Winter 1992, pp. 7-19.

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