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Wednesday, 24th April 2024 |
| Alternative Investment strategies for the Celtic Tiger |
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| The start of a global equities bear market, and the decline in property values both globally and in Ireland has again underlined the value of proper diversification and private wealth risk management. We examine the role of alternative investment strategies for Irish resident investors in a properly diversified portfolio, and their potential in the investment climate of 2008. |
In a report last year Bank of Ireland estimated that the number of millionaires in Ireland increased from 30,000 to 33,000 between 2006 to 2007, and Ireland became in the process the second wealthiest country of a group including the eight leading OECD nations.
However, 'The Wealth of the Nation' report by Bank of Ireland Private Banking also found that over 90 per cent of that wealth was held in property, cash and equities, (72 per cent in property, mostly residential property, 15 p.c. in equities, 3 p.c. in bonds, and 10 p.c. in cash), and that Ireland's net financial assets were lower than all of the top 8 OECD countries.
The result is that, because of Ireland's poorer diversification, the Bank of Ireland figures for 2008 are going to show Ireland's exalted position reduced - thanks to the country's excessively long love affair with one asset class in particular - residential property.
The moral of the tale is not being lost however, and increasingly there is a perception that diversification should accompany wealth accumulation, and the growing wealth management industry in Ireland is finding a growing interest in specialist alternative investment strategies.
Former Irish Life investment guru Frank O'Brien of Investment Faculty Ireland, in a recent article in Irish Pensions magazine examined the Yale University Endowment approach under the leadership of their chief investment officer, David Swensen.
O�Brien says of Swenson, 'The clarity of his thinking, on fund objectives, on asset characteristics and on portfolio construction is exemplary. If there is currently a leading edge in institutional investment thinking I suspect that this may be where it resides. The Yale University Endowment has 'lower exposure to equities and bonds and corresponding increases in exposures to alternatives and real assets' and of the alternatives - 'hedge funds and private equity account for the bulk of exposure to alternative assets.' They have been successful in building a manager selection skill, particularly in private equity and hedge funds. They have been investing in hedge funds for almost twenty years. I suspect that, in their early forays into the alternative assets, they enjoyed first mover advantage.
In a recent interview with Finance Magazine, Richard Dunn, director of portfolio management, at Merrill Lynch said he has been advising clients away from ISEQ shares. Dunn says Irish investors should look to the global opportunities that are available. Gary Dugan, managing director of Global Wealth Management and chief investment officer of Merrill in the same interview says he advised against investing at the time of interview in both Irish equities and property. Dugan says the last ten years in property has been helped by cheap credit ' these credit conditions won't be repeated in the next ten years.
Peter Howe, head of trading at Helvetia Wealth AG, who have opened a Dublin office for their Irish clients whom make up sixty per cent of their total client base, advised his clients out of U.S and European equities last year. Howe maintains this bearish position on equities advising clients out of equities in Europe and the U.S. at the moment by and large. One of a few exceptions is Bank of Ireland, Howe says because of a good dividend and their relative conservatism Bank of Ireland gives value. Brent McLean, director of alternative investments at Helvetia, says at Helvetia they offer a range of risk exposure from capital protected investments to higher risk offerings. McLean says investors need not invest their whole portfolio with one wealth manager. The possibility is there for clients to create portfolio of wealth managers and get the benefit of a variety of strategies/approaches.
Pat McCormack of Barclays Wealth, London, when discussing their investment philosophy, explained in greater detail in this month's issue on page 12, says that exposure to alternatives is a sensible tool to balance an investment portfolio. Absolute return works by looking at returns that are not necessarily linked to market returns so hedging against downturn in the market.
Conor Walsh, managing director of Key Capital Private, says that the move to alternatives is advisable to investors. Walsh, says that hedge funds should constitute 20 - 30 per cent of a client's portfolio. Shane Gill, associate director at Key, says hedge funds act as a 'insurance' within a portfolio. The view in the market that hedge funds are too risky is something Walsh has seen in the market, but believes attitudes are shifting.
Walsh says that by showing the investor the benefits of using alternatives in their own portfolio, through a special tool created by Key, he can prove the benefits to the investor of diversifying their portfolio. Walsh says the decorrelation between hedge funds and markets is what the investor gains by incorporating them into their portfolio. In documentation provided by Key it says, hedge fund managers are in general better protected in a period of crisis than pure traditional asset classes. Hedge funds decorrelate returns in adverse market conditions so investors are protected.
The list of the different alternative products offered by wealth managers range is extensive. The phrase 'product' however has a negative connotation amongst wealth managers - execution only service is rare when it comes to alternative products. Wealth managers and private bankers typically offer exposure to all forms of alternative 'asset classes' through investment funds. They offer unique tailored investment solutions for clients based on their profile in relation to risk aversion and risk tolerance.
Fund access/selection
Access to and choice of fund and fund managers is key to successful alternative investing. Brian Weber, executive director, head of Dublin office at Citiquilter, says 'Internationally, there is a healthy debate over a perceived conflict of interest in the provision of in house funds by wealth management companies.' 'Most world class wealth managers will offer best of breed funds and will avoid being tied to any one investment product. There is a wide a variety of world class funds available with strong track records and are rated by the various independent research bodies such as Morningstar, etc. Clients at the upper end of the market like this transparency.'
Weber says the key criteria of investment funds selection are 'Consistency of performance and established track record. Costs, availability of institutional units. Transparency, avoid investment managers whose style drifts away form stated objectives.
Frank O'Brien, says 'The development of a manager selection skill is key to the successful implementation of these strategies. It is important in the selection of active bond and equity managers and hugely important in the selection of managers of a fund's private equity and hedge fund exposures given the alarmingly wide dispersion of returns across managers of these asset classes.' |
This article was published in the February 2008 issue of FINANCE Magazine.
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| Article appeared in the February 2008 issue.
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