Disclaimer : The contents of this page are purely an individuals opinions, and do not qualify as financial advice, or solicitation for any product, investment or service. It is essential to seek professional financial advice for all investment decisions.
There are a large variety of instruments available to invest your hard earned capital in, examples include :
- Stocks and Shares of Companies e.g.
- - Large Cap UK/USA
- - Emerging Markets
- - Far East
- - Sectors (Mining/Banking/Healthcare)
- Commodities e.g. Oil, Gas, Heating Oil
- Precious Metals e.g. Gold, Silver, Platinum
- Currencies e.g. Pound, Dollar, Yen
- Fixed Interest e.g. Government or Coporate Bonds
The range is vast, and the job of a financial advisor is to pick an appropiate investment area that matches the clients goals, with his attitude to risk. This is normally done by picking an appropiate basket of funds. But with 10's of thousands of funds available, where do you start ?
Fund Analysis
In order to select a funds, a professional will usually use a piece of software to help with the job. As an example for this article, we will use analytics, from the company financial express. There are many similar pieces of software available in the market, which may do a better or worse job, hence this is by no means a recommendation.
1. Ratings
A quick and efficient way to pick a suitable fund is to look at it's ratings. There are many companies that review funds, and give them rating out of (for example 3 or 5). The ratings take into account the performance, fund manager track history, risk/return, and costs.
The Brandeaux Student Accommodation Fund (below) has a 'crown rating' of 3 out of 3
2. Fund Manager
So the fund has a high rating. It would be interesting to see who is behind the fund, how long they have been there, and there track record throughout their career. Funds can change managers at any time, and it would be worth noting if a high performing fund manager is suddenly changed for one with not such a good track record. An example of a fund manager review is shown below :
3. Risk vs. Reward
So you have chosen the sector you would like to invest in e.g. Japanese equities. So which fund do you choose from the large number available ? One way to quickly review a basket of funds is to use a scatter chart. This plots risk vs. performance. A high performing fund with low risk will appear in the topleft corner, a poor performing fund with high risk (volatility) will appear in the bottom right corner.
Since 1994, the highest returns have been generated with Global Macro strategies, followed by Event Driven and Equity Long/Short. It can clearly be seen that these strategies have achieved a higher return in comparison to the S&P 500, while showing a lower range of fluctuation at the same time! The latter is indicated as annualised return volatility and reflects the risk of each form of investment. Besides the three above-mentioned strategies, there are many other hedge fund styles that have beaten a classic equity investment by a mile in terms of their risk/return ratio. The pure short strategies (Dedicated Short) are an exception, but as an addition to a portfolio they will improve the latter’s performance in bear market phases.
4. Lump Sum or Regular Payment
The perfect fund(s) have been chosen and you are ready to invest ! There are now two choices, do you put all you savings in one go, or make regular contributions to the investment fund. In reality this will be determined by your financial situation and goals, and commonly a lump sum will be put into a fund, followed by regular contributions. To compare regular contributions (pound cost averaging), to the performance of lump sum investment, a chart can be produced :
(Chart 1 is a lump sum of £10,000 invested, Chart 2 is a regular investment of £400 (total is £10,000))
These are just some examples of how to build an investment portfolio, and (as mentioned above) it is important to seek professional regulated advice, when making investment decisions.
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