Are rewarding investment returns passing you by?

If no one is actively managing your investments, fast-changing market conditions could result in under-performance

It is a dilemma that, in truth, may never go away. Is it better to invest your money into a passive fund, with lower costs; or should you pay more to invest into an actively managed fund, in the hope of achieving stronger returns? 

A passive investment fund typically involves your money being invested into one equity market – such as the UK FTSE 100TM Index – and subsequent returns are entirely linked to its performance. In contrast, actively managed funds involve a pro-active fund manager or team implementing and overseeing an investment strategy, which fits within certain risk and reward parameters. 

Unlike a passive fund seeking to track a particular index, many active fund managers invest across the full range of asset classes – including property, cash and fixed interest – to try to boost overall performance.

They also have the flexibility of making quick changes, to make the most of market opportunities they identify and to protect the value of your investment when certain assets under-perform.

As an example within equities, heavy stock market volatility in 2011 prompted global market falls that impacted negatively on investors’ returns. Actively managed fund managers retained the ability to reduce their fund’s exposure to under-performing areas – such as banking and mining – in favour of other sectors – for example, pharmaceuticals – which delivered stronger returns. 

If you held investments in a passive fund, your money could have been left fully exposed to these equity market falls. You might need to decide whether to switch to an alternative fund then switch back later – but by doing so you risk missing out on strong returns from the original fund if the index it is linked to starts to rise again. Meanwhile, an active fund manager can quickly change its holdings back and forth, to benefit from upturns. 

Costs are an increasingly important consideration in this difficult economic climate, and so the cheaper investment option might look more tempting. An active manager will charge approximately 1.5pc per year – with the costs of a multi manager fund typically being higher. Meanwhile, passive funds typically cost around 0.5pc per year. 

Yet when it comes to the latter, there are other considerations aside from the costs. You may want to manage your investments yourself, which will take up more of your time. If the fund you are invested into under-performs, it will be up to you to determine if it is better to switch your money to a different fund. If you feel you do not have the expertise and confidence to consistently make such decisions, the lower cost of a passive fund may not be suited to your needs.

What are Structured Notes

No one will easily forget the turbulent times that 2008 and the early part of 2009 brought with them. Bubble after bubble burst; house prices hit rock-bottom; formerly ‘stable’ companies crumbled into insolvency by the ‘bucket-load’. The markets truly suffered a crisis that has been seared into the minds of financial professionals.

How can, then, individuals and institutions alike, now invest confidently into financial products?

How can they make asset allocation decisions beyond simply saying: ‘100% of my portfolio into Cash’ while still keeping the peace of mind that their initial capital will be preserved?

Simple.

Structured Products.

A Structured Product or Note is an investment vehicle that can be written or ‘structured’ in many ways, according to investors specifications; all range of asset classes, maturity dates, risk / return levels, liquidity, and even prices can be accommodated for!

Benefits:

-       Capital Protection

o   They can be written to guarantee to return 100% of your initial investment

-       Auto-Call Potential

o   They can be written so that, once certain criteria have been met, the note is redeemed and the growth is realised

As a reference, an example is described below. It is a note that significantly reduces the risk by giving up some potential return. It invests into 4 soft commodities; Corn, Sugar, Cotton and Soybeans.

-       100% capital protection, potential annual return of 10% per annum

o   Regardless of the performance, you will receive 100% of your initial investment, but you can ‘only’ receive 10% per year

-       3 years maturity

o   The note will ‘mature’ or finish in 3 years, in which case you will either receive your initial investment, or the growth up to 10% / annum, whichever is higher

This is a great example of how investors can invest safely into an ‘interesting’ asset class, with only a medium term commitment for tying up their money!

New notes are being written weekly, so for an updated list or for more information, just contact the Portfolio Team at Montpelier.  

Silver - Price could double by the end of the year

Were you cursing at your computer screen when silver nearly tripled during the short 9 months from September 2010 to May 2011? Silver at $20 seemed like an insurmountable threshold for quite some time. This caused many silver investors to give up, completely missing the ensuing ride. I believe silver is about to offer a similar ride. While it is unlikely to match the 180% advance mentioned above, look for silver to make new highs in the coming months, with the potential to double to $65 by year end.

Following the record gains in silver during late 2010 and early 2011, the metal has since crashed towards $25 and sentiment has crashed along with it. The threat of euro nations defaulting, banks announcing they are, well, bankrupt, and a series of other factors have scared away many of the Johnny-come-lately silver bulls. I think too many investors are underestimating the power of the central banks. While I agree they are running out of options, it seems that their ability to kick the can down the road has yet to expire. Given that the United States is heading into election season and President Obama is in full campaign mode, I expect the administration to pull out all stops in order to continue the illusion of economic prosperity a while longer. Every economic fire of consequence is being extinguished with fresh liquidity, more funny money or new legislation. In case you missed it, QE3 has been in full force for quite some time, albeit executed is a somewhat stealth manner.

The implications for silver (and gold to a lesser degree) are going to be incredibly bullish. Absent a deflationary sovereign default that spirals out of control and takes down major banks with it, stocks will continue to creep higher in volatile trade throughout the year. Once fear begins to subside, look for precious metals to come roaring back to new highs by mid-year. Whenever the next financial crisis finally hits, we are likely to witness a new injection of quantitative easing that is many magnitudes stronger than that of 2008.

Will a major debt default pull down gold, silver and mining stocks with it? Absolutely.

Will it last? Not likely.

Investors are a predictable bunch. They always overshoot on emotions in one direction or another. A rush for liquidity and the perceived “safety” of government bonds or U.S. dollars will be incredibly short-lived and viewed in retrospect as immensely short-sighted. Everyone that rushed for the door by dumping real assets will soon regret their folly. When the fear subsides and some semblance of rational thought returns, the realization of the worthlessness of government paper will be widespread and cause a mass exodus of fiat money.

So while it is prudent to hold a decent amount of cash in the short term, hoping to buy the irrational dip, the medium to long-term investor might consider buying silver aggressively at this juncture. In my view, commodity prices are either going to continue grinding higher throughout the remainder of the year, or there will be a short and steep dip, following by a resumption to new highs. Either way, the silver price has a long way to go before reaching previous inlfation-adjusted higher. It would need to climb to $150 to reach its 1980 high using officially-suppressed inflation statistics and closer to $300 using honest inflation statistics. Seeing as you can buy silver at $32 today, the upside potential remains absolutely huge.