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Markets dance to new beat

The Sunday Times 23rd December 2007 - Niall Brady

The Best and Worst Funds in 2007

Emerging countries were the stars of a lacklustre year for investors, but it´s still wise to spread risk writes Niall Brady

INVESTORS who relied on past performance to manage their money this year are licking their wounds as top-performing investments plunged into serious losses. Property and Irish equity funds had been the stars of previous years, with some rewarding investors with annual growth of more than 30%. These funds crashed to earth in 2007, however, as property prices began to slide and investors fretted about the consequences for banks and constructionrelated stocks, the backbone of the Irish market.

The biggest losers were funds that borrowed to invest because the debt magnified losses in a falling market. New Ireland´s geared Irish equity fund was the worst performer among funds tracked by MoneyMate, shedding half its value this year. It was a bitter blow for those who invested on the basis of New Ireland´s strong performance the previous year, when the geared Irish equity fund topped the MoneyMate table.

Investors had to look much further afield to find good news and those brave enough to put their money in up-andcoming economies such as China, India and Brazil were richly rewarded, repeating the gains of the previous year. QUINN-life´s China Freeway fund topped the Money- Mate tables in 2007 with growth of 42%. Fiona Daly, managing director of Rubicon Investment Consulting, which advises pension funds, said: "Stock markets are on tenterhooks and they could tilt either way next year. Markets such as China might look attractive, but the high returns mean high risk."

Noel Collins, senior consultant at Mercer Investment Consulting, another pensions adviser, warned investors to expect a rocky ride next year, no matter where they put their money. Equities should do all right over the next two to three years, but investors have forgotten about risk because they´ve had such a smooth ride," he said. "Volatility is back and is likely to persist."

Ireland

The Iseq finished a bad year on a miserable note, with the worst fourth-quarter performance since the market crash of October 1987. The index lost one quarter of its value in 2007, making it the worst-performing stock market in Europe by a considerable margin. All Irish equity funds lost money. New Ireland did even worse than the Iseq, with its Irish equity fund losing 30%. This helps explain why those who invested in the geared version of the fund saw 52% wiped from the value of their investment.

Eoin Kennedy, investment product manager at New Ireland, said: "Any fund that can go up 50% in one year can fall 50% in the next. If you chase returns of 30%, 40% or 50% in a short period, you must accept that you can lose by the same amount." He predicts that Irish equities will do better next year. "Markets have priced in a worst-case scenario for the Irish economy and this looks too harsh," he said. "We expect to see investors buying back into the Iseq because there´s real value there."

Other investment experts are less optimistic. Martin Haugh, director of HLD Actuarial Consultants, said: "You can´t avoid bank stocks if you invest in the Irish market and they´re likely to remain in a state of flux because of the credit crunch for another six months at least. There´s arguably some value in the market, but it´s too early to tell."

Europe

The eurozone provided better returns, with the Euro Stoxx index of the region´s top 50 bluechips growing 4.5% in 2007. Investors could have done even better by backing the right fund manager. Anthony Conroy and Eimear Moloney at Eagle Star made its eurozone equity fund the best investment of its type this year, growing 9%. It invests in stocks such as Total, the French oil company, Nokia, the mobile phone maker, and BNP Paribas, the French bank. "After a few lacklustre years, continental Europe is on the way back," said Haugh. "The outlook is reasonably positive and there´s no currency risk for Irish investors." Many eurozone nations must make painful reforms to their economies, however. "There´s a lot of room for improvement in European economies to make them more efficient," said Daly. "A weak dollar and high oil prices will also impact negatively on growth in the region."

America

Investors who put their money stateside should have had a reasonable year, with the S&P 500 index growing 4.8% and the Nasdaq up 10.6%. These gains, though, were wiped out by the falling dollar. Irish investors lost money on the S&P 500 when dollar gains were converted to euros, while Nasdaq gains were worth only 1% in euro terms.

Eagle Star managed to buck the trend and its Five Star Five fund gave euro investors a return of 5.3%. It invests in 25 stocks including Halliburton, Intel, Nike and Wal-Mart. Despite the weak dollar, experts advise investors that they cannot avoid the US if they want a balanced portfolio. "America remains the world´s dominant capital market. There´s a strong rationale for having greater exposure to the US than to Ireland, given the relative sizes of the two markets," said Haugh.

Emerging markets

Up-and-coming economies such as China and India were one of the few investment hotspots from 2006 that continued to deliver in the past year. China led the way, with the Shanghai stock market surging 81% in euro terms.

Joseph O´Dea, head of investment consulting at Watson Wyatt, said: "A major shift of wealth from developed to emerging markets is underway and investors will continue to get strong returns from these countries. This doesn´t mean returns won´t be volatile and there may be a correction in the short term. Think about emerging markets as a long-term play."

Tom Clinch, managing director of KSI Clinch, an authorised adviser, warned that investors should keep their eyes open. " It´s open to question whether the huge returns are based on sound economic fundamentals or are a bubble," he said. "The risk is there´s a wall of money chasing a rising market, while ignoring the fundamentals." Rather than jumping into specialist investments, such as QUINN-life´s top-performing China Freeway fund, Clinch advised investors to put their money in broadly based global equity funds. These balance exposure to emerging markets with investments in more stable regions.

Property

Property was a big disappointment this year, with investments such as Hibernian´s UK geared property fund and Ulster Bank´s European property fund crashing to the bottom of the Money-Mate tables. Investors bailed out of the sector in the belief that commercial property in Ireland and Britain had reached the end of a good run. Fund managers at Hibernian, Standard Life and Irish Life have tried to control the exodus by imposing exit penalties or forcing investors to wait for their money.

The downturn could present opportunities for brave investors to get back into property on the cheap. Eamon Porter of Aspire Wealth Management, an authorised adviser, said: "Everyone is running scared of UK commercial property funds - it´s a case of the blind following the blind. Some funds have been marked down by as much as 25%, which is way below the true value of their core property holdings. "I see this as an opportunity for investors with time and an adventurous streak." Clinch agreed that there could be opportunities in Britain next year, but warned investors to steer clear of Ireland because he believes other asset managers will follow Hibernian´s lead by penalising those who bail out of Irish commercial property funds. "I´m telling clients to take a profit and get out of Irish property," he said.

A TASTE FOR THE EXOTIC

EXOTIC markets have delivered returns of almost 40% for Conal Henry in the past year.

He invested in QUINN-life´s Emerging Markets Freeway fund in October last year, tracking 50 stocks from countries such as Brazil, South Korea, China, Mexico and Taiwan. "They´ve been the stars in my portfolio," he said.

Henry, though, is not planning to shift more of his cash into high-flying exotic markets. The 38-year-old chief executive of E-net, a communications company, believes in spreading his money around. As well as emerging markets, he has invested through QUINN-life in a number of other stock markets closer to home, including the Iseq, the Nasdaq and the Euro Stoxx index of the top 50 blue-chips in the eurozone. "I´m evenly spread across all of the various markets and that won´t change," he said. "I generally buy an index and stick with it for a reasonable length of time. I don´t move my money around unless I get a very bad feeling." Henry does not have that bad feeling about Ireland, even though QUINN-life´s Celtic Freeway fund dropped 24% of its value in 2007. "By the time you move out of a market the damage has already been done," he said. "There´s no point getting out now and my sentiment is to put more money into Celtic Freeway because the Iseq is now so cheap. The trick is to buy when the market is down."

Henry invests through QUINN-life because he likes its low-cost index-tracking funds. They automatically invest in all companies that make up a stock market index, without attempting to weed out winners from losers. "My strategy is to buy the markets - not try to beat them," he said. "It´s a mechanical approach which means I put my money in a range of global stock markets and take what I get."

Henry is sceptical of fund managers´ claims that they can beat the markets by picking the best stocks. "You pay higher fees for these actively managed funds and you don´t necessarily get a better result," he said. "Most fund managers can´t even keep up with the markets´ average performance over time."

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