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Several Attractions of High Yielding Funds

Euro

By now, most people accept that the developed world is facing low growth for some time yet as the debt overhang is unwound one way or the other. The US and UK are printing money to allow their respective governments to spend while the private sector contracts. The Eurozone, if it wishes to survive in its current form, must sooner or later embrace this time-honoured route to solving a sovereign debt and banking crisis.

There is a sense of d j vu about 2012 - everyone knows the problem and everyone knows the solution. So what if gold goes on a tear because the Eurozone, too, must print money!

The markets are reflecting this roller-coaster approach to arriving at a solution to the Eurozone woes. This presents a boon to one set of investors - the regular investors. This category includes ordinary savers who are prepared to invest even a portion of their savings in risk assets, those with the children's allowance and don't need them for today's expenses and those who are in employment and have the flexibility to invest their own pension monies.

Investing consistently - be that monthly, quarterly or even annually - is the most effective way of offsetting the volatility in markets and reducing the risk of overpaying for assets. My own analysis shows that even had you started a regular savings programme in stock markets at the peak of the last three bull markets in 1972, 2000 or 2007, which preceded deep stock market downturns, the longest it took you to breakeven was thirty three months.

The choppy market conditions provide an opportunity to get more and more savings invested while value is good. Risk, of course, must be controlled. Many private investors struggle to control the risk when they invest directly in individual stocks. That is understandable, as controlling the three principle risks in stocks is not easy as we all appreciate after 2008.

  • First, there is business risk - the risk that the business will not be earning tomorrow what it is today.
  • Second, there is financial risk - the use of debt which can undermine even a good business.
  • Third, there is the valuation risk - the risk that you simply overpay for the shares so that subsequent returns are poor.

Investing via funds offers an easy way for private investors to better control these risks while at the same time ensuring good diversification. The enclosed table highlights a list of ten international funds quoted on the stock exchanges offering an average initial dividend yield of 5.2%. This is miles ahead of prevailing interest rates and medium-term government or corporate bonds yields. The basket of funds is made up of both exchange-traded funds (passive tracker funds) and investment companies (actively managed closed-end funds).

High Yielding Funds Table - May 2012

Exposure to the Euro (or should I say the Irish Euro) is an understandable concern for private investors in Ireland today. This portfolio of funds has the added attractions of geographic and currency diversification. In other words, a globally diversified high yielding portfolio of funds provides a solution to today's two key problems facing both savers/investors; namely, how to generate an income and how to reduce the dependence on the Euro. Even the lump-sum investors, who can't add anything further to their investments if markets fall further, would surely be happy with an initial yield of 5.2%.

Unlike Irish unit-linked funds, stock market listed funds have no entry or exit costs and no set holding periods. In addition, fund running costs are generally lower for reasons that are beyond the scope of this article.

Whatever way you look at it today, the value and income lies in risk assets. There are some who say that you can only make returns by trading markets. As I said in this newspaper two weeks ago, that is plain nonsense. You must own assets in order to obtain the returns on offer. Equally, trying to circumvent the volatility in markets by buying guaranteed products is fruitless. All you achieve is to hand the vital dividends over to the product seller.

Rory Gillen
1st June 2012