Default Investment Strategies – The Balance between Risk & Return

What difference a year makes in the world of investment funds!

A year ago investors were concerned that the eurozone was about to break up and the global financial system on the verge of collapse. Indeed there were fears that the Chinese property market was about to implode.

None of the above came to pass but the impact on markets and pension funds was significant. Indeed the week ending January 11th 2013 has seen the largest inflows of funds into equities since 2007 (Source: Irish Times 12th January 2013).

For the investor attempting to fund for their retirement the volatility of equities can be a concern. In trying to achieve a good return on their investment and build the level of fund required for their retirement some investment in equities necessary.

Many investors however are not aware that there are options with most of the pension providers to have their investment managed on an ongoing basis whereby the fund managers are investing and diversifying the fund in order to minimize the volatile effects and provide a reasonable average annual return over the life of your pension.

A  brief case in point

To demonstrate this –  in a recent financial review carried out by of one of our client’s pensions which was taken out in 2007, the client’s fund has grown by 25.06% over the period which would equate to an annual average return of 5.01%. This was achieved in their provider’s Default Investment Strategy.

Taking into account the volatility and uncertainty that has been present within the markets over the last five years, this return is in line to achieve the fund value this client is seeking to meet their income requirements at retirement.

Many investors who were spooked by the recent trends in equities had made transfers into cash or deposit funds and whilst in general some of these provide reasonable levels of returns, the investor within the default investment strategy has maintained some presence in the markets to achieve a higher level of return.

The value of regular reviews of a pension cannot be underestimated as decisions can be made to allow the investor the best opportunity to achieve their desired fund at retirement.

Equities look best positioned to deliver the highest returns in 2013 (Davy Asset Management – 2013 Investment Outlook .pdf).

Investors currently sitting on cash/deposit funds do risk missing the upside in equities following the sharp decline of recent years and the Default Investment Strategy is best positioned to balance risk and return for the cautious investor.

It is said that fortune favours the brave, but perhaps when pricing conventions of financial markets have inverted, the really conservative investor may not be the prudent investor in the long run.