Get the balance right

The key to investing is getting the right balance between optimising returns and a given level of risk. The concept of risk and return is simple; if you invest in something which has very little risk, you can’t expect to make much money from it. In the current low/negative interest rate environment, to achieve higher returns you must embrace some risk. The Zurich Prisma fund range aims to generate long-term capital growth by targeting specific levels of volatility with returns appropriate to individual investor risk profiles.

Prisma fund flows

Low interest rates in banks have driven high demand from individuals looking at investments and typically lower risk; it is no surprise that we continue to see large flows into the low to medium risk rated Prisma 3 fund. This fund is designed for the cautious investor looking for a broadly balanced globally diversified portfolio that is designed to perform throughout differing market conditions.

Recently, positive investor sentiment in the market, along with low/negative deposit rates has seen investors willing to accept more risk in order to increase their chances of a better return. Moving up the risk scale may provide the opportunity for a better return. For example, if we look at the European Securities Market Authority (ESMA) risk scale we can see that the risk 3 band is 2-5% volatility and thus the midpoint is 3.5% whereas the 4 band is 5 -10% and midpoint is 7.5%. So if you, reasonably, take the midpoint as a proxy, there is a notable differential in ESMA 3 and ESMA 4 rated funds in terms of target volatility. This is similarly reflected in our Prisma fund range where Prisma 4 has 56% in equities and Prisma 3 has 28.5% (we are currently at the upper end of our equity ranges). 

Not surprisingly, we see most of the assets in the middle; Prisma 3 and Prisma 4 have €2.5bn out of a Prisma total funds under management of €3.4bn. The trend we tend to see is categorising a client as a 3 or a 4. With the potential for higher returns in the 4 or even 5 risk levels, the opportunity to embrace a little more volatility should be explored.

When you compare 5 year cumulative returns for the multi-asset fund ranges in the Irish market; as you might expect, at 28.1% the average of the risk-rated 4 range is almost double the return of the risk rated 3 funds at 15.3%.*

Tailored portfolios

Low to medium risk investors who are seeking higher returns without taking on a significant amount of extra risk may wish to adopt an approach whereby they invest the majority of their funds in a lower risk fund and supplement this by putting a portion of their funds in a higher risk fund. This method further diversifies the portfolio and increases the client’s exposure to growth investments.

Perhaps clients could consider a “3+” strategy where a Prisma fund is used as a core fund and add on some exposure to the Zurich Property Fund, Dividend Growth Fund and/or Global Select equity fund, for example, to make a potentially more suitable long-term portfolio embracing a little extra risk.

Our Portfolio Builder makes it easier to choose investments that match your client’s needs. You can review the various potential outcomes of tailoring your client portfolios with exposure to different funds, assets and volatility. The Portfolio Builder also allows you to produce customised reports based on your clients fund selection and allocation across their fund choice.

Long-term planning

When considering your clients pensions and long-term savings requirements in a negative interest rate environment, it’s important to explore the option of embracing some risk. Make an appropriate long-term financial plan and do not be deterred by short-term falls – to finish on a Warren Buffett quote: The stock market is a device for transferring money from the impatient to the patient”.

The Prisma Fund Range is available across the Zurich suite of Pension, Approved Retirement Funds (ARF), Approved Minimum Retirement Funds (AMRF) and Savings and Investment products.

You can find more information on each fund by speaking to your Broker Consultant.

*Source: Financial Express, 18 October 2019