All about investment funds

Investing directly in the stock market, whether in stocks, bonds or even derivatives, requires a certain amount of experience and the ability to remain calm in the face of external events that can destabilize the markets for a certain period of time, more or less long. In an environment where crises are multiplying and where the traditional benchmarks on which investors have calculated their course for at least 10 years are breaking down – in other words, low interest rates, steady economic growth and no inflation – mutual funds have assets to promote.

Diversification that better spreads risk

Main? They allow investors to, if not avoid, at least mitigate stock market shocks by requiring them – at least for funds subject to the Ucits rules – to diversify their holdings. Thus, the diversification policy applied to asset managers of traditional funds allows for a better distribution of risks.

With this in mind, a very large universe opens before the pawnbroker, in which it can be difficult to make a choice. As long as your banker offers you access to all products, both their own and those of competitors… There are around 30,000 funds in Europe.

Some of these funds specialize in asset classes (shares of companies with different capitalizations, government or corporate bonds, etc.), some prefer to play in specific sectors of the economy (industry, energy, pharmaceuticals or trade), others prefer cross-cutting themes such as water or population aging.

So many approaches to split and cross.

Enhanced investor protection

The investor is not alone in this crowd.

European regulations oblige professionals to provide their clients with full documentation, which should indicate, in particular, the fund’s strategy, its risk level, the recommended investment period, expenses and its past results. A read which may be unpleasant, but which is nevertheless wholesome and recommended.

For additional protection, fund dealers should segment their clientele into three profiles: cautious, balanced and dynamic. The first profile flows naturally. “Balanced” investors want to take advantage of positive market changes without taking on all the risk. Including the fact that their capitals are melting. Reserve swept by the “speaker”.

The effectiveness of the fund, of course, depends on the development of events on the stock markets. And obviously, performance remains very different between all the strategies out there and even between funds specializing in one of these so-called strategies.

In its latest sector review, the CSSF noted that all categories of equity funds underperformed last May. And while Japanese and Latin American stocks posted positive returns, those gains were negated by the impact of the euro. A similar result was for bond funds.

Good advice

In the context of slow growth and a jump in inflation, certain categories are doing better. We can mention (a non-exhaustive list) funds that specialize in long-term macroeconomic trends such as aging, renewable energy or even water management. Funds that use a so-called “price-in” strategy, including investing in companies with enough of a competitive advantage to be able to impose their prices on their clients, are currently very popular because of their ability to resist inflation.

We wouldn’t be complete on mutual funds if we didn’t talk about alternative funds.

The latter are not intended for “individual” investors. They are aimed at “informed” or “professional” investors. These funds invest in equity, real estate, private debt or infrastructure. Therefore, many assets are inherently illiquid, locking in the initial rate for a number of years.

Their success opens up avenues for retail clientele. For a long time, their appeal was that they outperformed traditional funds in a context of high liquidity and low interest rates. With a change in monetary policy, a correction cannot be ruled out.

Next Tuesday: Life Insurance.