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On the edge with high-risk funds
By Sam Barrett
If you're looking for a little more excitement from your investments then it could be time to spice up your portfolio with some higher-risk funds. As well as offering more thrills, as the extra volatility means they rise and fall more, this greater risk means they also have the potential for greater returns.
Because of the slowdown in the more developed markets of the UK, US and Europe, thrill seekers might need to look further afield right now.
"The area that will be the most interesting in 2008 is Asia Pacific," says James de Sausmarez, head of investment trusts at Henderson Global Investors. "It includes China and India, which are well tipped but a little over-valued, and the South East Asian region isn't very dependent on the US so it won't feel the effects of the credit crisis so much. The whole area offers
potential over the next year."
Although Dan Looney, investment liaison manager at independent financial advisers Towry Law, prefers an asset allocation approach to investment over tipping individual funds, he also sees potential in parts of Asia Pacific. In particular he believes China, India and the wider Asia region are set to perform well.
"They've got very good demographics with a young population and a developing middle class," he explains. "The US empire is in decline and if these countries can develop their middle classes they'll grow further."
Rush into Russia
Mark Dampier, research director at Hargreaves Lansdown, believes Russia is also worth a look. "It's the cheapest emerging market and it's been overlooked recently because of Putin and the elections. This has worried investors but it's had some very strong growth this year, rising by around 20%," he says. "I'm not against China and India, but they're not as good value as Russia."
Also in its favour is the huge amount of oil and gas that the country has. Additionally, while other parts of the world suffer from the fallout from the credit crunch, Russia is largely insulated from it with a strong domestic market keen to buy property. But Looney isn't so convinced by the Russian argument. He believes there are fundamental issues that have the potential to hamper any growth. "Corporate governance is an issue in Russia. Things could change very quickly, which would affect your investment in the country," he explains.
More well-known markets can also make an appearance in the exotic pile. Anna Bowes, investments manager at AWD Chase de Vere, tips the 1980s boom market, Japan, for big things in the next few years. "It's been a complete dog for a long time but I'm expecting the market to pick up again in 2008. China's still got a long way to go but it's had a lot of exposure and is a bit expensive," she explains.
As well as looking at regions, some specific sectors are also grabbing the experts' attention. For example, de Sausmarez is tipping property securities as a higher risk prospect. "Direct property isn't great but global property securities such as Real Estate Investment Trusts (REITs) look attractive. Discounts are higher than they should be, so you're getting good value for your money. This means markets have got to come back up again," he explains.
Whether you're smitten with China or hot for Russia, given the uncertainty about these regions it's prudent not to fill your entire portfolio with them. Dampier suggests a maximum of 5% if you opt for a single country such as Russia, with a maximum of 20% of your portfolio going into the higher-risk areas. "These markets are incredibly volatile. China can move by 25% in a matter of weeks so you need to be prepared for the falls as well as the rises," he adds.
Nick O'Shea, director of independent financial advisers Pharon, also cautions against filling your boots with emerging markets and riskier stocks. "If you're an adventurous investor go for between 15% and 20% exposure. You don't need to introduce those levels of volatility to get returns," he explains.
Although you can invest in shares of companies in these riskier areas, funds offer a much safer way to gain exposure to them. Rather than exposing you to the fortunes of just one company, funds invest in a range of companies of different sizes and from different sectors.
On top of this, your fund is managed by a professional who specialises in the area. Many will also have a team based in the region to help them identify good prospects.
Avoid over-exposure
Before you pick a fund investing in a new region it's wise to check your existing portfolio. "You might already have some exposure to the market anyway," says Looney. He recommends checking the portfolios of the other funds you hold to see whether it's already included. "You need to do an x-ray of your portfolio so you can see exactly where your money is invested," he adds.
Even if you don't have any exposure already, you don't need to plump for a country-focused fund to get exposure to a new market. Regional funds can help you get the exposure you want. For example an Asia Pacific fund will contain some exposure to China, Japan and India.
An emerging markets fund will have an even broader investment remit, taking in countries in Europe, for instance Turkey and Eastern Europe, as well as more far flung countries such as China, Brazil, India and South Africa.
Going broader is useful as it gives you valuable diversification as well as helping you to keep your exposure fairly low. But, if you do take this route, check the fund's country weightings to make sure you don't inadvertently bump up your exposure to a
particular country or region. For example, according to financial information company Trustnet, fund has 7.1% of its portfolio invested in China. Invest in the Aberdeen's Asia PacificAberdeen Emerging Markets fund alongside this and you'll have 7.9% of that investment also in China.
Another investment strategy that can help minimise risk is regular savings - dripping your money in helps to balance out the volatility.You can either opt for a monthly savings plan, to steadily increase exposure, or, if you have already committed your ISA allowance, transfer money from another fund within your ISA on a regular basis.
This gradual approach gives the benefits of pound cost-averaging. This is achieved because the price of the fund will vary each time you invest so you'll be able to buy more or less units depending on this. So if the market falls you'll be able to buy more units, which will hopefully grow when the market rises again.
But increasing your portfolio's risk profile won't be for everyone. Although greater risk does mean potentially greater reward, the extra risk won't always be palatable. "If you're getting close to retirement it's sensible to reduce the risk in your portfolio,"says Bowes. "You won't have any new money coming in so it will be difficult to replace any losses if the market drops dramatically."
Time is another important prerequisite. The volatility of these funds means you must be able to leave the money invested to ride out any dips in the market. If you have to withdraw it, you might lose out. Most importantly though, you need an appetite for risk and enough money set aside to help absorb losses. If the prospect of your portfolio losing 10% in a day gives you sleepless nights, then stick with something less volatile. The potential returns will be lower but getting rich isn't worth bags under your eyes and a nervous condition.
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