How to pick the path for higher returns

of a year. If the unit price fell, I wouldn’tknowwhether itwasdueto the ficklenessof themarketor toproblemswith someofthe companies in which the fund wasinvested. For me, ignorance is not bliss.I enjoy the feeling of owning a portion

of the companies inwhich I’m invested. Iwant to think like an owner; to under-stand the companies’ products andservices; to get behind thedrivers of salesvolumesandmargins; to feel comfortablewith their long-term strategies.In short, I want them to succeed. I

cannot get that same sense of ownershipand belonging through a pooledarrangement.Pension legislation forcesme to takean

annual “income” frommy pension fund,whether I want to or not. With a pooledarrangement, Iwould have to sell units—possiblywhenpricesweredepressed—togenerate the necessary cash. This is nor-mally not an issue with direct invest-ment. The combination of regulardividends and normal turnover— sellingshares I think are overpriced andreplacing them with others I considerunderpriced — ensures healthy cashflows throughout the year. Thisminimises the risk of having to make

forced sales to find the cash for thecompulsory “income”.Over the past seven years, my invest-

ment performance has been above theaverage for professional fund managersbut I won’t claim any special expertiseuntil I have survived a severe downturn.Judging from the market so far this year,2016 could provide that challenge.Investing directly and keeping an eye

on the businesses in which my money isinvested means I can sleep more easilythan would be the case if I had the samelevel of equity exposure through a pooledarrangement. I’m fortunate in that myprofessional background and experienceenablesme tomake reasonably informedassessments of companies’ long-termprospects. Short-term price fluctuationsdon’t faze me. I can focus on the realenterprises that ebband flowbeneath thefroth of volatility. This has a calmingeffect.It should not be beyond the wit of the

financial institutions to find ways ofbringing this long-term calming per-spective to their customers. When mar-ried to their superior investmentexpertise, itwouldmake for a compellingproposition.

friends and acquaintances. Unfortunately,threeofthesesurethingsarerunninginthesame race.What this confirms is that thereare no certainties in racing; this is equallytrue of investing.Investing in too small a number of shares

carries unnecessary risks. It is best not to“put all your eggs in one basket”. Simpleadvice but the number of investors whowere overexposed to particular sectors inthe financial crisis suggests even the moststraightforwardadviceisoftennotfollowed.Atypicalinvestmentfundwillgiveexposureto more than 100 companies across assetclasses, sectors and geographies.There is an old poker adage that, if you

cannot spot the novice at the table withinthe first five minutes, then it’s probablyyou. Investing involvesamixtureofpeoplebuying and selling shares; they will be amixture of professional and novice inves-tors. There is no reason to be the novice.My own company employs the services

of two of the largest asset managers in theworld, State Street and Bank of New YorkMellon.Theirexpertiseandprofessionalismguides our decisions and helps ensure welook after the interests of our customers.Thehardpart about investing ismaking

sacrificestodayandputtingmoneyasideto

enable a car to be bought, school fees to bepaid or to ensure a more comfortableretirement. The hard part should not beworryingaboutwhatthelatestglobalcrisiswill do to your portfolio and whether youshould sell everything or stay put. A widechoiceof investment funds isavailable thatwill match your risk profile. A goodexample of this is New Ireland’s lifestylefunds, which automatically switchclients into lower risk assets in the yearsbefore retirement.Anindividualbuyingashareorproperty

onhisorherownwill incura largenumberof transaction costs. Investing in a sharedfund is a great way of using the combinedpurchasing power of a number of investorsto obtain the best price available to thelargest and most favoured clients. Theeconomy of scale of shared investmentfundsmounts up over longer time periods.To return to the hill-walking analogy,

there are many ways to climb a mountainandallof therouteswill takeonetothetop.For the more adventurous DIY investor,climbing on your own on an unfamiliartrack will be exhilarating, but perhapsa little fraught. I would recommendtravellinginagroupwithanexpertguide—it’s still fun andmore than a little safer.

Savers looking toimprove ondismaldeposit ratesare turning toinvestment—butthere are differentroutes to follow,writesNiall Brady

COMMENTHouseholds reluctant topaywater chargesshould thank CharlieMcCreevy for givingthem away of gettingtheirmoney back.

One of his pet projects duringhis exile in Brussels as a Europeancommissioner was the creationof the single euro paymentsarea (Sepa).By imposing common

standards throughout Europe,Sepa ended banks’ ability to usetheir control of national paymentsystems to block competitionfrom abroad. Sepa also gavecustomers a stronger hand,although this benefit is oftenoverlooked and tends not to behighlighted by banks.Under Sepa, you have the right

to demand that your bankrefunds any direct debit paymentthat left your account within theprevious eight weeks. You do nothave to give a reason. You do nothave to prove youweremisled orconned intomaking thepayment. All that is required is a

change ofmind. Your bank isobliged to refund the direct debit— no questions asked.Withwater charges looking

like an optional expense since lastweekend’s general election, Sepaprovides away of opting out, atleast for direct debit paymentsthat left your account since themiddle of January. You cannotreverse all of the paymentsmadesince bills began arriving fromIrishWater last year but you

can at least recover the lastdirect debit.Exercising your rights under

Sepa does notmean you nolonger owe themoney and IrishWater could decide to pursue youfor rescinded payments. Before itgets to you, though, thebeleaguered utility wouldprobably have to tackle all of theother householders that haveboycottedwater charges fromthe beginning.

Pension off this ruleThe pensions timebomb isprobably too tricky and definitelytoo costly to be tackled by theshakyminority government thatwill be cobbled together over thecomingweeks. However, there isone pension problem that couldbe solvedwithout any politicalrisk or cost to the exchequer.It concerns that plight of up to

70,000 private-sector employeeswho have left defined-benefitpension schemes since 2011.Somewere forced out when

their employers wound up theschemes because the cost ofproviding guaranteed pensionshas spiralled out of control. Inother cases, the decisionwasvoluntary. Members chose to takethemoney and run afterchanging jobs because theyfearedwhatmight happen if theyleft their pensions behind and theschemewaswound up in future.Revenue decided in 2011 that

these people have only one optionwhen they reach retirement: they

must use the proceeds of theirpension to buy an annuity if theyhave been in a scheme formorethan 15 years.This rule condemnsmany to a

meagre retirement becauseannuity values have plunged dueto low interest rates and longerlife expectancy. It contrasts withthe freedoms extended to almostall other private-sector workers,who can keep their pensionsavings intact after retirement tomanage as they see fit. This doesnot guarantee a happy-ever-afterbut at least it offers the chanceto plan something better thanan annuity.Compulsory annuity purchase

has been rightly condemned onall sides of the pensions industry.Pensions ombudsman Paul Kennydismissed it as an absurd rule thatserves no purpose. TonyGilhawley, an actuarialconsultant, believes it may beunlawful because Revenue hasoverstepped its powers.Aswith all ill-conceived rules,

there have been unintended

consequences. Some early leavershavemoved the proceeds ofdefined-benefit pensionsoffshore to escape compulsoryannuity purchase. This is fraughtwith danger.It exposes those going offshore

to the vagaries of pension law inplaces such asMalta. It isexpensive because of the need topay advisers and fixers in all ofthe jurisdictions involved in thetransfer. There is also the risk ofincurring thewrath of thetaxman in Ireland, whichsuspects offshore pensiontransfers could amount to taxevasion rather than a legitimateway of dealingwith a daft ruleconcocted by Revenue. Scrappingthe rule would be an easywin forthe next government, whoeverthatmight be.

No swerving SetantaEither way youwill pay.Whilelast week’s court decision onwhoshould pick up the tab for thecollapse of Setanta Insurance in

2014 has important implicationsfor insurance companies, it waslargely irrelevant for theircustomers.Motorists were always on the

hook nomatter whichway thedecisionwent. In the end thecourt decided the bill should restwith theMotor Insurers’ Bureauof Ireland, an industry fund thatcompensates victims ofuninsured and hit-and-rundrivers. Its backers, the insurancecompanies, are sure to pass thetab tomotorists in the form ofhigher premiums.The outcomewould have been

the same formotorists if the courtdecided that the state’s InsuranceCompensation Fund should carrythe can because it would haveincreased the levy alreadyimposed on policies.With premiums already rising

bymore than 30% a year, theSetanta debacle could not havehappened at a worse time.

niall.brady@sunday-times.ie;@Niall—Brady

NIALL BRADY

Customers might reverse the cashflow on water charges

THE hunt for better returns is turningsavers into reluctant investors but manyare unsure of the best way to go about it.Building a personal share portfolio —

the DIY approach — puts you in controlbecauseyoupicktheshares inwhichyourmoney is invested. Funds claim to taketheguessworkoutof investing, spreadingyour money across many shares chosenby expert investors.Either option seems certain to earn a

better return over time than you couldexpect fromdeposits. If your grandfatheror great-grandfather had deposited theequivalent of €1 with an Irish bank in1900, it would be worth €239 today,according to the Credit Suisse GlobalInvestment Returns Sourcebook 2016.If he had invested in the Irish stock

exchange, the €1 would have grown to€16,038.We ask two investment professionals,

one who takes a DIY approach to man-aging his pension and another whofavours leaving investing to the experts,to argue their case.

DIY APPROACH“I want to think likean owner”Colm Fagan,retired actuarySome of my friendshave turned theirbacks on conven-tional pensions.Opting instead forresidential prop-erty, they plan to

use therental incomeasapension. I thinkthey are wrong but I can see where myfriends are coming from. Great comfortcan be drawn from seeing your moneybuying real assets, knowing that theywon’t disappear overnight and they willgenerate a dependable long-termincome.For many of the same reasons, I have

decided to invest my pension fund inindividual shares. I believe shares ingood-quality companies, bought atreasonable prices, will generate depend-able profits and dividends in the longerterm. Entry and exit costs are relativelylow and it is possible to obtain a reason-able spread of investments for a fractionof the cost of an individual property.Shares are also much easier to dispose ofthan property.I invest in less thanadozencompanies,

so I have a good idea what to expect fromeach of them in terms of profits anddividends.This allowsmeto treat tempo-rary price falls as minor irritants, pro-videdprofits anddividendsaremoving inline with my expectations.Having a reasonable understanding of

the businesses helps me take the occa-sional piece of bad news with a degree ofequanimity. Being in control, I canalways sellmyshares if I’munhappywitha company’s performance.In contrast, a pooled fund invests in

scores, possibly hundreds, of companiesand the number of buy and sell decisionscould run into thousands over the course

FUNDS APPROACH“There is no reasonto be a novice”Sean Casey,managing director,New IrelandAssuranceIn today’s world oflow interest rates,many savers arestarting to lookbeyond traditional

savings accounts to achieve meaningfulreturns. Of course, investing longer terminvolvestakingriskand,tominimisetheserisks, it is important for the cautiousinvestor to take a prudent approach. Myown experience of more than 30 years inthe financialmarkets includesanumberofmishaps fromwhich I have tried to learn.At weekends, I can usually be found

aroundtheWicklowhillsand, touseahill-walking analogy, while there are manyways to the top of the mountain, there isgenerally a safer route. That’s the one Ihope to sharewith you.Iwill be travelling toCheltenhamfor the

horseracingshortly,hopingtobenefitfroma number of “sure things” advised by

Someinvestorswill want topick and mixtheir owninvestments,while othersfavour aguide leadingthem tothe top

Money MOVING ON UPTO FIRST CLASSHeather Small’s financial treat p13

thesunday t imes . i e

06 .03 . 2016