Play the markets your way
Article Date: Jul 12 2006
These self-made success stories can be ‘a difficult breed’, he laments. ‘They think they’re God’s gift in everything, but running their business is far simpler than running investments. These people don’t realise you can’t control markets in the same way as your own company. Lots of clients in this category are happy to take risks with their own enterprises, but they don’t like to accept risk outside them.
‘Second-generation money is quite different,’ he adds, ‘more used to relying on advisers. It’s the hands-on guy who can prove difficult.’
On this point, Fraser is blunt. ‘Don’t try to involve yourself directly in the investment enterprise. You may be first-rate at running your own company, but why should you be able to run another type of business?’
Yearsley at Hargreaves Lansdown echoes the view that entrepreneurial clients need to think hard before committing their money. He says clients need to answer some key questions for themselves before plunging into investment markets. ‘What is your attitude to risk?’ and ‘How much time are you going to be able to commit to your investments?’ are among the most important.
If you are not going to have the time to make investment decisions throughout the day, you will need to develop a rapport with an investment manager who understands your motivations, inspires your confidence and can be trusted to carry out your wishes.
What to go for
One reason for portfolio investing is to reduce the risk of total dependence on your own business and a cool, calm and unsentimental head is needed to make the most advantageous moves in the investment game. Therefore, it probably makes sense to steer clear of putting money into the same sector as your own company – unless your information is so good it falls only a whisker short of insider knowledge. ‘If you buy into quoted companies, they should be in different areas from your own company,’ urges Yearsley, explaining, ‘you don’t want to go down the drain together.’
Many entrepreneurs make their first outside investment in property, ‘which they understand’, says Fraser, before moving on to other instruments. Index-linked gilts (Government securities) provide the most freedom from risk, but precious little else, while past evidence suggests equities will outperform almost everything else, except perhaps property.
Investment trusts and unit trusts represent potentially advantageous long-term investments, provided you have assured yourself of the fund manager’s track record, skill and probity, as well as checking that the fee-charging structure is fair and not stacked against you and in the manager’s favour. A unit trust, from which holders can redeem their investments, may perform very well in a ‘sexy’ sector but be vulnerable to a flood of redemptions if the market turns downwards.
Hedge funds, which can sell short as well as buy shares, have attracted a somewhat lurid reputation as high-risk corporate manipulators. But the sector has ‘grown in maturity and transparency’, argues Fraser, and can offer a worthwhile play.
‘If you expect them to generate consistent 25 per cent annual growth, that has risk,’ he warns. ‘But, using a strategy of short sells and long buys [selling stock then buying it back once the price has dropped], they can certainly outperform the market.’
If tax considerations are important, there are several alternatives to consider, some long-term and illiquid and others quite the reverse. Enterprise Investment Schemes, film finance and the like come with generous tax reliefs and can, in some cases, provide handsome returns, but you may have to wait some time before being able to make your exit.
Venture Capital Trusts also bring fiscal incentives. Investing on AIM, the London Stock Exchange’s successful junior partner, VCTs offer tax relief on capital gains and losses, and inheritance tax, among other boons.
