The banking crisis and property crash have provided an extraordinary lesson for Irish investors on some of the most important aspects of investment portfolio theory, particularly with regard to concepts such as counterparty exposure, asset class, sector, currency and geographic diversification and liquidity. Even since the dramatic destruction of wealth visited on Irish investors since 2007, professional advisors and pension fund managers continue to market supposedly “diversified” portfolios with as much as 70% exposed to specific asset classes such as equities or long dated Sovereign Bonds. Irish Managed pension fund surveys point to equity allocations in excess of 75% despite historically high correlations between different stock markets Private client stockbrokers, bloodied from their ill-fated foray into private equity funds and syndicated property deals, have moved back to advising almost solely on shares and Sovereign Bonds but again with little in the way of a structured or robust approach to risk management.
Bank depositors through the turmoil of the last three years have also come to a better understanding of the concept of counterparty risk. At the height of the crisis surrounding the Irish Banks and the Irish Sovereign in late 2010 and 2011, risks varied from a major default by the Irish banks on their deposits, the ability of the state to honour its guarantee of bank liabilities including deposits, to a redenomination of deposits from Euros into a heavily devalued new Irish currency. Subsequent IT problems at Ulster Bank have reinforced the view that bank deposits like any other investment face their own specific set of risks and should be approached on the basis of reconciling the level of return with the level of risk and never being over-exposed to any one counterparty or risk no matter how secure these appear.
The objective of this paper is to outline an alternative approach to investing “safe-haven” funds in a way that minimises risk of loss of buying power either through investment loss, counterparty default or inflation erosion.
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