Andrew Wilkins, Executive Director at Catalyst Investment Group, discusses the growing appeal of alternative assets in the current economic climate as investors look to maintain a secure and stable income.

2009 doesn’t look set to be the sunniest of years for investors. With the major indices posting dramatic losses, Sterling teetering near parity with the Euro, commodity prices plunging and the prospect of interest rates nearing zero, more traditional savings and investments are far from offering the kind of assured growth of years gone by. Meanwhile, as investigations into the evolution of this financial crisis have started to reveal the risky practices lurking beneath the City’s cool exterior, investors have become rightly concerned about where and with whom they should entrust their money.

As fears for the wider economy continue to mount, the majority of investors will be looking for a steady and fairly generous rate of return where negative or fairly flat figures are all too common. They will increasingly seek schemes that provide stable and fixed incomes and will therefore need to look at options offering returns uncorrelated with the major markets. In short, investors will have to start looking at alternative assets.

Greater understanding, and an ability to evaluate the investment opportunity these funds and their underlying assets pose, will now be required of IFAs. The careful selection of such a vehicle may also offer the only real, viable opportunity for more seasoned clients to regain money lost by tumbling equity markets, who cannot afford the luxury of time.

Quality control

Financial products that can produce an income or capital gain, uncorrelated to the stock market or other traditional benchmarks are gaining ground in the current economic climate. For example, significant inflows have been witnessed in recent months into Senior Life Settlement (SLS) backed products, which invest in the secondary trade of US life insurance policies. As the pay-out on such an investment is linked to the underlying policy maturing (which is fixed and predetermined), investors can be more confident of the value of the asset. It is also fairly easy to model the rate at which the policy’s maturity can be expected, and thus the expected rate of return.

This is just one example of the plethora of asset classes available to the investor that can deliver returns around a fixed ‘event’. The advantages of these kinds of vehicles are clear. Their returns are uncorrelated with the market and thus circumvent the kind of cyclical, investment or economic risk exhibited by riskier securities.

The IFA’s ‘tick-list’

Although alternative assets may be attractive in these uncertain markets, it is essential that advisers look at both the quality of the underlying assets and the quality of the structure packaging the asset.

• Are high quality, independent auditors, legal advisors, custodians and administrators reviewing the performance of the fund?
• Are any guarantees underwritten by a stable and well-established partner, such as a leading bank or insurer?
• Is there a potential currency risk at stake, and does the fund include hedges to help mitigate any exchange rate risk?
• How long has the underlying asset class been around?
• Does it have a performance track record?
• How secure and how easily determinable is the future value of the asset class and the fund itself?
• Does the fund consist mainly of the core asset advertised?
• Are any other elements of a similar risk and nature?

The ARM Guaranteed Income Fund

Following increased demand from investors, Catalyst Investment Group and its partners have recently brought to market the ARM Guaranteed Income Fund. The fund is designed to provide a secure annual return for investors of 7.05 per cent over a nine year time-frame, without stock or bond exposure. A-rated Commerzbank AG is acting as guarantor for the income paid to the fund. Both SIPP and SSAS plans can invest in the fund, or investors can commit monies via an ISA or PEP.

The fund is able to deliver such attractive returns by investing into the rapidly expanding SLS market. Capital will be invested into two financial instruments (notes) issued by Commerzbank AG. The first of these notes will secure the guaranteed annual income element to the fund. The second note references the Vis Vitalis Index, which tracks the performance of a number of independently managed portfolios of diversified SLS policies. Exposure to Commerzbank’s SLS Index offers investors additional advantages to investing in SLS directly, by enabling significant diversification across a number of individual life policies, life insurance companies, fund managers and trading strategies.

In conjunction, the notes are intended to achieve the overall investment objectives of the fund: firstly, of guaranteeing the annual income and, secondly, of providing the basis for a targeted return of at least 100 per cent of initial capital at the end of the term, above which a performance fee applies.

While the income paid to shareholders is guaranteed, the initial capital is not and will reflect the performance of the Index. The underlying investment of the fund and therefore its guarantee is dependent upon the solvency of Commerzbank AG.

It is the view of Catalyst Investment Group that uncorrelated returns of this sort will become increasingly attractive to clients.
In view of the virulence of the financial crisis and the expectation that the economy will take some time to rebound, IFAs will need to help guide clients to more diverse and informed investment options. Now, more than ever, it is time for advisers to look carefully at the choices available and lock in returns as the bear market continues to erode the attractiveness of traditional investments.

This financial promotion is for Investment Professional only and should not be passed onto or relied upon by retail clients. The fund is an unregulated collective investment scheme and is therefore for qualifying investors only.

Should you wish to discuss any themes or products featured in this article, please conact Catalyst Investment Group on
0207 933 8750.

Andrew Wilkins
Executive Director, Catalyst Investment Group