Don’t be scared of investing in shares – but choose the right manager to manage your risk

Your choice of investment manager can make a significant difference to your returns. Just as importantly, it also affects the level of risk to which you are exposed. Independent research by Plexus has shown that within each unit trust sector, and therefore for funds with similar objectives, the level of risk to which you are exposed can vary, often quite materially.

If you apply this to share or equity investing: There are two main reasons for investing in shares (or equities as they are also known), to generate capital growth and benefit from any income that the shares pay out. When you invest in shares, you are in effect buying a stake in a business. As the business grows and develops, you stand to benefit from the increase in the share price, generating growth on your capital. As a share investor, you also benefit from payouts in the form of dividends, which is how a company distributes excess profits to its owners. But there is always the risk that the individual business may not grow and do well, and your combined portfolio of shares may therefore be more “risky” than you anticipated.

So if you want to benefit from the long-term returns that shares have been proven to deliver, you are faced with many choices. Should you go it alone and build up your own share portfolio? Or could you benefit from the expertise of a professional portfolio manager and delegate the intricacies of these decisions to them?

There are benefits to each approach. But there are also costs. Not least of which is the opportunity cost associated with getting it wrong and losing out on valuable time to make up for negative returns. This is why John Kinsley, Managing Director of Prudential Portfolio Manager’s Unit Trusts says “If you don’t have the time, expertise and a disciplined framework for making investment decisions, you will be better off leaving this to the experts.”

According to Kinsley, “The best results for your money are based on two things: how much return you get, and as importantly, how much risk you are exposed to in generating that return.”

“Any professional portfolio management team worth its salt is supported by a team of experts including researchers, analysts and professional traders who have the ability and tools to implement investment decisions cost-effectively and timeously.” He emphasises that the entire team should subscribe to an investment philosophy and apply a disciplined investment process to get the best results. And manage your risk.

According to Kinsley, “Some equity investors remain nervous about the possibility of slow global economic growth, and even the risk of a ‘double-dip’ recession. However, if investors focus on current market valuations and consider the actual past history of asset-class returns, they will be well rewarded for holding equities in their portfolios.” Just be sure to choose your investment manager with care!

The Prudential Equity Fund generated the highest return in the Domestic General Equity Unit Trusts sector for the seven years to 30 June 2010 with the second lowest risk and is also one of only two funds to be awarded a 5 Star Plexcrown* rating.