By Genevieve Cua

RISK aversion remains fairly intense among individuals, but fund companies are rolling out equity products that they say can outperform in the medium to long term.

Whether they can raise substantial sums is arguable, as market volatility has whetted the appetite for stable fixed income type of investments.

Ironically, though, bond-like investments would not fare well in an inflationary backdrop. With default risk rising, due diligence is also key.

Equities, on the other hand, appear to offer value, even though risks abound.

Bill Barbour, DWS director and investment specialist, says: 'No one can tell you where the market is going. It's very important for investors to understand that great money is made when you take a contrarian view... There are great opportunities for astute investors who can take a two to three-year view.'

Here is a bird's eye view of some of the offerings.

DWS Global Inflation Buster Fund

This fund's catchy name is likely to win it some shelf space among banks.

Inflation, says Mr Barbour, is a secular trend. But perhaps even more importantly, these are 'opportune' times to begin to invest in the market.

'We think it's quite an opportune time. It makes far more sense to launch an equity product after we've seen extensive market declines. Markets are off by about 20 per cent; we're looking at valuations we haven't seen in 20 years. We're looking (into) companies that are advantaged by inflation.'

While the fund's name suggests an inflation-beating target, its stated objective is a tad more mundane - to beat the MSCI All Countries Index by 3 to 5 percentage points.

The fund aims to invest through three themes.

One is defensive opportunities, or companies that are natural inflation hedges due to their commodities-related businesses. These include companies in metals and mining, agriculture and energy.

The second theme is growth opportunities, or domestic consumption. Here, the bias is towards emerging markets.

And the third is tactical or companies that have financial or operational leverage.

Generally, companies that are 'inflation-resistant' should have pricing power, a strong market position and strong cash flow.

Given the widespread perception that commodities prices are toppish, some investors may believe the same holds true as well for stocks in the resources space.

Lead portfolio manager Andrew Tan says: 'It boils down to valuations. Lots of energy companies, ranging from top tier global companies to national companies - their price earnings multiples are less than nine times for the current year. Several offer cash dividend yields of more than 4 per cent. At nine times PE, this implies an oil price at less than US$90 a barrel.'

Mr Barbour says when one invests in a backdrop somewhat similar to the 1970s, one's point of entry becomes crucial to returns.

'We're looking at investing in companies at distressed valuations...We think we're close to a bottom. We don't know where the bottom will be. But what you need to do is to have a two to three-year view.'

AllianzGI Choice Equity Fund

This is a fund whose strategy typically may not be accessible by individual investors. Using a long-short market neutral strategy, the fund aims to achieve stable returns and pay an annual coupon to boot of 7 per cent.

The long-short positions are effected through a total return swap, and not directly through investments in shares.

To achieve market neutrality, each long position must have a corresponding short position in a stock in the same sector.

Kwok Keng Han of Allianz Global says what makes this fund different is the 'purely fundamental analysis' that goes into the selection of stock pairs, as opposed to quantitative or statistical arbitrage. Hedge funds employing the latter strategy incurred significant losses last year.

'We believe our philosophy differs in that by using fundamental analyses, we can uncover better stocks...We focus on fewer companies and take more concentrated bets.'

It may take time, however, for value to be realised.

'We consistently review the positions to see whether the (idea) is still viable and the story is still in place.'

At any time, the fund can have 15 to 40 pairs of stocks. Turnover is expected to be low.'

'Essentially, we're trying to bring a hedge fund strategy to the market, as having market exposure or beta is a concern.'

The fund was started in February this year. It has since then returned 4.6 per cent. Oppenheimer Capital, which acts as investment adviser to the fund, has a similar portfolio with a returns history since June 2006.

The fund has delivered total returns of 20 per cent up to April 2008, compared with 0.4 per cent for the S&P500.

While the strategy aims to deliver stable returns, it is likely to underperform when markets are strongly rising. It is also expected to underperform a fund that purely short-sells stocks in a falling market.

The return target is 2.5 per cent. A performance fee applies on returns in excess of that in the first year. In the second year, the performance fee will be charged on excess returns above a high water mark.

Schroders Global Active Value Fund

These fund uses a quantitative engine to pick the most undervalued stocks. The global active strategy, for example, screens 15,000 stocks daily using five metrics - dividend yield, cash flow, earnings, sales and book value.

These stocks are ranked by value; the top third go into the portfolio. The portfolios are 'unconstrained' by any benchmark.

Schroders head of quantitative equity products Justin Simler says: 'You are rewarded for being patient. The most effective long-term strategy is to invest in value stocks that are priced too cheaply and offer the best prospects for future returns. To capture this, you need to be systematic.'

The fund is not available yet, but may be launched for the sophisticated market later this year. Its diversified exposure to over 500 stocks avoids 'torpedo risk' which could easily arise in concentrated portfolios.

The approach also gives people the courage to invest in stocks that may be shunned by others.

'One reason that value outperforms is the premium you receive from investing in inherently riskier, lower quality stocks,' says Mr Simler.

In any case, based on academic studies, value investing outperforms in the long run. Using simulated data, the global active value strategy beat the MSCI World index in three out of four years over a 20-year period to 2008.

There are three environments where value is likely to struggle - in a bubble scenario (1999), amid fear of recession (1990) and the interest rate shock of 1994.

So, what are current valuations tell us?

Mr Simler says that based on the US market, valuation spreads for some sectors have reached peaks not previously seen over a history of 50 years.

Valuation spreads among financials, pharmaceuticals and consumer durables, for example, are at about 100 per cent or close to that.

Still, he says it is difficult to say whether the market has bottomed.

'We think there is further to go before a turnaround...But we're close to levels which have signalled a reversal or tightening of those spreads.'

This article was first published in The Business Times on 23 July 2008.