Better returns, but higher risks for savers

Saturday 1 September 2012

Savers who are struggling to cope with low interest rates and high inflation are moving their money into more adventurous investments in the hope of a better return.

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NAOMI CAINE

But experts warn of the risks involved, particularly for novice investors.

Sheridan Admans, investment adviser at The Share Centre, a stockbroker, says: "Riskier investments have the potential to deliver higher returns, but they are not guaranteed. You cannot even be sure you will get back your original capital. So savers should be very careful because they need to be able to sleep at night."

The typical interest rate on a standard no-notice savings account is now 1.06%, while inflation is at 2.6%, so it's perhaps no surprise that savings are at their lowest level for 12 months. But business in investment funds is booming. Sales reached £8.1 billion in the first half of 2012, almost double the £4.4bn total in the second half of 2011, according to the Investment Management Association (IMA).Jason Hollands of Bestinvest, an independent financial adviser, says: "Interest rates have been lurking at an all-time low for three years and, in my view, are unlikely to rise any-time soon. Meanwhile, inflation is well ahead of the Bank of England's target, with CPI at 2.6% and RPI at 3.2%. Unfortunately there are few safe havens in the current environment. Income seekers therefore have to move along the risk spectrum just to stay ahead of inflation." Cautious investors traditionally buy government bonds, sometimes called gilts, to boost returns. But the gilt market is under pressure. Mr Hollands says: "Gilt yields are unattractive, with the yield on 10-year gilts at just 1.6%." In other words, the return on bond funds is next to nothing after charges.Investors who want to stick with government bonds might be better off with a global bond fund that gives them access to government bonds across the world. Mr Admans says: "Many of the emerging markets are not in debt like the western economies, so a global bond fund can be a good option – as long as you can cope with the currency and political risks."The Templeton Global Bond Fund is a favourite among advisers and invests heavily in Korean and Polish government bonds. The yield is just above 2%.The next step on the risk ladder takes you to corporate bond funds. James Bateman, head of manager selection at Fidelity, the fund manager, says: "Investors can often get a better yield from corporate bonds than government bonds without taking on much more risk. "After all, which do you think is riskier: GlaxoSmithKline or the French government?" Recommended funds in this sector include M&G Corporate Bond and Invesco Perpetual Corporate Bond. But investors should be careful. Mr Admans says: "There are broadly three types of corporate bond fund. The standard funds invest in high grade bonds and are the least risky. "Strategic bond funds have a broader remit and can invest in a wide range of fixed-interest securities such as preference shares."Then there are high yield bond funds that can buy riskier bonds that pay higher yields."Strategic bond funds give managers greater flexibility and are the top pick of many advisers. Popular funds include M&G Optimal Income, Legal & General Dynamic Bond and Kames Strategic Bond. However, the popularity of the funds has pushed yields down to between 3.3% and 3.5%. Mr Hollands says: "For those willing to take on more risk for more return we like the AXA Global High Income Fund which is yielding 5.1% and focuses on bonds issued by companies with lower credit ratings."Corporate bond funds are popular, topping the IMA's sales charts for the past seven months. But investors who can stomach the stock market might prefer an equity income fund, which invests in companies that pay high dividends.Equity income funds are also attracting investors with yields of 4% or more. Mr Hollands says: "Since March 2009 when the Bank of England base rate was cut to 0.5%, inflation has eroded away the real value of cash by 12.05%. However, over the same period, the FTSE UK Equity Income index has returned 92.76%, far outstripping the effects of inflation."The other advantage of an equity income fund is the potential for a rising income, plus capital growth.But share prices can be volatile and you should be prepared to tie up your money for at least five years to ride out any ups and downs in the market. Experts recommend Artemis Income and Fidelity Moneybuilder Dividend. If you want to go global, there's Newton Global Higher Income.Before leaving a safe haven it's a good idea to consult an adviser, who can also tell you how best to avoid high fund charges and maximise any tax breaks by investing in an Isa.

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Better returns, but higher risks for savers

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