Firstly please accept our apologies for not posting items to this blog since the turn of the year. We have been fully occupied reviewing clients investments and following market events. We are certainly in for a challenging yet exciting 2009 and as a starter for ten here are our current views on investment alternatives for cash deposit based funds. With interest rates at all time lows and market positions offering tremendous potential now could be the maximum point of financial opportunity for many.With interest rates at all time lows and further reductions in base rate almost certain it explains why we have been inundated with requests for alternative forms of investments. The requests are simple; higher returns without increasing risk (significantly), the solutions are more difficult to find. However difficult is not impossible hence the purpose of this letter.
As I say we have received numerous requests from clients with different sets of priorities and ambitions. Therefore in order that we can cater for the various requests I list below several options that are currently proving popular with investors.
Firstly a quick reality check on just how low interest rates have fallen. A quick survey tells us that cash ISA’s from several leading banks have fallen as low as 1% (before the recent 0.5% cut) and when you consider inflation is still above 3% funds in these accounts is actually depreciating in value. Here are few examples: -
Alliance & Leicester Easy ISA = 3%
HSBC Cash e-ISA = 2.8%
Abbey Direct ISA = 2.3%
Clydesdale Bank Cash ISA = 1.5% - 2.75%
Royal Bank of Scotland Cash ISA = 1.15% - 2.20%
Lloyds TSB Cash ISA = 1%
Enough bad news let us move on to the solutions……….
Corporate Bond Funds:
Corporate Bond investment is proving extremely popular as investors strive to secure higher yield investments to replace lost income from falling interest rates. In terms of risk weighting Corporate Bond sits one step up from cash but with anticipated returns ranging from 5% to 8% the potential additional benefit is outweighing the additional risk for many clients. It is widely predicted that Corporate Bond funds will prove to be one of the best performing sectors in the current year.
Corporate bonds are issued by companies to raise capital. They are an alternative to issuing new shares on the stock market (equity finance) and are a form of debt finance. A bond is basically an IOU - a promise to pay back your original investment (the 'principal') at a maturity date, plus interest payments (the 'yield' or 'coupon') at regular intervals between now and then. The bond is a tradable instrument in its own right, which means that you can buy and sell it during its life, and its value will tend to rise and fall as interest rates change.
For private investors, the safest way into corporate bonds is to invest in a corporate bond fund which spreads the money from lots of investors across lots of corporate bonds, thus diversifying the risk. As with all funds, you need to choose the one that matches your investment objectives and risk profile. Some bond funds aim for 'high yield' (i.e. high income) but to get it they may have to invest in riskier companies. Other bond funds will aim for more modest income, and will only buy bonds of the most dependable blue-chip companies.
We believe Corporate Bonds offer an ideal alternative to cash based investments, particularly Cash ISA monies, and we have identified several core funds to recommend to clients that we believe will offer quality yielding products backed by capital growth potential.
In a number of cases we have been able to secure Corporate Funds with no initial charge and no exit charge making the complete package highly competitive and attractive.
Capital Protected Plans: -
With market positions offering exceptional value many investors are keen to take advantage of this point of financial opportunity but perhaps are fearful of the associated risk with so much doom and gloom still in the daily news.
Capital Protected products might be the solution for this style of investor as long as you are willing to tie up the funds for a number of years, normally 5 or 6. Capital Protection offers you the peace of mind to know that your investment is protected.
There are currently a multitude of Capital Protected plans open to investors reflecting the fact that investment houses believe now is a good time to be investing, but with protection wrapped around the investment. The key is finding the plan that is best suited to you and that will depend on your specific investment ambitions.
Typically a plan will offer at least 100p per share, regardless of the markets, plus 150% of any positive Final Performance of the Index it attaches to.
We believe Capital Protected plans will appeal to those investors whose objective is to achieve capital growth linked to any positive performance of the index over the investment term in the understanding that the investment will be 100% protected up to a fixed maturity date.
Accordingly investors will benefit from Capital Protection and from the potential growth of the markets to receive a return superior to an ordinary deposit account. We believe Capital Protected plans are attractive alternatives for investors looking to re-coup positions or re-energise flagging investments, particularly equity based ISA’s.
If Capital Protected Plans are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.
Distribution Funds:
Moving up the risk scale ladder a little further (but still on the bottom rungs) Distribution Funds have proven themselves time and time again in and out of recession.
Distribution funds are structured so that capital growth and income can be separated from each other. In most cases, a significant part of the portfolio is invested in fixed interest stocks (corporate bonds, gilts etc.) to provide the underlying income. The other main investment is usually in income-bearing equities to provide further income and give capital growth potential.
Saying that, there are some major differences between funds, which need to be recognised. Such as inclusion of property, UK or global based, bias towards equities or fixed interest, etc.
Distribution funds are typically used by investors seeking income. However, as income can be reinvested, they can also be suitable for investors looking for growth on a total return basis. There are number of income withdrawal options available to investors, these are:
A percentage of the initial investment paid monthly, quarterly, half-annually or annually. Under this option all distributions are reinvested to purchase additional units and then regular withdrawals are made by cashing in units. By using this method the 5% rule can be utilised to maximise the tax deferral facility and in most cases ensure tax free income payments.
A specific cash amount on a regular basis. This works very much along the same lines as the above option. It should be recognised that in adverse market conditions, both this option and the above option are likely to erode capital from the fund.
The full distribution where investors take all distributed income, generally on a six-monthly basis. The withdrawals will vary depending on the size of distributions but should provide a rising income over the long-term, as the fund benefits from capital growth. In addition, these withdrawals are taken from the distributions and so units are not cashed in.
Deferred income (no withdrawals) where income is automatically reinvested and used to purchase additional units in the fund chosen. Generally an investor can choose to take an income at any time in the future.
As I say Distribution Funds, whether deferred or income producing, have proven themselves time after time with the fixed interest element of fund offer some protection through these troubled times and the equity element offering real growth potential particularly given the current market positions.
If Distribution funds are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.
Investment Bonds:
Finally we have traditional investment bonds offering no protection but unlimited upside potential. Through the ability to spread investments over a wide range of funds covering assets classes and sectors investors can take advantage of the lowly market positions yet maintain a degree of caution through diversity.
With unlimited funds covering all asset classes, sectors and geographic areas available through investments bonds with no initial charge and no exit charge exciting opportunities arise for the more risk orientated investor and we would be pleased to consult, review, research and recommend individual solutions for the bolder investor.
If Investment Bonds are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.
Pensions:
Don’t forget about pension contributions. Now is probably one of the most attractive times to make additional pension contributions. What other form of investment guarantees a 20% (or 40%) immediate return on capital with or without risk depending on your fund selection. The tax relief associated to pension contributions is more attractive than ever and should not be dismissed lightly.
When you add the tax relief to the potential growth through cheap markets and the enhanced flexibility options now available within pension contracts we foresee pension arising from the ashes as a highly tax efficient and productive form of investing.
If Pension Contributions are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.
Summary:
If no one solution meets your requirements or a number appeal to you then we can “pick & mix” to arrive at the most efficient solution for you. It is however a fact that interest rates are at all time low’s and alternative investment solutions whether for income, growth or a bit of both must be at the very least be considered. We believe we have come up with a number of practical and attractive solutions and we would welcome the opportunity to advise you in this regard.
If our comments are of some interest to you and you would like to explore matters further please contact us at ifa@ferguson-oliver.co.uk and we will contact you to progress matters further. As always our advice is free of charge and you are under no obligation or pressure to pursue matters further if you do not wish to do so.
Thank you for taking the time and effort to read this letter.
