Going global in turbulent times
The answer to the question of how best to create a nest egg in a prolonged period of low interest rates has investors looking beyond Blighty, says Bill Jamieson
For most of the past ten years, the question of how best to save has been secondary to whether it is worth saving at all. Back in 2009, when interest rates on straightforward deposit accounts plunged to derisory levels, millions could no longer see the point. For cautious savers there was the added disincentive that alternative equity-based savings schemes had just been battered by the plunge on world stock markets during the global financial crisis.
But of course the need to save is as great as ever. We need a cash stash for emergencies. Saving for retirement becomes ever more compelling as we grow older. And we save for all manner of treats and purposes, from car purchase to home improvements.
But it has got no easier since 2009. Ten years on, the misery for fixed rate savers shows no let-up. The most competitive interest rate on an instant access account is just 1.5% (Virgin Money) and on a 90-day notice account barely better at 1.89% (Secure Trust Bank).
Nor is there any sign of any early improvement. The Bank of England’s Monetary Policy Committee recently voted to keep official rates at 0.7%. As if it was not tough enough already for households to put aside hard-earned money on a regular basis, the rewards have been paltry and look set to continue to be so. So the question persists: how best to save?
There is a threefold approach to this dilemma: we need a reserve of readily available cash on deposit. Longer term, we require investment in low risk income funds and trusts where re-invested dividends build up over time.
Many cautious savers have found themselves drawn into equity income trusts and funds as the average dividend yield on shares has persisted at well over four per cent.
And it is this long period of ultra-low interest rates that has fuelled stock markets here and overseas. Indeed, over the past ten years, while the UK economy has shown only modest growth, the FTSE100 Index has climbed by some 70% – though Brexit turmoil has led to UK under-performance relative to overseas markets. Meanwhile, returns on fixed rate bonds and so-called ‘absolute return’ funds have lagged.
But we also need some exposure to riskier investments offering capital growth. And here the trend in recent years has been to look beyond the UK and invest abroad.
Figures from the Investment Association show that in the first three months of this year retail sales of equity funds fell by £1.7 billion. Even after a market bounce since the start of the year, saver confidence was still depressed in March. Net retail sales (money flowing into funds less withdrawals) were negative during the month, with £205 million of outflows from funds specialising in UK equities. And ironically, despite the persistence of ultra-low returns, the fixed income sector enjoyed a net retail inflow of £810 million in March – the highest since January 2018.
For those prepared to take on equity risk, ‘anywhere but Britain’ has come to look a popular choice. ‘Global’ was the best-selling sector with £691 million in net retail sales. A further telling pointer of this trend is that fund management giant Hargreaves Lansdown has recently raised £298 million for its HL Select Global Growth Shares fund – a record amount for one of the online stockbroker’s ‘own brand’ funds.
‘Ongoing economic and Brexit uncertainty’ is the IA’s broad explanation. But there may be another reason why we have been minded to look abroad: the difficulty that many fund management groups
have experienced in achieving outstanding performance.
According to FE Trustnet data, few UK equity funds were able to successfully navigate the differing market conditions of 2018’s final quarter and the opening four months of 2019. The Investment Association UK All Companies sector scored the smallest proportion of members in the top 25% of fund performers over both periods.
The final three months of last year saw markets suffer significant sell-offs due to US-China trade tensions and fears that central bank monetary tightening would force up rates. However, the early months of 2019 saw a temporary recovery as these concerns receded.
Trustnet compared all of the IA’s quartile rankings from the final three months of 2018 with those from the first four months of 2019 to see which funds had stayed ahead of their peers in both. In the UK All Companies sector, just 0.76% of funds – or two – turned in top-quartile returns for both periods – the lowest proportion out of the 25 sectors considered.
It was the IA Japanese Smaller Companies sector that had the greatest proportion of members retaining top-quartile numbers over both time frames – some 28.6%.
The IA Global Equity Income was the highest ranked of the larger peer groups, with 5.4% of its 56 members achieving top quartile returns in both the sell-off and rally.
Most investors now readily accept the need for some of their longer-term savings to be invested in overseas markets. North America has long been the popular choice. Baillie Gifford’s Scottish Mortgage Trust has soared in recent years with a portfolio dominated by US tech giants such as Apple, Amazon, Google, Facebook and Netflix.
Asia-Pacific has also become a favoured destination, and many specialist funds in this region have achieved impressive returns. Aberdeen New Dawn Investment Trust celebrated its 30th anniversary in May. During this period it has returned almost 1,840% to shareholders, significantly outperforming its benchmark, which over the same period returned 1,188%. One-thousand pounds invested at launch would now be worth £19,399.
And in recent weeks fund manager attention has swung to Japan, one of the most out-offavour markets in recent years, with the coronation of the new emperor, crown prince Naruhito. Investor enthusiasm for Japan has never fully recovered from a plunge which saw the Nikkei 225 Index crash from an over-valued peak of 38,700 in 1989 to below 10,000. Today it trades at around 22,260.
Prominent among negative factors is the country’s aging and shrinking population. But reforms by prime minister Shinzo Abe – ‘Abenomics’ – have brought better capital efficiency while there are signs that demographic factors have encouraged a more investor friendly dividend policy. The country’s pension funds have been anxious to generate more income via equities given that Japanese government bond yields are still negative. An increasingly popular trust for UK investors has been the JPMorgan Japan Smaller Companies which offers a yield of 4.6%, having changed its dividend distribution policy just last year.
However, given the persistence of political uncertainties, savers may be reluctant to take on more risk at this time. Broadly-based multi-asset funds which include bonds, and index trackers will continue to exercise a strong pull.
As if it was not tough enough for households to put aside hard-earned money on a regular basis, the rewards have been paltry
Go global: ‘Anywhere but Britain’ has become a popular investment choice.