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

Scottish Field - - YOUR MONEY -

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.

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