Page 38 - DIY Investor Magazine February 2018

INCOME STARVED SAVERS INCREASINGLY TURN TO
INVESTING AS BOND FUNDS SEE RECORD INFLOWS.
Despite the Bank of England having increased interest rates to 0.5% in November, many banks have failed
to reflect that with interest paid by savings accounts often as low as 0.05%; even the best easy-access cash savings accounts paid just 1.3% last year after rates were cut.
Money Mail recently revealed that returns on bank savings accounts had plunged to as little as 15p for every £1,000 invested for the whole of last year; Cash ISAs paid just 18p.
As a result savers are ploughing money into funds to beat the income crisis; possibly to avoid the risk of potentially more volatile stock market investments, bond funds are proving increasingly attractive with savers pouring £11bn into bond funds in the first 10 months
of 2017 - more than £36m a day - the most ever in a calendar year.
Bond funds have been the best-selling type of funds among investors in the last five months; more than £2bn was invested in October alone, more than twice as much as the next most popular type which was ‘mixed asset’ funds that invest in a mixture of bonds, shares, property and commodities.
Traditionally bonds have been the safer element of a balanced investment portfolio, but years of low interest rates and quantitative easing (QE) - which involves central banks buying up bonds - has pushed their price to record highs; because they move in inverse proportion, yields have consequently been pushed to record lows.
Savers are advised to ensure that they are aware of, and comfortable with the investment risk they are taking and that they could end up losing some of their investments as low interest rates and QE are reversed. Stock market funds are typically more risky because share prices are more volatile than bonds and your payout is linked to a company’s profit and its dividends; bonds pay a fixed coupon for the duration of the loan to the government or corporation issuing them.
However, rising interest rates could impact bond funds, because when rates rise, the price of bonds tends
SAVINGS ACCOUNTS HAD PLUNGED TO AS LITTLE AS 15P FOR EVERY £1,000 INVESTED FOR THE WHOLE OF LAST YEAR
to fall; the Bank of England says interest rates could increase twice more by 2020, doubling from today’s rate to rising to 1% and investors, including many pensioners searching for income, could find their life savings are worth considerably less.
Laith Khalaf, of Hargreaves Lansdown, told This is Money: ‘Everything is pointing towards bond funds being a bad idea, so it’s worrying to see so much money piling in. If interest rates rise, as expected, it will be very difficult to make any money from them.’
Those seeking income generating investments, whilst keeping a wary eye on the potential for a stock market ‘correction’, have three main choices: bond funds, equity income funds and retail bonds.
A key tenet of a successful investment strategy is to ensure a portfolio is well diversified to maximise the potential for profit whilst spreading risk; those looking to invest in bonds may consider ‘strategic bond funds’ which invest in a range of corporate, government and high-income bonds.
The TwentyFour Dynamic Bond Fund currently offers 4.5% p.a. whilst the Kames Investment Grade Bond offers 2.7%.
Equity income funds invest in the shares of firms
with a track record of paying generous dividends to shareholders; those investing in the JO Hambro UK Equity Income Fund are currently rewarded with
4.3% p.a. and the Artemis Income Fund 3.7%. Those investing £10,000 for the last five years in these funds would be sitting on £18,040 and £16,827 respectively achieved from a diverse and actively managed range of investments.
Those wishing to create their own ‘bond fund’ could consider a diversified portfolio of retail bonds; despite the fact that new issues have been rare, it is possible to invest in bonds paying up to 6% via the LSE’s Order Book for Retail Bonds – see Retail Bond Expert.
DIY Investor Magazine | Jan 2018 38