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Investment view

More than ever, the words “protected” and “low risk” are being

wrapped around products to persuade people that they do not have to

throw caution to the wind to put their money in savings products.

Sales of structured products – the index-linked bonds most associated

with capital-protection guarantees – rose by 15 per cent last year,

when 68 providers offered more than 300 different products.

This is remarkable, considering that many of these bonds may not

return investors&#39 capital in full when they mature this year.

But there are plenty of other savings vehicles which are not

necessarily as safe as they are made out to be. Gilts – the Fort Knox

of savings products – have done well and until recently were yielding

more than equities.

But when stockmarkets recovered after the bloodbath of March 12,

selling intensified and long-dated gilts took a hammering, falling by

more than 4 per cent. Allied to the fact that inflation could easily

re-emerge and gilts suddenly seem less attractive than the Government

would like investors to believe.

Hargreaves Lansdown head of research Mark Dampier says: “It makes me

feel queasy when anything is tagged as being Government-backed. Gilts

are not cheap and you could easily see them getting pasted. I do not

even like the term low risk. It implies no risk, which is never the


Dampier points out that risk is subjective in terms of investors&#39

appetites and with regard to macroeconomic considerations. For

example, AAA-rated corporate bonds are considered one of the safer

investments, with the issuers almost certain to pay back their debt.

Risk is low but then so will be the relative returns if there is a

stockmarket recovery in the near future. Only BBB-rated bonds on the

cusp of investment grade are yielding decent levels of income but

that is in recompense for the increased likelihood of default. Either

way, there is a risk of some sort.

Threadneedle communications director Richard Eats believes these

problems can be largely mitigated by diversification. He says: “One

hundred per cent in anything is usually the wrong idea. With bonds,

the risk can be diversified away by mixing them so that even if you

lose two or three to default, the extra income from some of the

others will make up for it. The real risk is inflation.”

Fortunately for fixed-interest houses such as Threadneedle, inflation

is currently low, which has helped bond funds flourish throughout

what has otherwise been a wet blanket of an Isa season.

Another boost for bonds has been the bear market, which has forced

investors to reassess portfolios too heavily skewed towards equities.

This has also assisted the rise of property, which is reaping the

benefits of the old adage that you cannot go far wrong with bricks

and mortar.

Michael Philips proprietor Michael Both is one of many IFAs who

believe this view fails to take in account the myriad problems

associated with the sector. He says: “Rental yields are softening

considerably and the people who became buy-to-let landlords are now

finding there is not the demand they thought there would be. The

residential sector is near the top of the cycle and business-wise

companies are moving abroad. It is a very dangerous time.”

Some property fund managers agree that certain areas currently pose

too high a risk. But they argue that achieving high and sustainable

returns is simply a question of cherry-picking the best sub-sectors

within the market.

Close Brothers Investment marketing director Roger Bruce says the

industrial sector provides one of the most robust investments in

tough times. He says: “There is no excessive growth so, unlike other

areas, there is no cliff to fall off. There is also no excessive

supply because it is far more expensive to construct new buildings.

It is very steady.”

Close&#39s new high-income properties venture capital trust has

assembled a portfolio of 20 industrial estates with more than 160

tenants, ranging from lathe workers to a kickboxing school. Such

diversi-fication makes the sector hig-hly durable, says Bruce, alth-

ough he concedes that buy to let and London hotspots are areas best


One of the main problems for IFAs is that so-called safe investments

have a habit of rapidly becoming high risk. Zero-dividend preference

shares in split-capital investment trusts are the most obvious

example. Even the designers admit they did not appreciate how risky

they were. But the design flaws were exacerbated by excessive gearing

and cross-holdings, which are not practices associated with gilts,

bonds or structured products. However, the latter, in particular,

have their own well documented problems.

Seemingly, only cash appears to deserve the safe haven tag. But even

cash holds no guarantees. In October 1989, interest rates had hit 15

per cent. They have since plummeted to 3.75 per cent, bringing a 75

per cent drop in income for savers who have kept their money in cash.

It should also not be forgotten that inflation, despite its current

low level, erodes capital in real terms. The highest level of safety

that investors and savers can attain is through a steady

income-producing product with little risk to capital. But once

inflation begins to rise, no product can truly be called safe.


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