Iona Bain Personal Finance Writer Saturday 5 March 2016
Over a quarter of private investors are favouring the safety of cash over riskier shares for their Isas, compared with only one in 10 a year ago.
Despite today’s landmark seven-year anniversary of 0.5 per cent interest rates, which has left savers scrabbling to find decent returns, the scary nature of markets so far in 2016 has dented confidence.
Only 24 per cent of investors increased their stock market exposure in the early weeks of the year, against 49 per cent in early 2015, according to the latest investor confidence research from the Association of Investment Companies (AIC) and Interactive Investor.
However over half of the confident investors said they were taking advantage of the stock market volatility, whilst one in six cited those bombed-out rates on savings accounts.
It seems few have been running for the hills – only eight per cent said they were reducing market exposure, slightly less than the nine per cent last year.
Annabel Brodie-Smith at the AIC said: “It’s encouraging to see there is no panic selling. Given the volatile start to the year, it’s worth remembering the benefits of regular saving, which can smooth out some of those stomach- churning highs and lows in the price of shares.
Investment funds saw the biggest net outflows from retail investors since the financial crisis, the latest figures from the Investment Association show.
Investors pulled out a net £463m in January, the worst monthly outflow since October 2008 when £493m was withdrawn.
But Laith Khalaf at Hargeaves Lansdown said: “Despite a rocky month in the stock market, equity funds only saw modest outflows. The biggest withdrawals were from bond funds (particularly strategic bond funds) and mixed asset funds.
He agreed: “Investors who are concerned about market volatility should consider meeting their savings needs by investing monthly, which smooths the ups and downs of the stock market.”
A survey this week of 36 ‘gatekeeper’ firms which produce regular lists of top recommended funds for investors gave top marks to Tilney Bestinvest and Hargreaves Lansdown.
Graham Bentley of gbi2 which carried out the survey with Fundscape said: “There are plenty of funds that deserve to be on the lists, but there were also some that had less performance substance… we were also surprised by the number of funds that were clearly strong candidates for inclusion, but were overlooked.”
Jason Hollands, managing director of Tilney Bestinvest said: “Investors mulling choices for their Isas and Sipps should certainly have investment companies on their radar as well as open-ended funds. They can have distinct advantages over their more popular OEIC and unit trust cousins but are too often ignored by execution-only platforms in their lists of rated investments.”
His recommendations include six trusts, four of them managed in Edinburgh: Baillie Gifford’s Scottish Mortgage, Standard Life Equity Income, Stewart Investors’ Pacific Assets and the independent Personal Assets. The other two are Henderson European Focus, and F & C Commercial Property.
Meanwhile over half of investors are concerned that companies may slash dividends this year, according to The Share Centre.
It found 70per cent of its customers were looking for an income, and warns that many of the FTSE-100 companies have seen hit by the oil and commodity price crash and are under pressure to cut dividends.
Richard Stone, chief executive, said: “Returns on equities have been shown to consistently outperform cash over time, but that will be of little comfort to those investors seeking income in the short term.”
Adrian Lowcock, head of investing at Axa Self Investor, commented: “The UK market has always been concentrated with the bulk of dividends coming from 10 companies, and with some of these likely to cut their dividend, it is becoming even more crowded. The need to diversify your income has become more important than ever. Investors should consider looking globally for income and consider alternative asset to traditional equity income and bond funds.”
His tips for income investors are:
*Look for growing dividends: don’t just look for the companies and funds with the largest dividends, but consider those where the dividends are set to grow. A growing dividend especially where it is not fully appreciated by the market will not only bring a growing income to your portfolio but will also help it grow.
*Protect your capital: taking risk or sacrificing your capital in return for a better income can be very dangerous; as the value of your portfolio shrinks the amount of income it generates will also get smaller, so each year you will need to take more capital. Without careful planning you may run out of money sooner than you realise.
* Diversify: this helps reduce the volatility of your portfolio and the risk of losing money. The more different sources your income comes from the less volatile your income stream will be and the less risk that it stops entirely.
Axa Self-Investor’s fund ideas for income-seekers include Architas Global Diversified Real Assets, Schroder Asia Pacific Income, and PFS Chelverton UK Equity Income.
Inflation is stagnant and there are worries about global growth, which means interest rates are unlikely to rise any time soon.
Maike Currie at Fidelity Personal Investing says: “Holding your savings in cash could result in feeble returns. Our calculations show that if you had invested £15,000 into the FTSE 250 index over the 10-year period from 31 January 2006 to 31 January 2016 you would now be left with £35,455. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £16,076. That’s a difference of £19,379 – too big for any sensible saver to ignore.”