Most of us started off saving into a building society; we’d trundle off there, passbook in hand, to pay in our pocket money, or a £15 birthday cheque received from Auntie Gertrude.
That was decades ago, and we’d like to think things have since become a bit more sophisticated: a bit of equities, and maybe even a hedge fund and private equity fund. But when the stock market goes tits up, cash is the safety blanket we return to. And why not? With some building societies offering more than 7%, it’s a shrewd move.
West Bromwich Building Society and the Post Office are both offering a rate of 7.05%, and savers can lock into Yorkshire Building Society for two years at 7%.
Further afield, Nigerian-owned FirstSave has launched bonds paying 7.1% over one and two years to British savers. And Iceland’s Landsbanki and Kaupthing Edge offer 7.01%.
“Difficulties in raising funds on the money markets have seen companies turn to consumers to navigate liquidity problems,” IFA firm Albannach Financial Management explains. “As a result, over the past few months a war in the fixed-rate savings market has continued to heat up; institutions are throwing down the gauntlet with progressively higher rates.”
Looking at the private client end of the market, the Investec High 5 savings account looks like a good bet – it’s increased its interest rate to its highest ever at 6.56%. Savings accounts are a safe bet, as the Financial Services Compensation Scheme covers deposits of up to £35,000 per person, should a provider go under.
The Bank of England’s sky-high interest rate of 5% helps push up rates for cash investors. In fact, more savings accounts offer interest rates matching or exceeding the base rate than in previous years.
According to Defaqto, some 28% of easy-access accounts offer a rate of 5% or more, compared with 8% that offered rates equal to, or above, the base rate two years ago.
And more good news for cash advocates comes from Thomson-Reuters Lipper. The firm’s research upturns the belief that equities perform better than cash over the long term, as it reveals that investors putting their money in a savings account would have trounced UK unit trust holders since the start of the decade.
If £1,000 was invested in 2000, it would now be worth £1,094 in an average UK unit trust but £1,358 in a typical savings account. However, if the seven years up until July last year was analysed instead, equities would have won the battle. As with all investments, it depends on the timeframe you look at.
For now, though, cash is a sensible choice. And it’s not just me saying that; the statistics prove you’ve all got the same idea and have been piling into the money markets. For example, investors in Barclays Stockbrokers Funds Market pushed 34% of their total assets into the money market sector in June.
Chris Stevenson, associate director at the fund supermarket, notes: “We saw money market funds dominate assets invested over the second quarter. Market volatility has continued to dominate the headlines, so a cautious approach from investors comes as no surprise.”
The money market sector was the third best performing IMA sector in July, after UK gilts and corporate bonds. It returned 0.2%, whereas its stock market peers were all in negative numbers.
For people wishing to have a cash allocation in their portfolio, or wanting to move their money temporarily out of equities, a cash fund is ideal. There are two categories: treasury-style, which invests in deposits and short-term instruments; and investment-style, which contains more long-term and exotic instruments.
Peter Hicks, executive director of UK retail at Fidelity International, explains: “Treasury-style is most like actually holding cash and the yield won’t be waivering too much from Libor.” According to Hicks, using a cash fund rather than a savings account is a convenient and cheap way to escape a period of turmoil in the stock market, as you can simply switch from an equity to a cash fund, rather than fiddle around with application forms for a bank or building society account.
Hicks says he’s noticed more customers flock to cash funds since the market volatility kicked off last year: “People have had a very good four or five-year run in equities, so now they’re taking the profit off the table and retreating to a safe haven. But many of them intend to go back into stocks – it’s a question of timing.”
Market timing will always be an age-old conundrum, but at least investors have a broad and competitive range of cash alternatives to choose from for now. Read on to find out about three cash funds on offer.
Products on trial this month
- db x-trackers Sterling Money Market ETF
- Henderson Cash Fund
- Schroders Offshore Cash Fund
