With inflation currently running at 3% (RPI) and interest rates looking set to erode the value of any savings held in cash (and a cut in Bank Base Rate not unlikely in the event of a bumpy, ‘no-deal’ Brexit), it has never been more important for savers to think seriously about protecting their capital. There are several investment products which can meet the needs of investors aiming to preserve capital and receive above-inflation returns.

Risk-Aversion

It seems many UK investors remain cautious about investing in stocks and shares, happy instead to watch inflation eat inexorably into their cash holdings. With the recent decision of Neil Woodford to suspend his flagship Equity Income fund last month due to liquidity issues and fears of a ‘no-deal’/hard Brexit now in the ascendant, UK investor confidence in active fund management and investment markets generally might well have been dented.  A study by Aegon in January this year found that some 41pc of UK adults avoid investment risk at all costs. Of these, most said they preferred the safety of cash, which typically earns them less than 1pc, over the return on stock market investments, which the financial institution puts at more than 5pc annually over the long term. [1]

This dynamic is particularly noticeable among female investors. Recent research from Scottish Friendly suggested that roughly 2.6m women have been put off investing because there are too many funds available to them. This compares to around 1.7m men. In line with this, nearly three-quarters of women said that the security of getting their original investment back is more important than achieving significant returns. [2]

Equally, HM Revenue & Customs statistics show women save more in cash than men. Men tend to invest in stockmarket-linked investments aiming for higher returns, while women are known to be the savers who set money aside rather than trying to grow it.

Take ISAs for example. In 2015/16 (the last year for which this data is available), only 892,000 women invested in stocks and shares ISAs. Conversely, 5.2 million women invested in cash ISAs. The same can be said of mothers saving on behalf of their children – 73% save into cash ISAs rather than Stocks and Shares Junior ISAs.

Inflation – the ‘Thief in the Night’ 

Ironically, by avoiding investments and putting their money into cash, these savers are guaranteeing that the ‘real’ value, in terms of the purchasing power of their nest-egg, will decrease over the long term.

As it stands, the Bank of England’s base rate sits at just 0.75pc after being hiked for only the second time in more than a decade last August. Most commercial banks don’t even manage to meet this level, with easy access savings accounts offering an average return of just 0.23pc last year. [3]

Critically, both figures sit well below the current rate of UK inflation, which sat unchanged month-on-month in June at 3.0 per cent (as measured by the Retail Prices Index). When inflation outstrips an account’s interest rate, the ‘real’ value of the money held within that account declines – i.e. the decrease in its spending power outweighs the return it generates from the bank in exchange for holding it.

According to Gatehouse, this process of insidious burglary, or value-erosion, led the average UK cash-saver to lose £500 in real terms last year, with a £2,000 lump sum declining in value by an average of £37 over the 12-month period. This isn’t a new phenomenon for cash-savers either. Research from Brewin Dolphin earlier this year found that a £100 investment in cash would be worth £84 in the 10 years to February 2019. In comparison, an investment of £100 in the FTSE 250 over the same period would be worth £314.

Reckless Caution

By exercising what Merryn Somerset-Webb of FT Money termed this ‘reckless caution’, cash investors are overlooking the long-term benefits of the active management industry as a whole. There are thousands of products available to suit investors with all kinds of risk profile, and many of these continue to boast impressive long-term returns relative to cash.

For example, funds in the IA Targeted Return sector, a favourite among more risk-adverse investors, have returned an average of 31.6pc on original investment in the 10 years to 22 July, according to FE Analytics. Perhaps surprisingly, products in the more high-risk IA UK Equity Income sector – the home of Woodford’s gated fund – have returned an average of 154.6pc over the same period.

The list could go on, but the key point is that active funds are a long-term commitment, by which is meant a minimum of five years and preferably longer. Periods of underperformance during difficult periods should be outweighed by outperformance during stronger conditions in a market cycle, and there remain countless examples where this is the case. Rather than allowing short-term fears to drive them into cash, investors should search for the funds that can help them achieve their longer-term financial goals – either on their own or with the support of an adviser.

Holding money on deposit might well suit individuals saving for short-term needs, even at the expense of the ‘real’ returns on that cash. But those focusing on longer-term goals should screen out the ‘white noise’ of market news and coolly evaluate the investment that is most suitable for their risk appetite, investment objective and time horizon.

Seeking out solutions that aim to preserve the ‘real’ value of their wealth by beating inflation is a good place to start.

_______________________________________________________________________________________________________________________________________

[1] https://www.thisismoney.co.uk/money/diyinvesting/article-6554817/Most-people-safety-attitude-money-finds-Aegon-survey.html

[2] https://www.scottishfriendly.co.uk/news/2019-news-press-releases/gender-investment-gap-why-fewer-women-invest-men

[3] https://www.independent.co.uk/news/business/news/uk-savings-interest-rates-inflation-banks-isa-instant-access-brexit-a8731291.html

_______________________________________________________________________________________________________________________________________

Important information

The above is for information purposes only and does not constitute advice or a personal recommendation. The value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment.  You should also be aware that past performance may not be a reliable guide to future performance.