Low Risk - 5% or more return?

Roland_Flagg

5 years ago I was lucky enough to get a 5% fixed rate deal from the Newcastle just before interest rates went downhill.

That deal matured this week, leaving my deposit back in my current account doing nothing, and obviously no deals out there to compare to the one just finished, so I'm looking at a low risk way of potentially earning 5% or more.

I've tried peer-to-peer before (zopa) but found it confusing and had a lot of defaulters.

What does that leave? Drip feeding large-ish monthly amounts into a FTSE tracker? or Corp bonds?

kidmugsy

Roland_Flagg wrote: »

obviously no deals out there to compare to the one just finished...

Except for all the current accounts and regular savers that pay 4% - 6%.

Roland_Flagg

kidmugsy wrote: »

Except for all the current accounts and regular savers that pay 4% - 6%.

Thanks for your answer

I've found current accounts have limits of how of your money qualifies for the high interest rate (i.e first £3,000), and a lot want you to switch.

As for Reg Savers, I have a few of those, but the yearly interest rate works about half because of the drip-feeding.

bowlhead99

Unfortunately, the state of world markets at the moment means there is no such thing as a return of 5% that doesn't involve risk. Because bank base rates in US, UK, Europe are half a percent or less. You can't get 10x that rate without taking on a chunk of risk.

As an example, Ryanair launched a €0.9 million corporate bond last month, their first one, and they are hardly operating in a low risk industry, but they had very strong demand and were able to get the bond away at 1.875%. They're in the Eurozone which has even lower base rates than we do, but the example shows that finding yield is a global problem.

Government 10-year gilts are yielding 2.5% at the moment and low risk (i.e. 'investment grade') corporate bonds are not a lot higher. You can find higher rate corporate bonds from companies with lower credit ratings and various investment funds are set up to hold a portfolio of high yield bonds, and may yield the 5%+ that you seek, if you want to take more risk.

However, this is risky not just because the company may fail, but more because of the way the bond market works. If a bond that doesn't mature for a long time is valued at 100 and paying you a 6% yield for the riskiness of the company, and then market interest rates go up by a percent or two, then nobody wants to pay you £100 for the £6 a year income stream. They want to get an 8% a year return instead, so they'll only pay you £75, allowing them to get their 8% on what they paid. So, you're still getting your £6 a year but the bond you're holding has lost a quarter of the value of your initial £100. Whoops.

You can find funds that hold short-dated corporate bonds to maturity, or you can buy individual ones yourself, and then you don't really need to worry about the day to day market value of the bonds because you are only going to hold them until the company pays them off in a few years. However, as this is low risk, it is of course low reward.

So back to looking at cash. You are right that current accounts paying high rates will only do it on a limited pot of money. It is generally correct to say most want you to switch, because that's why they are tempting you over with the high interest rate being a bit of a marketing spend.

However they don't force you to switch, they just insist you deposit a certain amount of money each month, which you can instantly remove and move into a second bank's account to meet their minimum criteria too. And some accounts allow you to have more than one of these accounts so you can put twice as much into them. Lots on this board do that and shop around for all the bargains so they have over £40k sitting in current accounts getting a highish rate on all of it. The accounts paying the best rates only do it on a few thousand but Santander is 3% up to £20k and if you have a partner you can get more / joint accounts.

So that's bonds and cash options, remaining is shares. Drip feeding largeish amounts (or one time funding an even larger amount) into a FTSE tracker would not qualify as anything close to low risk (i.e. compared to cash), because the FTSE can easily drop by 40%.

However, left alone for long enough, yes you would expect to get 5%+ out of a stock market based investment. You mentioned your maturing deposit had been there for 5 years. If all you are going to do is roll over cash deposits every 5 years and not need to actually spend them, you could certainly look at a medium or high risk investment fund or investment trust with a 10-15 year time horizon.

But if you need your money back in 5 years, using funds that are tracking stock markets up and down is a risky approach because market fluctuations mean that even if the fund grows 20% over two or three years it might then fall 40% over the next couple. If you need the money back at that point, you could find you've lost 5% a year rather than made 5% a year which was your initial goal... So, you have to be able to commit for the longer term.

It wouldn't make much sense to just hold 1 tracker invested in one market like the FTSE, but if you have thousands to invest you could easily invest in a fund or a set of funds that hold a mixture of UK and overseas stocks. A mixture of both market sectors and asset classes (bonds as well as shares) would generally be considered prudent.

You mentioned drip feeding a tracker. Some people like that because if the fund goes down they buy more units with the same cash every month and when the fund goes back up to their start price they have made money. Of course the opposite is true as well,
so if you are buying monthly and the market goes up for a while, which is the whole reason you are buying the fund, and falls later, it becomes painfully obvious that you have bought a lot of your units more expensively than you could have bought them at on day one.

Also drip feeding an investment fund has the problem you already identified with regular savers, where the money is only really invested for half the time. If you only wanted a five year investment the drip feed method means you have only really made a 2.5 year investment, limiting returns. So you would still want somewhere relatively high earning for it to be sitting while waiting for it to drip across.

So, there are no easy answers if you've disregarded the promotional rates of current accounts at 3-5% pretax and if you don't want regular savers earning 2-6% pretax. Good luck in your quest though. :beer:

Eco_Miser

Yes, they do have limits, which is why so many of us have multiple current accounts, and they do want you to switch, but they don't insist on it. (The high interest ones that is, the joining bonus ones do.)

Regular savers pay the full interest, but only for half the time - for the other half the money earns whatever the feeder account pays.

coyrls

bowlhead99 wrote: »

You can find funds that hold short-dated corporate bonds to maturity, or you can buy individual ones yourself, and then you don't really need to worry about the day to day market value of the bonds because you are only going to hold them until the company pays them off in a few years. However, as this is low risk, it is of course low reward.

Excellent summary of the state of the world in your full post! At the risk of hijacking the thread, can you give some examples of funds that hold short-dated bonds to maturity?

bowlhead99

sure, here's an example http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MGTRI&univ=O

I can't say whether they literally hold them all the way to maturity but according to last month's holdings list on the HL site (slightly different from this month's per that trustnet link) they did have some Kingfisher 2014 for example. So this is the type of fund that would be low risk low reward.

Alternatively iShares do an ETF that aims to cheaply track a sterling corporate bond 1-5 index.

Neither are recommendations to you or the OP, but just an example of types of funds in that sector. You can of course buy and hold your own individual bonds for a purer effect without management fees but your risks would be higher as affordable diversification is the benefit of using a fund and the 'operating costs' of your own portfolio would add up.

Reaper

Here's another possibility which will pay just over 5%. However you have to believe that Barclays Bank will not go bust in the next 3.5 years. If you think that's a possibility then read no further.

It's a preference share. An overlooked investment choice which I mentioned them previously in this old thread:
https://forums.moneysavingexpert.com/discussion/3626651

In this case for a Newcastle equivalent I would suggest BARCLAYS 6% PREFERENCE SHARES.

My reasoning being these are short dated and end on 15th Dec 2017 at which point the capital is repaid. The "yield to call" (ask if you don't understand the term) is around 5.3% according to this table:
http://www.fixedincomeinvestments.org.uk/fixed-income-stocks-spreadsheet
though it depends on the price you manage to get it at. Pretty good compared to the 3 year fixes available on a savings account and even if you don't put it in a ISA there is still no tax to pay on it for basic rate tax payers.

The catch is if Barclays goes bust or gets nationalised during the term there is no FCSC backup so you would lose most or even all of your money, so only buy preference shares (or any other kind) in companies you do not think are at risk.

brendon

Reaper wrote: »

My reasoning being these are short dated and end on 15th Dec 2017 at which point the capital is repaid.

This isn't correct. Barclays have a call option to buy back in 2017, but they may decide not to. Then they will start to pay 3 month LIBOR + 1.42%, which is currently 1.58%. See http://www.fixedincomeinvestor.co.uk/sdoc/3558.pdf

coyrls

bowlhead99 wrote: »

sure, here's an example http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MGTRI&univ=O

I can't say whether they literally hold them all the way to maturity but according to last month's holdings list on the HL site (slightly different from this month's per that trustnet link) they did have some Kingfisher 2014 for example. So this is the type of fund that would be low risk low reward.

Alternatively iShares do an ETF that aims to cheaply track a sterling corporate bond 1-5 index.

Neither are recommendations to you or the OP, but just an example of types of funds in that sector. You can of course buy and hold your own individual bonds for a purer effect without management fees but your risks would be higher as affordable diversification is the benefit of using a fund and the 'operating costs' of your own portfolio would add up.

OK I understand, but although there are short term bond funds, in the event of a significant outflow, they would have to sell the bonds prior to maturity to fund payments to those who were selling.

Thrugelmir

Reaper wrote: »

The catch is if Barclays goes bust or gets nationalised during the term there is no FCSC backup so you would lose most or even all of your money, so only buy preference shares (or any other kind) in companies you do not think are at risk.

Companies can also suspend dividends on preference shares.

Risk comes at a price.