In a low interest world where returns from bank savings accounts are rock bottom with no sign of changing, The Virgin Investor needs to appreciate that large amounts of funds held in a bank represent a missed opportunity for greater returns. In fact, due to inflation, funds kept in most bank accounts are likely to be reducing in value in real terms.
So there is a real need to look away from banks for returns. Traditionally a risk adverse investor may have looked at low risk bonds, however returns from these are very low at the moment. The next stop may have been property, but this is increasingly feeling like a risky place to put funds, with capital gains unlikely to reach the levels seen over the past decade.
The future is particularly opaque at the moment with a number of big global questions still unanswered: for example the impact of Brexit, US elections, where global interest rates are going and China’s credit bubble. All this is adding to the uncertainty in the markets. In this article, given we are talking about finding a new place for bank savings (that may make up a large amount of a savings portfolio), a low risk strategy is most appropriate.
This requirements lends itself well to a ‘wealth preservation’ fund. This is a fund that looks to protect against the downside in changing market environments and also provide a base level of returns. Below are two wealth preservation funds that are of particular interest.
Newton Real Return
This fund aims to preserve capital and is focused on defending against risk. It is a very well diversified fund with a good spread across assets classes including bonds, global equities and commodities. The aim of the fund is to deliver a minimum return of cash + 4% gross annual return.
With the fund taking such defensive and well diversified positions, it is a natural place to put funds in tough market conditions. Returns may not be spectacular (especially when stock markets rise) but it has managed to deliver positive returns in each of the last 5 years.
JPM Global Macro Opportunities
This fund aims to identify the key macro themes driving the global economy and base an investment strategy of that – taking care to manage risk. In times with big global questions that require answering, this may well prove to be a winning strategy. The fund aims to deliver cash + 7% gross annual return which is an attractive proposition as stock markets become increasingly volatile and returns from cash remain low. All in all past performance in 2014 and 2015 put this fund among the best performing absolute return funds.
The JPM fund is broken down 52% equity, 19% currency, 15% fixed income and 14% advanced derivatives but the fund management is known to be nervous about stock markets in general, with equity exposure concentrated in defensive sectors such as healthcare and telecoms.