An Alternative to Cash?

A question many people are asking at the moment is, “where can I put my money when cash is returning so little”?

Well the answer is pretty limited… For investors not wanting to take any risk, fixed term deposits are the ideal place, however with the best rates at around 2% per annum it is hardly a viable option for those trying to match liabilities or at least beat inflation at 3%. 

Investors are being forced to take more risk than they would prefer.  So let’s look at the alternatives.

• ·         Fixed Interest/Bonds – these will offer little more than cash at the moment, government debt is yielding around 2%, and investment grade corporates are not much higher.  High Yield will be your best alternative at around 5-6% per annum.  With yields at record lows, long duration funds will be very sensitive to interest rate rises.  Therefore I would be fairly against this option, unless you can access short duration funds, such as AXA U.S High Yield Short Duration Fund.
• ·         Equities – there are a number of high yielding equities out there, however this is a risky option.  A number of UK equity income funds yield above 4% per annum, with some up towards 6-7%.  This option has the potential for added capital growth as well.  If you are looking to go for this option, more defensive funds such as Troy Trojan Income would be my choice.  This has excellent performance over the long term with a relatively low volatility.
• ·         Absolute Return Strategies - whilst these do not provide an income this may be suitable for those who do not require liability matching.   Absolute return strategies aim to provide absolute returns over the medium to long term.  Typical return aims are LIBOR + 4-6% per annum.  This is not as secure as holding cash however downside risk is fairly low as a multi asset approach is combined with derivative strategies.  This sector has been growing as more people seek alternatives to cash, it also acts as a great diversifier in any investment portfolio.   A number of examples are Standard Life’s Global Absolute Return Strategies which is now over £20bn in size, Insight’s Absolute Insight Fund which is a combination of absolute return funds offering a more diverse holding and Newton Real Return.

This hopefully provides you with a few alternatives to cash, but the reality of it is, until interest rates increase, more risk will have to be taken to obtain returns.