Doomsday funds: As savers fear deeper crisis, how can they safeguard their cash?

By Richard Dyson

Published: 16:02 EST, 28 July 2012 | Updated: 07:14 EST, 30 July 2012

With shares, banks and the euro all in peril, we look at how savers can guard their cash and at some safer havens for investors.

Shares slumped last week in response to the latest twist of the eurozone debt crisis, centred this time on Spain. There were increased fears that banks and other financial institutions could fail – not just in southern Europe but more widely, in a worrying replay of the 2008 banking crisis.

Meanwhile massive debts coupled with low or negative growth in the US, Britain and other economies led some usually upbeat professional investors, such as John Bennett of global fund firm Henderson, to warn: ‘The risk is high of a global, synchronised crisis.’

The traditional safe havens of gold, government bonds and cash deposits now offer such poor returns, or are so expensive, that they pose risks to savers’ wealth in themselves. And the stock market, with all its gyrations, is hardly appealing. Private investors face renewed risk on all fronts, as Financial Mail warns. But there are opportunities, too.

Dividends offer hope to troubled shareholders

 Governments and banks have proved unfit to manage public money but thousands of businesses, including many in the eurozone, are continuing to earn profits – and pay dividends to shareholders.

One of Britain’s most respected money managers is Richard Pease of fund management house Henderson. He has managed portfolios of European stocks for decades and throughout the crisis has focused on the strength of individual businesses and their ability to maintain and grow profits, whatever happens politically or economically.

Cautious: John Reed backs solid firms that pay dividends in good times and bad

Cautious: John Reed backs solid firms that pay dividends in good times and bad

Pease cites lift manufacturer Schindler, ‘75 per cent of whose money comes from servicing lifts’. His point is that even if sales of new lifts slump, there will still be plenty of money made from fixing old ones.

‘It’s too easy to get obsessed with the euro crisis and forget there are world-class businesses that happen to have been born in Europe,’ he says.

Retired town planner John Reed, from Leeds, is among the army of committed private savers who have built a portfolio of low-cost investment trusts, most of which have long records of paying dividends, through thick and thin. The trusts achieve this partly by investing in the shares of hundreds of solid companies, which themselves are consistent, successful divi-payers.

John, 66, who has invested in the stock market since 1997, says: ‘Overall, I want growth. But over time we have seen a greater part of total returns coming from dividends that companies pay.

‘I would describe myself as a cautious investor, but I need to take an element of risk because inflation for people of my age is high. Dividends are a crucial aspect of shareholder rewards.’

The trusts in which John invests include Alliance, Bankers and Brunner, all of which have increased their dividends every year for at least 40 consecutive years.

Many of these trusts have run for more than a century, which to John is proof of the resilience of equity investing. One of his holdings, Scottish Investment Trust, was founded in 1887, the year of Queen Victoria’s Golden Jubilee.


GOLD

Johannesburg-based Alan Demby, founder of international gold coin retailer the Scoin Shop, says the past four weeks have been the busiest ever – with a 100 per cent increase in trade on the previous month.

Some customers have been buying commemorative coins marking events such as the Queen’s Diamond Jubilee but many, says Demby, are loading up on Krugerrands and sovereigns in response to turmoil in financial markets. ‘People are seeking tangible investments – something to have in their bottom drawer,’ says Demby, whose firm operates three stores in Britain and a further 30 overseas.


 

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‘This is a climate of fear. People have lost faith in governments and banks. They want to be able to hold some of their wealth in their hands.

’ In the London offices of bullionvault.com, the world’s biggest marketplace where private savers trade physical gold and silver via online accounts, business is also brisk.

Bullionvault’s Adrian Ash says: ‘The gold market is traditionally quiet during the summer, but we’ve seen a spike in new accounts.

‘There is a sense in which the financial crisis has now become permanent, like a background noise, a state of emergency.’

The price of gold rose last week, though it remains below its all-time high. Nonetheless, at more than £1,000 an ounce, it is still more than five times its value at the start of this century – and in the view of many, expensive.

But as Ash points out, in a world where other low-risk investments pay little or no income, gold holds its appeal. ‘We are in a situation where interest rates are close to zero for as far as you can see,’ he says. ‘By owning gold today you are not necessarily forsaking income.’

BEST WAYS TO INVEST:

Private bankers, who manage the wealth of the world’s super-rich, generally reckon that an exposure to gold of ten per cent of your total assets is about right. But this proportion has increased since 2008 with global financial uncertainty.

Modest investors can own physical gold in the form of coins or via the secure online platform bullionvault.com, although these are different forms of investing – with different risks. It is also possible to buy physical gold via funds quoted on the London stock exchange.

Go to thisismoney.co.uk/gold for more.

GOVERNMENT BONDS

Britain's finances are woeful but, ironically, and thanks largely to the crisis in Europe, investors are desperate to lend our Government money – which they do by buying gilts, or UK Government bonds.

The appetite for gilts means their price has soared. The fixed return they pay to investors, the ‘coupon’ or interest, has correspondingly crashed to about 1.5 per cent. In other words, investors in gilts lose money after inflation. They are effectively paying for the privilege of lending to the Treasury.

Except for doomsayers who predict full-blown Armageddon, the consensus among professional investors is that gilt yields are too low to make them attractive.

NATIONAL SAVINGS

Government-run National Savings & Investments offers savers the highest level of depositor security because there is no limit to protection. But the returns are low and unlikely to improve.

Its most popular product, the Lottery-style Premium Bond, has a current payout rate, in the form of prizes, of just 1.5 per cent. Its most attractive deals are tax-free accounts such as index-linked certificates, which are most effective when held by higher-rate taxpayers. But these are not currently available.

Financial Mail publishes NS&I account details weekly. Investments can be made online, by phone or via Post Office counters, depending on the account.

MONEY ON DEPOSIT

Last week’s dire economic data has raised the spectre of another interest rate cut, even though the Bank of England’s base rate has already been stuck at a record low of 0.5 per cent for more than three years.

The best tax-free cash Isas, which are the most effective way to save cash, pay about 3.3 per cent, which is only just above the current rate of inflation. Devote time to seeking out the best savings rates but ensure that you never exceed the savings limit of £85,000 per person per bank or building society. This is the maximum amount that is protected under the Financial Services Compensation Scheme.

To read more, go to thisismoney.co.uk/safe-saving.