Lower rates and higher inflation increase the pain for cash savers

Sarah Culver 18/08/16 in Income investing, Economics & politics

When Mark Carney announced interest rates would fall to 0.25% earlier this month, he also said he fully expected savers to move into riskier assets as a consequence.

With Santander now slashing one of the best cash account rates from 3% to 1.5%, and inflation starting to edge up as a result of the pound’s devaluation, anyone still holding cash may well now be looking for alternative ideas.

We look at some funds those savers may like to consider.

1. Search for a higher yield

Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem as it erodes the real return you receive. To mitigate this risk you could go one of two ways: either invest in a fund such as AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity, or look for a bond fund paying a high enough yield to provide a cushion. Invesco Perpetual Monthly Income Plus, which has a yield of 5.5%* and Premier Multi-Asset Monthly Income, which invests in all asset classes and currently has a 4.7% yield* are worth a look.

Elite Rated funds with yields between 3 and 5% Elite Rated funds with yields above 5%

2. Find inflation-proof industries

Some companies do better than others in inflationary environments. Cash generation and pricing power both provide buffers for a company, enabling it to self-fund its operations and offset rising costs by passing them on to customers. Evenlode Income invests in some such companies. Infrastructure is also a good bet, as toll roads, for example, have prices linked to inflation. You could consider First State Global Listed Infrastructure.

3. Go all out for UK equities

Alternatively, you could just decide to put your faith in the central bank and invest in UK plc. R&M UK Equity Long Term Recovery and Man GLG Undervalued Assets are interesting options. As we start to extricate ourselves from Europe, volatility is likely to increase and there may be plenty of opportunities to invest in good companies that find themselves undervalued by the market and at fire-sale prices.

*Source: FE Analytics as at 16th August 2016

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.

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