Should I spend or should I save?

With our social lives on hold, holidays postponed, and many shops shut, there hasn’t been much to do with our disposable income in the past 12 months.

Having spruced up the garden in the first lockdown and redecorated in the second, with the exception of the odd birthday/Easter/Christmas present, reasons to go on a spending spree have been few and far between. As a result, some piggy-banks are now full to over-flowing.

A British nest-egg of £250 billion

The UK quarterly savings rate surged to 27.4% in the second quarter of 2020, having been just 7.7% pre-pandemic*. And there was a similar pattern in other countries: the eurozone saw the rate climb from 12.4% to 24.6%*, while in Japan, stimulus payments of 100,000 Yen to every man, woman and child helped increase savings from 4.4% to 21.8%*. With the average family of four the beneficiary of stimulus cheques and child tax credits worth $14,000 in the US, savings also rose there from 7.3% to 25.8%*.

If these trends continue, Britain’s savings ‘nest-egg’ would be over £250 billion by this coming July, according to the Bank of England – just in time for people to enjoy a life without restrictions if the vaccine rollout goes to plan.

Saving not spending

While many people believe that pent-up demand could result in us experiencing a ‘roaring 20s’, what if instead we keep our new savings habit and continue to put money aside?

The savings rate in the US fell to 16% in the third quarter of 2020, for example, as the American economy partially reopened – but this rate was still well above pre-pandemic levels.

Should the same happen here in the UK later this year, then financial services companies could get a boost. Here we take a look at the funds investing in the sector.

Investing in financial services

“There are a number of asset managers that are listed on the stock exchange, as well as wealth managers and platforms,” commented Ryan Lightfoot-Brown, senior research analyst at FundCalibre. “It’s also a multi-cap opportunity, from global giants such as Schroders and JP Morgan down to some of the smaller boutiques.”

One of the simplest ways to invest in the sector is via a specialist fund like Jupiter Financial Opportunities, which invests in financial services and associated firms around the world. It has JP Morgan and Goldman Sachs in the top ten for example**, and also invests in stock exchanges. One of the manager’s current themes is the Millennial/Gen Z wealth transfer.

Most UK equity funds have a fair number of financial companies in their portfolios too, as the sector represents more than 25% of the UK stock market***.

Liontrust UK Micro Cap and Liontrust UK Smaller Companies invest in Tatton Asset Management, Mattioli Woods, Gresham House, Mercia Asset Management, Impax Asset Management, Brooks Macdonald Group, AJ Bell, Nucleus Financial Group and Charles Stanley between them^.

Other funds, like Jupiter UK Smaller Companies, invest in Liontrust^^, while Unicorn UK Smaller Companies prefers River & Mercantile and Polar Capital^^.

Sid Chand Lall, manager of Marlborough Multi Cap Income, told us recently that, after a strong 2020, wealth managers are doing well this ISA season and he thinks there is some excitement in the sector in the small and mid-cap space.

Fixed income funds are also finding opportunities in this sector.

GAM Star Credit Opportunities, for example, invests in the junior or ‘subordinated’ debt of investment grade companies. Junior debt is a bond issued by a company that has a lower priority for repayment than other debt claims in the case of the firm defaulting, but usually a higher yield too. The managers of this fund find many of their best opportunities in the junior debt of banks and insurance companies. The team believes the higher capital buffers enforced by regulators has made these businesses much safer.

Co-manager Gregoire Mivelaz said recently: “Three quarters of subordinated debt can be found in the financials sector. Despite having to make provisions for a lot of cash [during the pandemic], banks remained profitable and kept on lending.” Top ten holdings include HSBC, Barclays and Lloyds **.

Gary Kirk, co-manager of TwentyFour Dynamic Bond is also a fan of the banks. He said: “Banks are far more robust today and are part of the solution for this crisis, not the cause. The banking sector is also pro-cyclical so should benefit from the economic recovery.” Top ten holdings include Nationwide and Coventry Building Societies**.


*Source: S&P Global Ratings
**Source: fund fact sheet, 28 February 2021
***Source: FTSE Russell fact sheet, 26 February 2021
^Source: FE fundinfo, full holding data as at 31 January 2021
^^Source: FE fundinfo, full holding data as at 28 February 2021

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.