What is the best asset for investors to be holding now? According to one highly rated multi-asset fund manager, cash.
Schroder’s Marcus Brookes says the market is so short of high conviction ideas, in his MM Diversity Tactical fund he has been forced to take a mammoth cash position of 45%. “According to our analysis, both bonds and equities are due a correction over the next year. We can’t be certain of the timing, so we would rather have as little exposure as possible and risk missing out on incremental rises in asset prices, than have exposure and lose a lot of our investors’ money,” he reasoned.
While not everyone would agree with Brookes’ punchy stance, cash is a great diversifier. While current rates won't make you millions thanks to Bank of England intervention and the Government’s Funding for Lending scheme, cash can provide a helpful buffer and is uncorrelated from equities and bonds.
If you want to get the most bang for your buck income wise, you have to lock up your cash in a fixed rate bond or ISA. Generally speaking the longer you lock away your cash for, the better the rate of return. This is not suitable for investors who want instant access to their money, but by splitting your cash holdings between instant access and fixed rate bond accounts you can be prepared for a rainy day, and also make your money work as hard as possible.
Moneyfacts has just awarded Shawbrook Bank ‘Best Fixed Account Provider” for providing products that best meet the needs of their customers. Shawbrook offers one of the best paying 18 month bonds at 1.9%, but if you lock your money away for five years, the bank will pay you a market leading 3.1%.
The best paying fixed rate savings bond is from SecureTrust Bank and pays 3.52% for seven years, although savers should consider where interest rates may be in seven years’ time before committing their cash.
Go for an ISA for Best Returns
These bonds are liable to income tax, but if you plump for a fixed rate ISA, you can shield your savings from HMRC. To get the best rate of return on your cash, make sure you utilise your full ISA allowance, either through investments or cash, before you deposit money in a bond.
The best short-term fixed rate cash ISA is from Halifax and pays 1.7% for 18 months. If you can afford to lock away your cash for a little longer, Nationwide is paying 2.05% for two years.
For the very best interest rate on cash, Julian Hodge Bank is paying 3% on a five year fixed rate ISA – but you have to have a minimum deposit of £5,940 – the current maximum cash allowance for ISAs. This will be raised to £15,000 in July when NISAs are launched, as first announced in the Budget.
For a more accessible rate of return, Leeds Building Society is paying 2.85% for their five year fixed rate ISA.
Susan Hannums at savings advice site Savingschampion.co.uk said with thousands of rate cuts to existing savings accounts and hefty falls in best buy rates in recent years, savers will need to keep a close eye on the rates they’re getting and switch when accounts become uncompetitive.
She suggested savers also consider high interest paying current accounts, as they have become pseudo savings accounts; many paying more interest, even after tax, that traditional savings accounts, including ISAs.
“Savers might be naive to believe that when rates do rise they will reap the full benefits, therefore it may be wise to spread the money between a mix of products from longer term fixed rates, shorter terms and easy access accounts, including high interest current accounts – in order to access the very best rates available now as well as reacting to a changing market going forward,” she added.
