Savings products
Real returns have been elusive over the past year, as savers struggled with low interest rates combined with inflation above the Bank of England target range. Will 2011 be any better? Those paying the basic tax rate will need to obtain an interest rate of 4.1 per cent to beat inflation, while higher-rate taxpayers will require a return of 5.5 per cent. “I don’t anticipate a significant interest rate rise over the next two to three years, so fixed-rate accounts may well end up faring better than variable,” says Justin Modray, founder of candidmoney.com, a personal finance website. Current best buys include the Post Office’s three-year fixed-rate bond paying 4 per cent gross and the AA’s five-year fixed-rate bond at 4.5 per cent gross. Stronger returns require exposure to the stock market, but Modray says he remains nervous about stocks so chooses funds with an element of built-in protection. The Schroder Income Maximiser fund generates additional income from selling covered call options and currently yields 6.5 per cent net of basic rate tax.
Also in Prospect's investment special:Alistair Darling: what is financial literacy? Jim O'Neill: A great American revival John Kay shows Max Hastings how to invest Best and worst investments Jim Rogers: The Chinese century Vicky Pryce: Stop the Greek exit
Up and away: the Shard, which will be the tallest building in the EU, takes shape at London Bridge
Property House prices show no sign of recovering from recent lows. Analysts at IHS Global Insight are forecasting a further 10 per cent fall during 2011. But if proof were needed that the commercial property market has bounced back, investors need look no further than the Shard, a 72-storey tower rising over the office roofs of central London. Yet even here, the best of the recovery looks to be over. Andrew Milligan, head of global strategy at Standard Life Investments, expects returns of 8-10 per cent a year over the next three years. This compares with the 14 per cent achieved in 2010, according to the Investment Property Forum. Future returns will depend on whether the banks decide to reduce their property holdings. This would boost the supply of investment property and, say analysts at Legal & General, “sap some of the medium-term momentum for total returns.” But property is an international game and even if London has peaked, Paris and Stockholm look due for an upturn, while the US office market faces a supply shortage. Land The old adage about nobody making land any more—apart from the Dutch polders and Dubai’s artificial offshore islands—holds true and underpins the price. But in Britain, supply is fixed and the big house builders compete for the larger plots, while self-build enthusiasts scoop up the smaller sites. Prices are determined largely by location. The cost and difficulty of obtaining a first-time mortgage is flattening demand, while the government’s localism agenda will transfer power from local authority planners to communities. “This injects huge uncertainty,” says Steve Turner of the Home Builders Federation. “How is this going to work in terms of bringing land to market?” Forestry land presents a clearer investment opportunity, though the value lies in the growing trees and proximity to a sawmill. “You must take a ten-year view,” advises Colin Lees-Millais, director of FIM Services, a forestry management company. Its Sustainable Timber & Energy fund anticipates a 6 per cent internal rate of return from harvesting the timber. Currencies The prospect of a further rise of sterling against the euro in 2011 will be welcomed by travellers and those seeking to purchase a continental farmhouse. The eurozone remains dogged by over-stretched government finances, with both Spain and Portugal fingered as candidates for bailouts in the wake of Greece and Ireland. At the end of 2010, the pound seemed stuck at €1.20 but some analysts forecast a rise to €1.25-€1.28. What seems to be holding sterling back is Britain’s dependence on trading ties with the eurozone, as well as British banks’ exposure to Irish and other euro-denominated loans. Against the dollar, sterling could find it harder to make way from its year-end rate of about $1.60. “We will see quite a bit of dollar strength because the economy is growing at a faster rate,” says Duncan Higgins, market analyst at Caxton FX. Elsewhere, Chinese demand for Australian raw materials is expected to underpin a strong Australian dollar, while southeast Asian currencies including the Thai baht and South Korean won also look attractive, says Higgins. Gold Will 2011 see the continuation of the seemingly inexorable rise in the gold price? Many experts think so. Goldman Sachs forecasts an average of $1,700 an ounce in 2012 but others foresee it reaching $2,000, up from nearly $1,400 at the end of 2010. But gold is notoriously volatile and some sceptics fear that profit-taking or a rise in interest rates will rub the shine off the metal. But others point to the fact that, allowing for inflation, the gold price is still well below the previous all-time high of $850, reached in 1980. Concerns about the value of paper currencies, notably the dollar and the euro, remain. For all the column inches devoted to gold it still only makes up a tiny percentage—0.14 per cent—of the investable universe of global equities and bonds. “Only a marginal increase in the propensity to hold gold as an investment could have a dramatic effect on the gold price,” according to Fredrik Nerbrand, global head of asset allocation at HSBC. Wine Continuing strong demand from Chinese and Middle Eastern buyers is expected to push the prices of fine wines to new heights in 2011. The Fine Wine Fund, which gives investors access to a basket of wines, rose 33 per cent in 2010 and, while further strong growth is expected in 2011, there may be some slowdown in the rate of increase. “It would be very nice if 2011 was as strong as 2010 but we can’t expect increases of 30-40 per cent again,” says William Beck, a partner in the fund’s managers. Wine has replaced brandy as the drink of choice for sealing business deals in China, with left-bank clarets—Lafite, Mouton Rothschild and Latour—the favourites. Newcomers to wine investing should be wary, however. Truly investable wines make up only a small share of the total: the Liv-Ex 100 Index, which tracks prices, consists of 95 per cent red Bordeaux. Art Dealers and auction houses are confident that the art market’s bounce-back in 2010 will continue into 2011. “A lot of people worried about cash returns are looking at art as a tangible asset,” says Philip Hoffman, chief executive of The Fine Art Fund Group. Prices fell sharply in 2009 in the wake of the financial meltdown but have since performed strongly with records being set for artists including Picasso and Giacometti in 2010. The London sale of an 18th-century Chinese vase for £43m to a private collector last November highlighted the prices that buyers are still willing to pay for top-quality pieces. The new wealth of Russian oligarchs and Asian businessmen has seen a spike in demand for pieces—icons and 19th-century landscapes in the case of the Russians—that remind them of home. Hoffman foresees strong demand this year for imperial Chinese porcelain and art of the Middle East and India. Stamps Stamps have proved a steady investment over the years, and while price rises stalled after the financial crash, they have recovered recently. The Stanley Gibbons 100 Stamp Index, reflecting the prices of the world’s most frequently traded stamps, rose 3 per cent in 2010. “Prices are looking strong at the moment, particularly for British Commonwealth stamps, because good material is getting harder to find,” says Hugh Jefferies, editor of Gibbons Stamp Monthly. But the best picks can often be found away from the main index. Newly-rich Chinese collectors are buying pre-communist era imperial stamps and those from the time of Chairman Mao, when large quantities were destroyed. Stamps are much more than a pocket money investment, with the Lady Mairi Bury collection fetching just over £3m at a Sotheby’s auction in November. The 30 constituents of the SG Great Britain Rarities Index are worth £1.59m, up 274 per cent on their 1998 base. Exchange traded funds Exchange traded funds (ETFs) have enjoyed spectacular growth in popularity in recent years and there is every indication their rise will continue into 2011 and beyond. ETFs are investment funds that are listed on a stock exchange and that trade like an ordinary share. Most replicate an underlying index so they allow investors to diversify their risks while retaining the convenience of a share—but without the need to pay stamp duty. They have proved popular with both private and institutional investors. More than 2,400 ETFs are available, while the value of assets held within them rose 19 per cent to more than $1,231bn last year, according to BlackRock, a leading provider. Deutsche Bank added to the list at the end of December, launching ten ETFs based on the MSCI World Index. But an ETF is only as good as the underlying investment and Vanguard, another provider, has warned that the inflow of funds into emerging market shares was “a reason for concern.” BlackRock’s Deborah Fuhr cautions investors that the ETF umbrella covers a range of different underlying investments supervised by different regulators and subject to a variety of tax regimes. Spread betting For the more adventurous, spread betting, a tax-free way of taking a punt on price movements in a wide range of underlying markets, has come a long way since it was introduced into Britain in the 1970s. About 100,000-150,000 people are believed to be active in financial betting, some with an investment background but others with an interest developed from conventional betting (on the horses and other sporting events). Spread-betting companies will offer customers a price range on, say, a share, or a number range on an index either side of the present level. A better might then wager £100 for every point the index moves above the agreed range, or for every point it falls below the bottom of the spread. If the index or the share price moves in the expected direction, the investor will be in profit. If it moves the other way he or she faces potentially unlimited losses. Newcomers need to be aware of this risk and to make use of stop-loss orders to limit exposure. Because spread betting is treated by the Revenue as gambling, it escapes the capital gains tax and stamp duty on regular share dealings. Spread betting started as a means of enabling investors to take a view on the gold price, but has expanded to cover single shares, indices, currencies and commodities. People bet on sporting outcomes, house prices and election results. Spread betting was given a boost by the government’s decision to raise capital gains tax from 18 to 28 per cent last March—increasing the relative appeal of spread betting over conventional share trading. Increased activity and tough competition between the spread-betting companies have halved spreads and hence costs to investors over the past 12 months, says Craig Inglis, product manager at CMC Markets. But spread betting remains a minority activity and the companies involved are still attempting to broaden its appeal. CMC launched an iPhone trading platform in 2010 and plans to update its platforms for contracts for difference (see next item) in the spring. “We want to make it accessible for a mainstream audience,” says Inglis. Contracts for difference Contracts for difference (CfDs) are sometimes described as “spread betting for professionals” though they are increasingly being used by individual investors. The two investing techniques have many similarities but they do differ in significant ways. Like spread bets, CfDs allow an investor to take a view on the price movements of an underlying share, index or commodity such as gold for only a small outlay. Both allow the investor to put down a deposit or margin payment—typically 10-20 per cent of the underlying asset rather than its full value—though if the price moves unfavourably the losses can be large. The most significant difference lies in the fact that the price that is offered to the spread better is based on the underlying asset but includes commission, typically 0.1-0.2 per cent, and costs. It is not the clean market price offered by the CfDs provider and the spread is likely to be wider, making it more expensive. This pricing transparency appeals to professional investors such as hedge funds. In addition, the spread better is, in effect, betting against the provider who has an interest in him losing the bet. The CfDs provider offers a market price and acts more like a broker, with a disclosed level of commission. Like a spread bet, a CfD is exempt from stamp duty but it does incur capital gains tax. Finally, spread bets have a fixed expiry date while CfDs are open-ended.Also in Prospect's investment special:Alistair Darling: what is financial literacy? Jim O'Neill: A great American revival John Kay shows Max Hastings how to invest Best and worst investments Jim Rogers: The Chinese century Vicky Pryce: Stop the Greek exit
