Personal finance: In pursuit of returns

When Apple published its latest profit figures in January, the numbers were extraordinary. Sales grew 73 per cent during the three months to December, profits reached $13bn, up 117 per cent. But perhaps most striking of all was the quantity of cash Apple is now holding—$97.6bn—enough to buy outright more than 450 of the 500 companies in America’s S&P500 index.

It is an almost inconceivable sum. But Apple operates in an industry prone to sudden change and in these uncertain times, it may need money fast if something goes wrong, or an opportunity arises. What’s more, since the credit crunch of 2008 it has become clear that you can’t always borrow when you need to. Not surprisingly, a lot of people have started to think more like Apple in their finances.

In Britain, habits are changing—people feel less secure in their jobs and more in need of a cash cushion. Wages are stagnant but food and household bills have gone up fast, and the VAT rise a year ago increased prices, further squeezing disposable incomes. The high street casualties of this squeeze are numerous: HMV, Mothercare, Blacks Leisure—even Tesco has recently stumbled. The Bank of England’s latest quarterly report on the financial position of British households shows that a large proportion of those with mortgages plan to save more in the coming year, especially if they still owe large amounts.

This opens up the first big problem for people trying to manage their money sensibly through what is likely to be a long rough patch for the economy—interest rates on savings are derisory, so the cash in the bank that many feel is essential brings security but almost no growth. And inflation is still well above interest rates so the real value of cash in the bank falls because it cannot keep up with rising prices.

This is the situation facing people with savings they need to keep safe and accessible. Perhaps the only way to look at this negative return is as if it were an insurance premium: the price you pay for the security of having cash on hand. There is at least some good news on this score, provided you believe the Bank of England’s forecast that inflation is likely to fall quite sharply this year. If that happens, the after-inflation loss on your savings will get smaller. Or to put it another way, your insurance is about to get cheaper.

Ultra-low interest rates give households with heavy debts some breathing space, particularly those on tracker mortgages, but they also make a bad situation worse for the pension funds and insurance companies that will have to provide our retirement income. Very low long-term interest rates tend to reduce the return that pension funds can earn on their investments and likewise the incomes available to people who buy annuities.

Not surprisingly, there has been a rapid rise in the number of people aged over 60 who are continuing with self-employment and freelance work. According to the Labour Force Survey, between the second quarter of 2008 and the same period in 2011, the number of self-employed people aged 60 to 69 rose by 18 per cent. The rise for those aged 70-plus was rather more eye-catching, at 66 per cent. Both groups are heavily skewed towards professionals and those in the top occupational categories. Even the middle-class baby boomers who are now retiring and whose sheer numbers partly explain this rise in the “grey self-employed,” are underwhelmed by the lifestyle their pensions alone can allow. Tom Wainwright of Kingston University, who has researched this area, says: “A lot of professionals have realised that although they will have an income in retirement, the pensions and savings they have tried to amass simply haven’t met their expectations.”

For those with cash savings and a sum available to invest, the main options are hardly appetising. Investors have become extremely sensitive to risk, and their periodic flights to safety have produced bouts of alarming price volatility. Large sums have been seeking safety in bond funds recently, even though most government bonds in the developed world now look either very risky, or risky and very expensive. In search of a better return, many people have instead opted to buy highly-rated corporate bonds, since big company finances are in rather better shape than those of most governments. This has pushed prices up and consequently reduced the returns mainly to the 4-5 per cent range, about the same as inflation.

Gold has enjoyed a remarkable price run in the past decade as government finances have deteriorated and the dollar, in particular, has devalued. Gold prices have been on the rise again recently as concerns have grown about a medium term pick-up in inflation, spurred by developed world central banks pumping out cheap money. Gold’s traditional appeal is the insurance it gives against high inflation and the debasement of paper currencies—but this insurance is looking pricey to many people (that doesn’t mean gold can’t go a lot higher).

Equities might produce more attractive returns and many companies are now putting greater stress on improving their dividend pay-outs. Capita Registrars, which provides share registration services, reports that dividend payouts by UK-listed companies rose 19.4 per cent last year to a record £67.8bn. The total is forecast to rise another 10.6 per cent to £75bn in 2012. This at least holds out the prospect of earning a dividend yield higher than the rate of inflation—provided you can stomach the current price swings. Many can’t and in early January, the Investment Management Association announced that British equity funds had seen their biggest monthly outflow in November, at £864m.

Could this be a case of retail investors providing a counter-signal? Might this be the time to buy? The economist Gavyn Davies argued recently that shares might outperform bonds, even in depressed economic conditions, mainly because company earnings are holding up and bonds have become so expensive. He may be proved right, but for many private investors putting their own savings at risk, the equity market looks a dangerous place. Even the Bric economies have had a poor year.

Against this uncertain background, trends are emerging, such as the intensifying search for yield coupled to safety. This may be from bonds targeted at retail investors, such as recent index-linked issues from National Grid and Tesco; big blue-chip dividend-paying companies; structured products, though for many they remain too complex a proposition; or, when they’re on offer, index-linked savings certificates from National Savings & Investments.

Managing your savings and investments has rarely been trickier than it is now. The options are limited, certainly, but even in these difficult times, there are some left.