The world has changed greatly since the days when relatively high deposit interest rates and generous bond yields offered savers and investors a range of capital secure products which allowed them earn quite strong returns with the comfort of knowing that their money was completely safe.
Deposit rates today are effectively zero with some banks even charging investors for taking their money. Bond yields too have collapsed with Irish government bonds falling from 12 per cent as recently as 2011 to less than 1 per cent today.
That changed reality doesn't seem to have changed attitudes, however. "We've asked people in surveys what level of risk they want to take and 40 per cent of them say they want to take no risk at all," says Ann Prendergast of State Street Global Advisors.
"Unfortunately there really aren't any options for savers who want guaranteed capital security with a reasonable return," says Dan Moroney, investment manager with Investec. "This comes back to the current ultra-low interest rate environment. Capital security offers zero returns. There are some structured products linked to equity indexes which offer an element of a guarantee as long as the index doesn't fall by more than a certain amount. That's quite a dicey scenario for investors because in most cases if the index falls there is a lot of downside risk which is not very appetising.
“There really is no way to get a decent return with a capital guarantee,” he adds. “Even if you thought that Irish government 10-year bonds with yields slightly below 1 per cent aren’t too bad, there is the risk of inflation beating that and the real value of the capital being eroded. There really are no simple options for people.”
Maiyuresh Rajah, senior DC investment strategist with State Street Global Advisors, says that this is an issue which is not just affecting Irish investors. “It’s affecting every country. A savings and investment portfolio needs to be carefully managed on an ongoing basis to managing risk to protect capital while still offering a predictable outcome in returns. The way we look to address this is by investing in growth assets across asset classes to get equity-like growth.”
Diversity is key to these funds. Their assets can include commodities, real estate and other securities which are not correlated to each other. This means that the prices of the assets do not necessarily move in the same direction at the same time.
Another key feature is volatility management. “We also employ volatility management mechanisms,” says Rajah. “We look at the level of volatility in the market. If it is quite persistent and the chances are that it will continue, there is a mechanism to move from risky to more stable assets in response to those trends. The asset allocation can be adjusted one way or another in response to market conditions.”
Trevor Booth, of Mercer Financial Services, says that the only option is to commit for the long term and even then the returns are extremely low. "Deposit rates are extremely low at the moment, with some deposit accounts paying no interest so it is difficult to get a decent return while getting a capital guarantee on your fund," he says. "If you are prepared to commit your savings for longer, then you can get better returns. For example, State Savings currently offers a three-year Savings Bond which gives 1 per cent tax-free return (0.33 per cent AER) after three years and a Five Year Saving Certificate which gives 5 per cent tax-free return (0.98 per cent AER) after five years. However, there may be an opportunity cost here if interest rates rise during the term."
Colm Power sounds a note of caution for investors tempted by seemingly attractive returns. "People are being driven away from cash on deposit and are chasing returns. It's important that they don't chase too hard or they will find themselves taking on too much risk."