Even with UK interest rates on savings accounts rising gradually above 1%, investors are still losing more to inflation (currently at 3%), than they are earning from interest. So where should investors invest their money to generate an inflation-beating return?
The answer could simply be – actively managed funds. On November 2nd last year, the Bank of England raised UK interest rates by 0.25%, after a decade of historic lows. Several rises of this kind would be needed, to make any difference to investors.
Tom Stevenson, investment director for personal investing at Fidelity International, says: “With interest rates unlikely to overtake inflation for the foreseeable future, cash continues to remain trash.”
“For anyone who is unsure about the benefits of investing in stocks and shares, our calculations show how staying in cash would have severely stunted your savings over the long-term. While investing in stocks and shares may appear to be more risky than keeping your money in cash, history shows that, over the long run, equities have significantly outperformed cash.”
What funds will outperform cash?
Fidelity’s analysis also looked at how choosing an actively-managed fund could have boosted your returns even further.
Ayesha Akbar, Portfolio Manager, Fidelity International says: “Active performance looks to have turned a corner. Close to half of all US large cap managers outperformed the S&P 500 in the year to the end of June 2017, compared to fewer than one in five over the past five years.
“Falling stock correlations should continue to benefit active managers, as would declining factor correlations in 2018. Factor correlations have not declined as much as stock correlations over the past year, and remain above their post-crisis lows.
“Value opportunities are concentrated in sectors like financials and energy, which tend to re-rate when economic growth picks up as financials benefit from higher loan demand and energy companies from higher oil prices.”
With regards to returns, Lindsell Train UK Equity leads the way, with Nick Train’s fund returning investors 273.6% over the past ten years.
This means a £15,000 investment would now be worth a whopping £57,830. Liontrust UK Growth, Majedie UK Equity and Fidelity Special Situations would have returned investors a tidy £39,614, £39,484 and £35,937 respectively over the same period.
Looking at the performance of the funds mentioned above, it is easy to see how they could boost an investor’s long-term returns compared to cash. Nathan Sweeney, co-manages the Architas MM UK Equity fund. The fund has a 12.40% holding in Majedie UK Equity (see chart above).
Sweeney says: “Given the four manager structure, the fund is well diversified, and although they [the managers] are aware of the benchmark they are not a slave to it. The fund tends to have more large-cap exposure, but in 2017 did start adding more to mid-cap.
“In a value rally ‘it won’t shoot out the lights’, due to the level of diversification, but it also shouldn’t suffer as much in a down market. The managers are currently fairly bullish on the oil sector.
“Demand has held up while shale producers are being a lot more discerning about production levels. Major companies including BP and Shell are now also covering their dividends so prospects look reasonably good.”
This was written by editorial staff at Professional Adviser. All views are from the publication.
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