Losing interest: Bank of England takes emergency measures

We examine the impact of the Bank of England’s announced interest rate cut

Article updated: 23 March 2020 1:00pm Author: Tom Rosser

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With the Bank of England recently cutting interest rates even further to 0.1%, those with money in savings accounts will be facing even lower returns on their hard-earned cash. This would seem like the perfect opportunity for savers to dip into the world of investing to try and generate some additional returns. However, whilst the current heightened levels of market volatility can rightfully make investors nervous about entering, there are still options. A combination of regular investing and utilising lower risk investments such as Multi Manager Funds can help savers get started on their investment journey.

The amount of money earned in a generic savings account will likely be less as the banks have to lower their rates in order to remain vaguely profitable. The lower rates generally pave way for higher inflation as investors spend more on goods and services, forcing prices up. This means the real return (adjusted for inflation) on the savings will most likely be even less than it is now. As a result, there is a good chance savers will stand to lose money in real terms when held in cash savings.

The graph below shows the return you would have earned putting money into a savings account over the last ten years, alongside the return after inflation in a period characterised by low interest rates and fluctuating levels of inflation. You can clearly see the eroding effect inflation has on a starting value of £250 with additional monthly contributions of the same value over 10 years.

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The solution to this problem is making sure money is invested in a way that generates a return greater than the rate of inflation on a consistent basis. For those investors afraid of investing in the stock markets for fear of losing money, or are worried about the current financial market conditions, then entrusting a Multi Manager Fund with your money could be an option. These types of funds invest in a collection of other fund managers, with the aim of providing investors with a well-balanced portfolio. They essentially represent a simple ‘one-stop-shop’ for investors.

These funds benefit from reduced levels of risk compared to pure equity funds or index trackers as investments are spread across various asset classes, geographies and investment types. They also won’t be overly exposed to one theme, meaning downswings in the performance of one manager when market conditions don’t favour their approach are smoothed out by the performance of other managers. Finally, they are managed by a team of experts who conduct extensive research into selecting the right managers and putting them together in a way that produces the right results.

We have three Multi Manager Funds, each appealing to investors with different levels of risk appetite. One example is the ES Share Centre Growth & Income fund, appropriate for investors seeking some income but also an element of capital growth. Over a 5 year period, its returns have been considerably less volatile than the FTSE All Share – nearly 5% less on an annualised basis. The below graph shows the inflation adjusted returns of investing £250 per month in either the fund or a 1 year Fixed-Rate ISA over 5 years. This helps to illustrate that there are investments out there for investors wanting to grow their money without taking excessive risk.

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All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Tom Rosser

Investment Research Analyst

Tom holds a BSc Economics degree and an MSc Investment Management degree, and has passed both CFA Level l and CFA Level ll. He joined The Share Centre in September 2018 on the graduate scheme and is now an Investment Research Analyst on the fund research team. As well as being a fund commentator, Tom also comments across equities and other asset classes.

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