Jeff Salway: The big interest isn't in savings

Published on Thursday 26 August 2010 11:14

INVESTORS may feel increasingly uncertain over the outlook for world stock markets, but that has not prevented fund sales hitting highs this year. The Investment Management Association revealed recently that sales of unit trusts reached the second highest level on record in the first six months of 2010.

The impact of rock-bottom interest rates on savings is a key reason, with investors piling more than 2 billion net into unit trusts in 12 of the past 15 months. Investors starved of income from savings accounts have been forced to cast their caution aside and put their money into stock market-based investments.

Fund managers have benefited not only from the paucity of income paid by cash, but by the absence of other alternatives that were often favoured over equities in the mid-2000s - namely property-based investments.

The housing market slump has dampened the hopes of millions expecting property to provide their main investment returns and new research by PricewaterhouseCoopers (PwC) suggests equities will continue to prevail over bricks and mortar for at least another decade. House prices will not return to their 2007 peak until 2020, says PwC, and while that still implies growth of 2 per cent a year, it compares with historic growth of 3 per cent a year between 1984 and 2010. In contrast, the research claimed that while equities remain considerably riskier than housing, they can be expected to provide returns of 5 per cent a year over the next decade.

That doesn't mean investors should forsake property or cash in favour of equities, but it does reinforce the diversification message. Most good IFAs spend a lot of time ramming home the message that their clients should have their money spread between different asset classes and, if anything, the current uncertainty will help them under- line why the fundamentals should come first.