Ken Taylor: For growth, the name is bond – good quality strategic bond funds

Published on 31/03/2012 05:35

AS ANOTHER tax year draws to a close, so the usual surge in sales of individual savings accounts (Isas) will peak.

It is always interesting to see the types of investment that gain the strongest support. If nothing else, it tends to be a fair bet that the top selling sector will prove to be a poor choice, so it’s worth trying to explain what leads to such an outcome.

If we accept that the majority of Isa investments are either advice-led or based on fund management advertising, then it is fair to point out that the key driver will have been past performance.

So investors are led to select funds that have already produced strong returns, but with little thought given as to their ability to deliver going forward. Anyone who invested in technology stocks in 1999 will know exactly what I am saying here.

What is surely of more importance is to look at where the various asset classes currently sit, and where the value might really lie. For me, that would lead to equities, though on a selective basis.

Too many investors still view low share prices as a disincentive to buying. At this point in the cycle that tends to suggest we are seeing the latest example of herd mentality – because things have gone one way for long enough, they will continue in this manner. The reverse of everybody chasing ludicrous virtual valuations in technology stocks in the nineties, in fact.

Having said that, I’m not overly bullish on equities, because both the length and extremes of the current economic cycle are largely unprecedented.

The banks are still in a very perilous state and anyone who dismisses the notion of the eurozone ultimately unwinding is frankly in denial. Such a background can only result in sometimes extreme volatility, which is understandably unnerving for investors.

So perhaps it is right to say that equities are the least bad asset class, because offsetting the volatility is a growing yield of over 4 per cent, which when reinvested over time enhances capital value significantly.

Turning to the alternatives, we all know that cash accounts merely offer a return free risk, while government debt (gilts) cannot be justified at current levels. While inflation is for now officially coming down, it is highly likely that at some point not too far in the future it will rise sharply.

This again leads to a need to invest in assets capable of generating a return in excess of the inflation figure, which perhaps makes the Chancellor’s notion of issuing 100-year bonds into the market a tad misplaced.

One alternative to pure equity investment – and a means of not only diversifying but also seeking less volatility – would be to have some exposure to decent corporate bonds. This is an asset class I have long supported, and investors have been extremely well rewarded. Just as the share valuation of quality companies is in many cases attractive, or even cheap, so the gap between perceived and actual risk of defaults on corporate bonds is often poorly judged.

My advice to anyone considering their investment options at present would be to embrace good equity funds, particularly those giving exposure to the very strongest businesses worldwide.

Good quality strategic bond funds would be a worthwhile diversifier. Just be sure to look beyond the headline or the past performance figures, and think instead of investing for the future. By so doing, you will significantly increase your chances of making a smart choice, and hopefully avoid owning the same as the herd.

• Ken Taylor is director of Mackenzie Taylor Wealth Management