If you want your cash to grow, break bonds with received wisdom

OVER the past few weeks I have read several articles arguing that what investors are currently experiencing is purely temporary - all will return to normal sometime soon, they insist.

Some such articles cite historical data and base their optimism on traditional measures of value, while others focus on justification for pure equity investment as if serious consideration of any alternative asset class is simply nonsensical.

As we have recently passed the third anniversary of the credit crunch, I have to say that I find such commentary quite intriguing and in no small measure disturbing. It almost appears that for some commentators, nothing has changed.

What I struggle with is deciding whether such observations are in fact correct, or whether what they exhibit is a simple denial of change.

Richard Woolnough, who runs about 10 billion of fixed interest money for M&G, recently offered a very salient observation about western economies and their potential for growth. Given that three years after the crisis began there is little sign of an upturn in economic growth in such economies, it might be sensible to at least consider the possibility that the traditional permanent upward trend in growth may have ended.

In other words, economies such as the UK may not be simply experiencing a cyclical downturn, as the traditionalist argument goes. If such a scenario is indeed emerging, then it offers challenges that are largely unknown to politicians, bankers and investors.

What I like about Richard, apart from the fact he is a superb fund manager, is his fresh thinking, in contrast to the dogmatic insistence that is so common among his peers. What is wrong with suggesting that things might just be different this time?

All of this has significant implications for investors. There is a huge dilemma for those who require to grow their capital, either to provide a rising income stream or to fund retirement in future years. We have now become accustomed to historically low interest rates, and there is in my view little chance of significantly higher rates emerging in the next couple of years.

Again, too many people are concerne at the threat of spiralling inflation some time soon, but then they have been saying the same thing for two years now and nothing has changed.

Does this again betray an over reliance on historical data?

We need to remember that the biggest single driver of inflation in our country is wage demand. Given the impending cuts to public sector employment, there is no such dynamic in the economy. Added to this, we are likely to experience a downturn in spending by consumers this winter and beyond.Over the past 20 years millions of people in the UK have experienced house prices rising quicker than their salaries, and given the psychological security that provided, they were happy to spend and take on debt. Now that house prices are at best stagnant, it is not unreasonable to conclude that such confidence among consumers will evaporate.

Tying together the prognosis of recurring low interest rates, relatively benign inflation and an extremely uncertain stock market, is it surprising that investors have flocked to corporate bond funds in recent times? Sadly, far too many were advised to exit such funds a year ago, as apparently the party was over and a stock market that was "cheap on a historical basis" offered better opportunities.

Over the period, decent corporate bond funds have outperformed the FTSE 100 index by 40 per cent, with very little of the volatility associated with the stock market. As an observation, investors would be better served by more intelligent consideration of this asset class by commentators.

I find it bemusing how often I read about bonds being the next asset bubble, when in fact the asset is described is a gilt. I have long been aware that corporate bonds are a poorly understood asset class, and closer scrutiny reveals significant opportunities for investors who in reality are seeking to beat cash returns on a recurring basis with as little risk as possible.

For me, that is where we are right now and will be for some time yet.

• Ken Taylor is managing director of Mackenzie Taylor Wealth Management. www.mtwm.co.uk