So where can hard-pressed investors find a shelter for their money?

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SAVERS turning to traditional refuges are taking a bigger risk than they think, writes Jeff Salway

Investors in search of a safe haven for their money can be forgiven for not knowing where to turn in a climate shrouded in uncertainty.

From the lack of returns available from cash accounts to a recent slide in gold prices and gilt yields, confidence in traditional safe havens is thin on the ground.

Yet experts warn that many savers turning to the traditional safe havens are taking a bigger risk than they think. Millions of pounds have been taken out of equity funds in recent months as the flight to safety has accelerated, but pension investors panicked into short-term changes could pay a handsome price over the longer run, advisers say.

The latest fund sales figures from the Investment Management Association show that while corporate bond funds remained the most popular option in April, what used to be called cautious managed funds also attracted large sums of money from risk-averse investors.

The cautious managed sector has been relabelled “mixed investment 20 to 60 per cent shares”, but the name underlines the relatively high exposure to equities and some funds have shipped hefty losses.

Absolute return funds have also proved popular, due to their aim of producing positive returns in all market conditions. More than half of these funds are have lost investors money over the last year, with some down by 10 per cent or worse.

So where can you go for shelter?

Cash remains the only real safe haven in the short-term, but even then you should ensure your money is in a robust bank – preferably FSA-regulated – and that you have no more deposited in an institution than the £85,000 protected by the Financial Services Compensation Scheme.

In the longer term, however, cash savers face losses too, with inflation eroding the value of their savings over time.

That factor, along with continued market volatility, has helped drive demand for gold as a safe-haven investment in recent times.

Gold prices have soared over the past decade but with particularly volatile movements in recent months even as it has touched new record highs. The gold price has fallen by more than 17 per cent since an all-time high last August raised the prospect of it passing the $2,000 mark.

However, Haig Bathgate, investment director at Turcan Connell in Edinburgh, advised against relying on gold as a buffer against the current economic turmoil.

“The price is very much determined by investment sentiment; it has no yield and only half the production is actually used to make things,” he pointed out. “It has also started to correlate with equity markets more recently and, as we have seen, it can move by over 10 per cent in a day at points. This is therefore not a low-risk investment.”

Bathgate is also sceptical towards fixed income funds, into which private investors have ploughed millions of pounds over the past few months.

Investors looking at buying conventional government bonds (gilts) as a way of shoring up their portfolio could be making an expensive mistake, Bathgate warned.

“If interest rates increase [which they will do as they have never been lower in the Bank of England’s 300-year history] conventional bonds will lose a lot of value,” he said.

“Even if the government pays all coupons and the principal value back at maturity, investors could suffer significant capital losses compared to where they are trading at the moment.”

He is not alone in warning of the downside to investing in gilts in the current climate. Alec Stewart, head of asset management at Anderson Strathern in Edinburgh, said that the while economic crisis had made US, UK and German government bonds the investment of choice for those seeking security, there’s little value on offer.

“With ten-year yields between 1.6 and 1.2 per cent and the two-year Bund effectively yielding nothing, I think that capital values are due to fall making alternatives look more appealing.”

Such ongoing uncertainty is one reason why some experts say investors should stick to taking a long-term view on equities.

The key is to diversify by spreading your money across different assets and funds, said Andrew Hannay, director at IFA Robson Macintosh.

“In the short term it has to be cash, but over the medium to long term it is better to invest in a broadly-based portfolio of shares, unit trusts, investment trusts, property and bonds listed here in the UK and across the globe, including Europe.”

While nervous or risk-averse investors will be attracted to cash and gilts in the short-term, those asset classes will do little for growth over the longer haul.

John Godfrey, director at Barclays Wealth and Investment Management in Edinburgh, said: “Genuine investors should take a long-term view and asset allocate appropriately given their risk profile and investment objective, fine tuning in times of market stress or exuberance to ensure allocations remain appropriate.”

The recent flight to safety has seen investors taking money out of equity funds. Yet global stock markets have been more resilient than might have been expected since the eurozone crisis escalated last summer.

That’s one reason why some experts believe that rather than fleeing the markets, now is a good time to go in.

“Being in the market is good long-term for wealth creation,” said Hanney. “Long-term investing in quality, cash generative companies is the way ahead. Many of the fund managers we speak to think that this is a good time to be buying equities. We agree”. But what kind of equities?

The eurozone crisis has deterred some investors from developed world markets, including the UK. But for Alan Steel, chairman of Alan Steel Asset Management, you can’t go far wrong with traditional options such as UK equity income funds.

“They’re designed to pay income to rise each year above inflation, and simultaneously grow capital above it too,” he said. “What else would you want?”

Steel likes Neil Woodford’s Invesco Perpetual Income and High Income Funds and, for worldwide income, the M&G Global Dividend and Troy Asset Management Trojan funds.

“This would give investors peace of mind, protection and decent profits /income over the next three years or so.”