Expert View: Where investors can find safety

By Oliver Ralph, January 29, 2009
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The banking crisis has left investors with much to mourn. Banks used to be havens of stability, offering savers a safe home for their cash, and shareholders a relatively secure investment with a decent annual dividend. But after a tumultuous year, they’re no longer looking so attractive for either group.

So where should investors go to find safety? Savings accounts are still the obvious choice, provided you don’t put more than £50,000 (the government’s compensation limit in the event of problems) with any single bank.

True, interest rates are low and falling, but so is inflation, so the low rates on offer are not quite as damaging as they might seem. And there are still some decent rates around. According to comparison website Moneyfacts, you can get a fixed rate of over 4.6 per cent if you’re prepared to lock your money away for a year.

Moving slightly up the risk scale are bonds, which fall into two categories. Government bonds (gilts) are very safe as the government is unlikely to go bust. However, the market price of these bonds has been rising lately as wary investors have looked for safe havens, so there’s a risk that the value might fall as appetite for risk returns. The easiest way to buy gilts is via funds such as the iShares FTSE All Stocks Gilt.

The other category is corporate bonds. Although they fell in value last year as investors fretted about bankruptcies, many analysts believe that recovery is on the way. Again, funds are the easiest way in — the M&G Corporate Bond Fund and the Invesco Perpetual Corporate Bond Fund are both often recommended.

If you’re looking for reliable dividend-paying shares to replace the much maligned banks in your portfolio, there are plenty of options. I ran a filter of the FTSE 100 to find companies that have a good record of growth, a decent dividend and a relatively stable share price. Amongst the names that came up were utilities such as National Grid and Centrica, pharmaceutical companies such as GlaxoSmithKline and AstraZeneca and food and drinks groups such as Compass and Diageo.

There are many other investments that offer safety in troubled times, but be cautious. Gold, for example, is seen as a good store of value. But if the economy starts to recover the gold price could suffer.

And structured products, which rise in value if the stock market rises but offer protection if the stock market falls, also attract safety seekers. On the face of it, they offer reward with relatively little risk. But read the small print – many of them perform worse than cash when the stock market is falling and perform worse than shares when the stock market is rising.

Oliver Ralph is the editor of Investors Chronicle

    Last updated: 2:50pm, January 29 2009