Don't take the money and run

The financial markets may be in turmoil, but savers can still produce good returns without putting their money on the line

WITH a global recession possibly heading our way, where should we put our money? Equities have been attracting record numbers of investors in recent years and, unless you desperately need the cash, you should leave any money invested in shares to ride out the storm. But for new investors the answer is not so simple.

Lewis McNaught, director and head of retail at Gartmore Investment Management, says: "It is not a time for the fainthearted and we have probably not yet reached the point where people can pile in and buy up underpriced equities."

He adds: "Investors are not panicking. We have been preaching the gospel of long-term investing and taking at least a five-year view; hopefully this message has hit home."

Mr McNaught says there is still scope for equity investment in selected areas in the US and Europe, but less so in the UK and emerging markets.

Many experts have suggested that index-tracking funds would suffer in a slump because they can only follow the market down, but this doesn't seem to have happened yet. "We are not seeing people leaving index funds but nor are we seeing much money coming in," says Mr McNaught. "Index funds still represent excellent value because of their low charges, although actively managed funds are attracting more interest at the moment."

He suggests that investors wary of market turbulence look at three areas: gilts and bonds; fixed-interest investments; and cash. Gilts are issued by the government to raise money and pay fixed interest over a set term. Corporate bonds are similar in principle but issued by private companies and therefore more risky. Both are considered attractive because interest rates look set to fall as governments act to kickstart the global economy.

Mike O'Shea, joint managing director at Premier Asset Management, says: "We are looking at fixed-interest investments generally. I think the UK investor is going to be surprised at just how far rates are going to fall.

"We like bonds but are also looking at the high-yielding UK equities with strong dividend cover, such as the utilities, which are less affected by the global economy."

Mr O'Shea says most private investors do not have the flexibility to switch investments around: "You cannot tell somebody with a PEP that they should sell and move into cash, and try to get back into the market later. This isn't possible with a PEP, and anyway, investors who charged out of the market in November 1987, only to return later, will have regretted it.

"You could cash in your investments and stick them in the bank, but although you may get 7.5 per cent now, in a year's time you may only get 5 per cent or less, and this will be taxable."

Investors should still consider taking their PEP allowance for this financial year. Mr O'Shea says that demographics, new technologies, globalisation and the opening up of new markets means the outlook over the next 10 to 15 years is still positive, if you can invest for that long.

Bob Yerbury, chief investment officer with Perpetual, says the UK and US markets may now offer some bargains: "I think it is a good time to be accumulating equities, but gradually. I'd be looking to buy over the next four or five months."

what is the government doing to our savings?

At the moment we can invest pounds 6,000 a year in a tax-free personal equity plan. Most PEPs are "wrappers" round a pooled fund that invests in the stock market.

We also have the right to buy one tax-free bank or building society account, called a Tessa. This runs for five years and the maximum investment is pounds 9,000 during that period. New Tessas can be opened at any time before next April.

From 6 April 1999 PEPs and Tessas will die, though existing investors can keep their accounts and they will grow tax-free. The replacement is the individual savings account (ISA). Under the new scheme you will be able to save pounds 5,000 tax-free in each tax year (pounds 7,000 in the first year). You can split this between savings accounts, shares and life insurance policies.

Each year you can put a maximum of pounds 1,000 into an ISA savings account (pounds 3,000 in the first year), and pounds 1,000 into an investment run by a life insurance company. Or you can put all or part of the annual pounds 5,000 allowance into shares. So PEP investors may well just carry on investing as they do now, with a slightly lower annual limit.

All money and investments held in an ISA will be free of income tax and capital gains tax, and you won't have to declare your investment on your tax return.

The Government is developing a scheme to put endorsements on certain "fair deal" ISA investments. For example, a savings account can earn a CAT-mark (standing for fair charges, easy access and decent terms) if it allows pounds 10 or more to be deposited at a time and pays interest no lower than 2 per cent below base rate.