Being a saver remains a miserable business in the UK. The most recent inflation numbers showed the consumer prices index rising to 4.5%. It means that if you are a 40% taxpayer and you want to be sure your cash makes a real return this year, you will need to get it an interest rate of 7.5%. And the problem? Bar a couple of fixed-rate individual savings accounts, no bank pays that, or anywhere near that.
So, if you keep your money in cash, you absolutely guarantee yourself a negative real return. As Moneyfacts points out, even if you are a 20% taxpayer, a lump sum of £10,000 put away five years ago would now have the purchasing power of a mere £9,345.
This is hardly new news. But it is why the search for an income has become increasingly desperate. It is why 500,000 people have poured into NS&I index-linked certificates in the last few months – and why the certificates have now been withdrawn.
It is also why many of the income-oriented investment trusts trade at a premium to their net asset values. Buy shares in the Henderson High Income Trust and you’ll pay 3.3% more than the value of the shares on the open market. Go for the Troy Income and Growth Trust and it is 2.8%.
And it is why UK companies have started to launch bonds for retail investors. This week, Caxton FX issued a four-year non-transferable bond that will – assuming all goes well at Caxton – pay an interest rate of 7.25% (nearly enough for you to beat tax and inflation!), and National Grid, showing a nice sense of recognising the thing people really care about, issued a ten-year bond linking returns to RPI.
Both of these come with hefty risks. There has been talk this week about the NG issue being a replacement for NS&I bonds. But it is, of course, nothing of the sort – for the simple reason that it is not backed by the UK government, but by a very heavily indebted private company. These days, if you want to get a reasonable return on your money you have to take risks to do so.
So what next? There is a general assumption that the frantic search for income we see today is a temporary market distortion. As interest rates return to more normal levels (ie they are higher than inflation), and savers become more confident that their purchasing power is being protected by ordinary accounts, the premiums on income investment trusts should disappear – and the likes of NG will have to take their RPI-linked bonds back to the corporate market.
But I’m not so sure. Why? The ‘baby boomers’. They were born in their hundreds of thousands in the years after the second world war. They grew up in the 1950s and 1960s and started saving en masse in the 1980s and 90s, pushing Western stock markets up as they did so. Now they are all retiring. One likely effect of this has been long anticipated: the ageing boomers will sell their equities and, along the way, push all stock markets down – yet another reason why new investors will have to come to terms with lower long-term returns.
But I wonder if they will be pushing all parts of the market down. Most boomers will be finding that their retirement funds aren’t quite as big as they had hoped. So, regardless of the current crisis, their retirements are likely to be one long search for income. And that might keep pushing the price of any asset that provides a reasonable-looking income up – not just for a couple of years, but for a decade or more.
Remember Mrs Watanabe, the proverbial keeper of Japan’s savings? For years, near zero interest rates pushed her into a frantic search for yield, something that led her into the currencies of countries she would never dream of visiting (think Turkish lira, where interest rates were 17% or so in the mid-2000s), as well as high-yielding foreign equity funds and a variety of complicated derivatives. Middle Japan became a market mover.
Now think of millions of US and UK retirees doing the same – scouring the globe not for capital gains but for the income they need to maintain their living standards, without eating too much of their capital. They too could easily be market movers.
My point is that, while many of the products that produce income look expensive today, in the context of many millions of oldies stampeding into them over the next decade, they might not be.
It is irritating to pay more than net asset value for an investment trust, and today you might wonder if 7.5% is enough to compensate you for the risk of handing cash to a company in the tough business of currency conversion. But it might be that, five years out, it will be hard to regret choosing to chase income, simply because everyone else will be doing exactly the same thing.
• This article was first published in the Financial Times