Four alternatives to rock bottom deposit rates for savers

With deposits so unprofitable, how can savers improve yields without too much risk?

Negativity is taking hold in Europe. No, not the mood (although that could be true also) but rather interest rates. Last month, for example, Bloomberg found that about €1 trillion worth of German bonds had negative yields.

While this is far short of the €4 trillion plus in Japanese government debt that carried negative interest, it clearly demonstrates that the trend towards negativity, which has gripped interest rates in the absence of inflation, shows no signs of subsiding.

So what are Irish savers to do?

A few weeks ago we looked at alternative homes for your money, given the plummeting returns available on deposits. This week we take a look at investments you could consider as an alternative, given that rates are likely to continue to decline. (There is one strong caveat, though: unless you opt for State savings, trying to get a better return on your money will always mean taking on more risk. Unfortunately, there is nothing that can match the risk-free nature of deposits, so bear this in mind before you opt for another home for your money.)

"It's a big challenge for anyone who has traditionally invested in deposits," says Ian Quigley, director of investment strategy at Investec, of the current environment. He adds that people "have been used to getting reasonable returns by leaving their money on deposit and haven't had to endure market volatility".


But this has since changed.

“One thing that is pretty apparent now is that if investors want to earn a return, they will have to withstand some volatility,” he says.

Paolo Maggioni, senior research analyst with Goodbody Stockbrokers, agrees that it's a challenging time.

“For people that have a low-risk profile, they are in difficulty because deposits are not offering a lot.”

If this is you, here are four options to consider.

Think about an absolute return

If you’re prepared to take on some risk, but not enough to warrant a stock market investment, you could consider an

absolute return fund


These funds are designed to protect the capital value of assets and to consistently achieve positive returns regardless of market conditions, and typically promise a return of cash and a particular percentage return. While they typically deliver a lower return than equities, they also tend to fall less than equities during periods of market stress. But, as Quigley notes, they’re “not a panacea”.

“They have the exact same dilemma,” he says, noting that they have to invest in the same assets that are proving challenging at the moment, such as cash, equities and bonds. “Some absolute funds do well, some do poorly.”

Quigley adds that due diligence is important on these funds, which can be very complex in the way they are structured.

Maggioni, however, suggests an approach that involves allocating to three different funds: the Standard Life Absolute Return bond fund; the BlackRock Dynamic Diversified Growth Fund; and the Julius Baer Absolute Return Fund.

“The idea is to combine a few strategies that have a low correlation among them,” says Maggioni, adding that with this approach you might get small, positive returns, while minimising your risk. “Over a short-term horizon we can definitely see the probability of cash plus 2 per cent returns. It’s definitely achievable.”

While opting for such an approach is riskier than leaving your money on deposit, Maggioni notes that combining absolute funds in a portfolio results in a volatility of about 2 per cent.

“It’s very conservative,” he says, “but at the same time, despite the low degree of volatility, it’s possible to have a nice upside”.

And, unlike many hedge-fund strategies, which often impose lock-up periods, the product has liquidity, “a big advantage”, says Maggioni. “So if you require your money back, you get it back immediately”.

Go for gold

It’s the best performing major asset so far this year, according to Bloomberg, rallying by 19 per cent by early March at a time when most other assets are slumping.

Yes, gold, traditionally favoured as a safe haven, is back on an upward trajectory, having advanced by 10 per cent in February alone, and is currently hovering around $1,259 (€1,134). It’s the first time it’s been in bull-market territory since 2013.

As Quigley notes, with characteristics more akin to property than other commodities, one could make a case for gold.

“It has good diversification qualities, but I don’t think it’s especially cheap,” says Quigley, adding that investors typically opt for physically backed exchange-traded funds (ETFs) as they are more liquid and far easier to buy than actual gold. The Irish-domiciled (this is important for tax reasons) iShares Physical Gold ETC ETF, for example, seeks to track the return of the gold spot price.

Gold, like all commodities, can be volatile. It slumped after peaking in 2013, and the three-year return on the aforementioned fund is 24 per cent.

Get lending

Two key factors have contributed to the rise of so-called crowd or peer-to-peer (P2P) lending around the world: the difficulties small businesses have in accessing credit, and the difficulty for savers of getting a decent return on their deposits.

This combination means that, in Ireland, the practice is growing. LinkedFinance, for example, which set up in 2013, has since lent more than €16 million from more than 12,000 lenders to 350 Irish businesses.

In practice, P2P involves lenders loaning their hard-earned savings to a host of small businesses, instead of putting them on deposit, with the promise of returns of as much as 15 per cent on their money.

Typically, lenders bid on projects by offering interest rates of between 5 and 15 per cent, although LinkedFinance is set to introduce fixed-rate loans in the coming weeks.

There are a number of intermediaries in the Irish market, acting as something like an online matchmaker for your money. The intermediaries will suggest people looking to borrow money and, if you lend to them, will handle all the administrative and repayment side.

In return, you pay them a fee – LinkedFinance, for example, charges an annual rate of 1.2 per cent.

Recent borrowers availing of P2P lending include restaurant chain KC Peaches, which successfully raised €55,000 at 8.27 per cent over 36 months through Grid Finance, and Galway’s Gilltech Engineering, which raised €15,000 at an average interest rate of 10.01 per cent through LinkedFinance.

But before you get lending, consider a cautionary note first: in February, Lord Turner, former chairman of the UK regulator, warned that losses in the P2P lending industry will make Britain's "worst bankers look like absolute lending geniuses".

His concerns stem from the fact that P2P lenders are trying to automate loans without doing the proper due diligence on borrowers. Bad debts, arrears, impaired loans are always a risk. One of the UK’s largest lenders, Funding Circle, has a bad debt rate of just 1.5 per cent, for example, but its lending history is limited. Indeed, P2P lending is new, and so there is little evidence of how it can perform in a worsening economic environment.

Moreover, P2P lending is not regulated by the Central Bank at present.

Opt for State savings

Yes, the returns are less than stellar but, thanks to being Dirt-exempt, State savings sold through An Post are looking increasingly attractive in this climate.

Unsurprisingly, then, savers across the country are increasingly turning to the State-owned option as a way of getting some kind of a return on their money. Indeed, as of the end of January this year, State savings came to some €16.75 billion, up by 2 per cent or €370 million, on December 2014.

Potentially the best of the bunch is the 10-year national solidarity bond from the National Treasury Management Agency (NTMA) , which pays an annual equivalent rate (AER) of 2.26 per cent. Sounds good? Well, the downside of this product is that you have to lock away your money for 10 years, which means that there is an opportunity cost associated with locking away your money. If you lock into a return of 2.26 per cent now, for example, could you be missing out on better rates in years to come?

While potentially true, the way interest rates are going in Europe it would appear that rate hikes are still some way over the horizon.

So, if you can afford to lock in for 10 years, a guaranteed return of 25 per cent seems like a good deal. You can invest €50-€120,000 per person, or €240,000 for a couple. You can withdraw your money within seven days, but you will miss out on the full return.

As a comparison, one of the best rates currently available is Bank of Ireland’s seven-year growth product, which pays out 1.6 per cent AER.

After one year, this rate would pay out €161.17 on a deposit of €10,000, compared with €232 on the solidarity bond. And Dirt at a rate of 41 per cent still has to be deducted, leaving the first saver with just €95 (or €88.50 if they must also pay PRSI at 4 per cent on this).

If the 10-year term is too long, another option is a four-year bond paying 0.99 per cent AER or 4 per cent over the full term.