Funds to size up when taking first steps out of cash

The combination of falling interest rates and stubborn inflation is not a happy one for cash savers: not only are returns shrinking, but the purchasing power of those returns is declining.

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But that’s the situation that now confronts savers in the UK. The Bank of England recently cut the base rate to 4.25% - a full percentage point lower than at the July 2024 peak – and while it held rates in its June meeting, two further cuts anticipated for the rest of 2025.

Meanwhile, consumer price index (CPI) inflation of 3.4% over the 12-month period to May, matched April’s figure. The figure is explained by higher household bills for water, gas and electricity and other outgoings, as well as rising food prices.

It means that anyone not earning at least 3.4% on their savings account faces the prospect of their money actually losing real value in coming months (in terms of what they can buy with it). Moreover, as interest rates continue to fall more people will find themselves in that boat.

At the same time, markets have largely rebounded after April’s tariff-induced slump. For savers with a long-term perspective, the attractions of some level of exposure to stock market returns are therefore growing, despite inevitable short-term volatility from time to time, which is likely to be higher than average, given the unpredictability of President Donald Trump’s policy decisions.

Capital preservation with a yield

So, what kinds of fund might suit those for whom the time has come to commit at least a portion of their savings to investments? We asked some experts for their ideas.

At investment consultancy Square Mile, associate research director Eduardo Sánchezbelieves investors could consider several types of investment that have “potential to preserve capital while delivering a yield which could be seen as a substitute for cash”.

Fixed-income bond investments are one option that sidesteps the need for direct exposure to equity markets and pays a reliable income.

Multi-asset combinations of bonds and equities may be better placed to deliver some capital growth; in some cases other assets are included to reduce portfolio volatility through diversification.

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On the fixed-income front, Sanchez picks out the AXA Global Short Duration Bond fund. “While its focus on shorter-dated bonds means it will typically have a lower yield than funds with exposure to the full maturity spectrum, this does bring some major advantages,” he argues.

First, these bonds tend to be inherently less volatile, because their short-term approach means they involve less uncertainty around rates and more clarity around companies’ earnings.

Second, the fund enjoys a continual stream of liquidity as portfolio bonds mature. And third, it “offers some protection should interest rates start to rise again, as around 20% of the portfolio matures each year, enabling the manager to re-invest into bonds with higher yields – an attractive prospect in an environment when traditional fixed-income markets are likely to fall”.  

As Sanchez observes: “This combination could make the fund attractive for investors seeking some income and the potential diversification benefits of fixed income, without the volatility of a full duration strategy.”

Gavin Haynes, investment consultant at Fairview Investing, also highlights short-duration bond funds for their “lower-risk exposure to corporate bond markets”. He likes Artemis Short-Duration Strategy Bond, managed by the highly experienced Stephen Snowden.

He adds that a broader-based alternative is PIMCO GIS Income, which “offers a diversified portfolio covering global bond markets and is managed by a well-resourced US-based team”. Over the five years to end April, Pimco Income returned an annualised 4.3%.

Low correlation to equity markets

For a rather different strategy with a focus on capital preservation, Sanchez also favours Jupiter Strategic Absolute Return Bond fund, which “has the potential to deliver a return of cash plus 2-4% net of fees, over rolling three-year periods”.

Sanchez likes the fact that its returns exhibit very low correlation to mainstream asset classes, and “has demonstrated its ability to protect capital in testing times, such as in 2022 when inflation and interest rates rose significantly”.

Moreover, he adds: “It adheres to a very disciplined risk framework and therefore differs from traditional strategic bond funds that do not manage duration risk as effectively and tend to struggle in periods of rising volatility.”

Another option is to invest in multi-asset funds that combine stock market investments with bonds, and in some cases also with other assets such as gold, currency or derivatives.

Haynes points out that investors who want to take the multi-asset route have a number of types of investment available to them, including passive index trackers and actively managed funds and investment trusts.

As far as simple passive choices are concerned, he picks out the Vanguard LifeStrategy range, which offers exposure to a range of low-cost index trackers. Lower-risk investors could opt for the Vanguard LifeStrategy 20% Equity fund (20% in stocks and the balance in bonds), while those willing to take a little more market risk could use the 40% or 60% equity alternatives.  

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For actively managed funds, Sanchez highlights Rathbone Multi-Asset Total Return Portfolio. This aims to deliver capital growth of 2% above base rate. “It invests in a diversified portfolio of equities and bonds and follows a philosophy of avoiding permanent loss of capital,” he explains. 

Sanchez is impressed by both the experience and the process of the managers of this fund. “Their primary concern is when and where they allocate capital, so while the underlying investments are carefully selected, the focus is firmly on asset allocation.

“This makes the fund a robust option for investors who want capital growth but who are only prepared to accept a moderate level of volatility, significantly below the level expected from equities.”

Investment trusts with cautious stances

William Heathcoat Amory, an analyst at Kepler Partners, picks out Ruffer Investment Company (LSE:RICA) as a simple, low-risk choice for those looking for total returns in the investment trust universe.

The aim of this multi-asset trust is to deliver consistent positive returns regardless of how financial markets perform, while protecting against market falls, so there is a clear alignment with the likely requirements of those moving from cash.

The managers are looking for assets that can perform well in multiple environments, particularly when equities and/or bonds do poorly. As Heathcoat Amory explains: “The portfolio is currently full of assets the managers call ‘ugly ducklings’, meaning assets which are overlooked and unloved and therefore cheap.”

Examples among many include the Japanese currency, derivatives protecting against widening credit spreads, China equities and gold miners. “Being cheap and unloved typically means having an asymmetric return profile— lots of potential upside in the right scenario and limited downside in the wrong scenario,” he adds.

“We think investors should be concerned about the potential for equities and bonds both to do badly at the same time. We saw this in 2022, when RICA delivered excellent performance as bonds and equities were under the cosh,” Heathcoat Amory observes, although he stresses that there are no guarantees of repeat performance.

Haynes favours another cautious multi-asset investment trust stalwart, in the shape of Personal Assets Ord (LSE:PNL), managed by Troy Asset Management. “It follows a cautious approach, looking to generate a return better than cash from a mix of assets including equities bonds and gold,” he says.

Over the past 20 years to end April PAT delivered returns of more than 200%, according to FE Analytics data – far ahead of its investment trust sector average (120%), but more importantly also of UK CPI inflation at around 75% (as well as broader RPI inflation at 107%).

The other wealth preservation trust often cited is Capital Gearing Ord (LSE:CGT). Over the long term the trust has delivered, having meaningfully bested UK inflation over the past decade and beyond and returning above UK CPI in eight of the last 10 calendar years.

Peter Spiller has managed the trust since 1982, while succession planning has been in place for many years, with Alastair Laing appointed co-manager in 2011 and Chris Clothier appointed co-manager in 2015. See here and the link below for interactive investor’s recent write up of Capital Gearing’s annual results.

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Elsewhere, one of the ready-made solutions offered by interactive investor could be the answer. Dzmitry Lipski, head of funds research at interactive investor, points out that this will avoid the potential headache of choosing funds from what’s admittedly a pretty huge universe of possibilities. He gives the example of interactive investor’s ii Managed ISA. “Ten portfolios have been designed, categorised into two styles (index-tracking investment style or sustainable investment style), each of which comes at five different levels of risk,” he explains.

“Customers fill out a questionnaire to find the most appropriate portfolio for the level of risk they’re willing to take in their investments. Once they have invested, the portfolio is periodically rebalanced to keep it in line with the specified risk level.”

So, if you’re feeling that the time has come to seek a more secure alternative home for your money as the threat of depreciating savings rises, take comfort that there are various routes to explore.