The last few years have been tough ones financially for most people in Britain. But savers in particular are justified in feeling hard-done by. They’ve had to put up with rock-bottom interest rates and a central bank that couldn’t care less about inflation, all for the sake of bailing out our badly behaved banking sector.
Enough is enough. Earlier this year, I got so fed up with the pathetic interest rates offered by my high-street bank that I withdrew some of my cash and placed it with a peer-to-peer (P2P) lender – an emerging breed of lenders that allow you to lend to complete strangers online.
Now I’ll point out right away that this is not the same as keeping your money in the bank. My capital is at risk and it’s not covered by the Financial Services Compensation Scheme (FSCS), which insures up to £85,000 of deposits in a bank or building society account. So it’s not suitable for your ‘emergency boiler repair’ fund.
But so far, I have to say it’s worked out quite well. I haven’t met these people. I don’t even know their names. But as long as they keep paying me between 6.1% and 7.4%, we’ll stay on good terms. I’m just one of thousands in this country who are fleeing high-street banks right now. In the wake of the Libor scandal, Nationwide reported an 85% week-on-week increase in new account enquiries, the Co-operative 25% and some of the smaller ethical banks and credit unions an increase of more than 200%.
What the Libor scandal means for you
Why the Libor fixing scandal has rocked the City, and what it means for you.
That’s great to see. The big four – Lloyds, RBS, Barclays and HSBC – have controlled too much of the market for too long. As long as they’re repairing their balance sheets and being pulled up in front of regulators for various shenanigans, few of us will get a decent rate of return on our current accounts.
But will the deals offered by the Co-op and credit unions be good enough? Probably not. They can’t offer you significantly better interest rates than the big four. The warm feeling you’ll enjoy by entrusting your savings to an ethical bank will probably wear off quite quickly.
When I was 13, for example, my parents brought me to the local credit union where a lady with electric blue hair taught me about the discipline of saving. It worked well at first. But when Irish inflation hit 5.8% in 2000, it wasn’t doing my savings any good.
So once we’ve salted away enough money to cover us for three to six months’ living expenses – that ‘emergency fund’ I mentioned earlier – what we really want is for someone to pay us a very high yield. We want a rate that will stay well ahead of inflation. We also want to know that we can trust them to make good on their promise. Who fits the bill?
It’s a question that we at MoneyWeek have been wrestling with for the last two years. Between the 12 experts on our newsletter roster, we’ve come up with some pretty interesting ideas during that time. Here are four of the best: a bond that could pay 11.55%; an insurance group paying 9.4%; an airplane-leasing group that pays 13%; and a new way of lending that could make you 8% a year.
I’ll note once again that these are risk investments – you can lose money as well as make it – but if you’re looking for ways to beat inflation and grow your wealth in the long run, adding one or more of these to your portfolio could be just the ticket.
And read what my colleague Phil Oakley has to say about investing in a bombed-out sector that could pay off handsomely: the European utilities sector.
Lend to Enterprise Inns for 11.55%
One asset class that has increasingly drawn the attention of small investors since the financial crisis is corporate bonds. With banks reluctant to lend, the launch of London Stock Exchange’s retail bond platform in 2010 – which has made it easier for small investors to buy individual bonds rather than rely on corporate bond funds – couldn’t have been better timed. New bond launches and the gradual opening up of the market have also drawn investors’ attention to existing opportunities in the market that perhaps they once would have missed.
One big fan of corporate bonds is Bengt Saelensminde, who regularly tips them in his free email, The Right Side. A big believer in asset diversification, Bengt thinks it’s important not to be put off bonds by the derisory yields on the likes of gilts and US Treasuries. While government bonds are largely unattractive, there are several interesting possibilities in the corporate bond market.
What should you buy? Bengt recommends the Enterprise Inns 6.5% 2018 bond (LSE: 47VU). As the name suggests, when issued, this bond promised to pay the holder a coupon of 6.5% until 2018. But you can currently buy the bond for 81p. That means instead of getting just 6.5% on your money, it’ll be nearer 8% (6.5/81). But it gets better. At the end of 2018, you’re promised £1 back for every 81p bond you buy today. Add that capital return to the running yield, and you get a gross redemption yield of 11.55%.
You don’t get a yield like that without taking some risk. The pub industry has had a hard time of it in recent years. Enterprise Inns – the largest pub landlord in Britain – has managed to build up a sizeable debt load. However, there is some security backing your investment. This particular bond is secured against a ring-fenced portfolio of pubs. So if Enterprise Inns can’t repay its debt, it’ll have to hand the keys over to bondholders. The pubs that the bond is secured against are currently worth £1bn. Given that the bond issue is for £600m, there should be plenty of security here for bondholders.
What are the other big risks? The valuation of the pubs (and so the security behind the loan) could fall further. The price of the bond may also fall between now and maturity. This isn’t a problem if you hold until maturity, which is what we’d recommend, but if you have to sell before then, you could lose money. And, of course, there’s the general risk to bond prices – that is, the threat that interest rates rise. If market interest rates go up, then your fixed coupon loses some of its appeal. The price will probably fall to reflect that.
However, as Bengt points out, “rates haven’t moved for over three years”. He believes that “low rates are here to stay for a long, long time. In that environment, you can’t afford to ignore bonds.” If your broker doesn’t trade retail bonds, check out MoneyWeek’s broker comparison page.
Lease aeroplanes and earn 13%
Here’s another option. How about taking a stake in a plane and earning 7.4% for your trouble? That’s what you get with Doric Nimrod One (LSE: DNA), says Nick Sudbury in The Zurich Club (for more on The Zurich Club, call 020-7633 3608). This Guernsey-domiciled company raised some £39.625m in a share issue in 2010. The company then borrowed a further $122m to buy an Airbus A380-861 aircraft. This has been leased for a period of 12 years to Emirates Airlines, the national carrier owned by the Investment Corporation of Dubai.
What you have here is effectively a property investment, says Nick. The running costs – maintenance, repairs, insurance – fall on the airline. At the end of the lease the aircraft will be sold, probably to Emirates, with the proceeds paid back to you, the investor.
In the meantime, you earn a monthly dividend out of the annual rental income. The directors have targeted an annual dividend of 9p. With the share price at 123p, that gives you a gross yield of 7.4%.
The good news is that the rental income should be high enough to pay off the interest and principal of the $122m senior secured loan in full over the 12-year term of the lease.
This means the aircraft should be unencumbered at the end of it – with all the sale proceeds available for shareholders. The average estimated market value of the aircraft at the end of the lease as forecast by three independent experts is $109,899,200. If shareholders agreed to wind up the company at that point, and the plane was sold for this figure, it would enable a capital return of 161p a share. That would give a gross annual return of nearly 13% between now and 2022 (when the lease ends).
The key risk is probably the ability of the airline to meet its obligations. Emirates has recently been hit by a 44% jump in fuel costs. But it still turned a profit for the fiscal year to March – the 24th profitable year in a row. Revenues grew by 18% for the fiscal year, despite disruption during the Arab Spring. The other main risk is the resale value of the plane. Some A380s have been found to have cracks in the wings. This hasn’t grounded this plane, and a solution is being worked on, but it’s worth monitoring.
The investment manager Doric Asset Finance has a long, successful record of managing these planes. It has a $3.6bn portfolio of 24 aircraft. It’s an unusual investment, concludes Nick. The spread between the buying and selling price on the shares can be significant too. So only put a small portion of your portfolio to it. But as a high-income investment backed by a real asset, DNA looks worth the risk.
Lend to strangers for 8%
There is nothing radical about investing some of your money with a peer-to-peer (P2P) lender. Every day thousands of people in Britain use these online marketplaces to borrow and lend small amounts to each other. There is a good reason they keep coming back.
Right now, the average yield that you can get on a Zopa loan after tax and fees is 5.5%. While it’s nowhere near as safe as keeping your money in a high-street bank, Zopa has managed to maintain a remarkably low bad loan rate since it launched in 2005.
It works like this. You deposit your money with Zopa and enter the marketplace. There you’ll meet five categories of borrower – each vetted on the basis of their credit score and organised into bands: A*, A, B, C and Young. On your dashboard you can view the prevailing yields offered to each band (Zopa charge a fee of 1%). Then you call out your offer.
Being a conservative so-and-so, I choose to lend only to the A* group. I lent the money out over three years and secured an average gross yield of 6.1%. But you can get a better rate by going further up the risk scale: a similar loan to the C group today fetches from 8%-8.3%.
What kind of assurance do I have that my loans will be repaid? Well, if repayments are missed, Zopa employs a collection agency to recover your money. But the long-term users who I spoke to assured me that a conservative strategy can keep bad debts to a minimum.
“Bad debt and late payments are still a concern”, web designer Ed Wilde told me. “But I keep my exposure low – only £10 loans to each person – so just under 1% of my total balance has been written off over the five years. I believe this is the average for the shorter markets.”
Dr Stephen Doyle has been a P2P lender for three years. “As I am 65, it more behoves me to be conservative. Zopa is the largest market and hence the return is the smallest on similar risk profiles, as there are more lenders bidding and the price finds a lower level. For A* with Zopa I am getting about 5.5% net after their 1% fee. I have had a few bad debts but they are less than 0.25%.”
Overall, it seems to be working for them. But it’s not the only option. “I have taken money out of Zopa and now have more in RateSetter, which has a reserve system that so far has covered all bad debts”, says Dr Doyle. “With RateSetter I am getting 6.7% gross and they charge 0.67% of this as their fee.”
I will be depositing more money with Zopa over the next few months. The yields are, of course, quite attractive. But there is also the thrill of being part of a community that is cutting out the high-street banker. I may not know the real names of the people I’ve lent to. But so far they’ve made good on their promises.
A financial institution you can trust
If you are looking for a reliable high income, says David Stevenson in The Fleet Street Letter, there is one corner of the financial industry worth investing in: general insurers. These groups provide most insurance needs apart from life cover. As David puts it, “they won’t insure you against falling under a bus, but they’ll provide cover for damage to the bus itself”.
It’s been a tough business to be in recently. In 2011, a record level of claims totalling $105bn was made, following the disasters in Japan and New Zealand. Investors are also worried that financial firms will need to raise lots of extra capital in the next year before new rules are introduced.
But general insurers shouldn’t be lumped with the rest of the financial sector, says David. Take RSA (LSE: RSA). The stock has underperformed the broader market over the last three years. But the group saw pre-tax profits grow 29% last year, and the key measure of an insurer’s profitability, the Combined Operating Ratio, is back to 2007 levels of health.
RSA also has a very low-risk investment portfolio and a healthy balance sheet. So how much will it pay out? The historic yield is running at 9.4%. The dividend cover isn’t high – of last year’s 11.8p earnings per share, 9.16p was handed back to shareholders. But David reckons the group should be able to maintain its dividend.
General insurers are increasingly using last year’s huge payouts on catastrophes as an excuse to increase premium rates – and profits. The shares have dipped this week after the company said it would lose £50m on last month’s British weather-related claims. But this will help RSA raise the price of providing future flood cover, a longer-term positive for the stock, says David. “Even if RSA were to have a very bad year and the dividend were reduced, say, by a third, you would still be getting a 6.1% yield on the current price. That’s still pretty good. RSA is a strong buy.”