The UK's favourite investments

Where are British savers investing their money?

At lovemoney.com we often emphasise the importance of saving money for your future. And there’s no question, it is really important. But that’s only half the story. It’s important to save but it’s also important to put your savings in the right place. So where is the best home for your money?

Well, I believe that everyone should put at least some of their money in a savings account. Cash in a savings account gives you a useful cushion if something goes wrong such as losing your job.

However, if you want your money to grow faster than inflation, I think you should at least consider investing in the stock market too. That’s because history suggests that shares normally, but not always, deliver outperform cash over the long-term (ten years or more.)

Many people invest in the stock market via investment funds, so I thought it would be interesting to look at the most popular investment funds in 2010.

Here’s the top ten:

The funds in italics are all stock market tracker funds

Before I go any further, I should acknowledge that this list isn’t perfect. That’s because the table has been created using data from the Alliance Trust savings platform - a platform which enables people to invest in funds cheaply. Alliance Trust offers special deals on some funds, so those offers are bound to distort the results somewhat. Still, I think the above table is worth analysing.

Four stock market trackers

I’ve italicised four of the funds in the table because they are stock market tracker funds. In other words, they track the movements of a particular stock market index.

I’m very pleased to see this as I’m a big fan of tracker funds. I like their simplicity, their strong relative performance and their low charges.

I should add, however, that Vanguard’s funds aren’t available on most of the rival platforms to Alliance Trust, so some private investors will have come to the Alliance Trust platform purely because it offers the Vanguard funds. (Vanguard’s funds are arguably the cheapest tracker funds in the UK.)

But it’s still great news that people are buying trackers and they’re not just buying Vanguard funds. In tenth place, you can see Legal & General’s UK index tracker doing good business as well.

Bonds

Just as Vanguard’s strong performance won’t be repeated on other platforms, I doubt other platforms will see so much demand for Alliance Trust’s Monthly Income Bond. (An Alliance Trust fund might do better than usual on an Alliance Trust platform.)

However, I’m sure that investors elsewhere will be putting plenty of money into similar funds that invest in corporate bonds.

Personally, I think investing in corporate bond funds is a mistake for the majority of investors. Fans of corporate bond funds say they’re lower risk than funds which invest in conventional shares. There’s some truth in that but if you’re young, I think you should take the extra risk and go for shares. Even if corporate bonds beat shares over the next five years, a younger investor can afford to wait until shares almost inevitably win out over a longer period.

And anyway, as it happens, I suspect that shares will beat bonds over a relatively short period such as the next three or five years too. That’s because the value of bonds will fall if inflation and interest rates rise. So I believe that younger folk should steer clear of bonds and if older investors want to reduce their risk, they should consider moving some or all of their money straight from the stock market to cash. Leave out the half way house of bond funds.

Absolute return

Moving down the list to fourth place, we come to Standard Life’s Global Absolute Return fund. Absolute return funds have become very fashionable in recent years because they’re supposed to perform well regardless of what is happening on the stock market.

Trouble is, there’s no guarantee that the funds will deliver a positive return every year. What’s more, the charges are normally high. Standard Life’s fund is no exception. There’s an initial charge of 4% followed by an annual management charge of 1.5%. By contrast, Vanguard’s UK tracker fund only charges 0.15% a year!

Given that the stock market will probably perform well over ten years or more, I think you’re better off going for a tracker fund. If you have a more short-term horizon, you could do a 50/50 split between a tracker and cash. Or maybe go for 100% cash if you’re very risk averse.

Emerging markets

I’ve only got room to look at one more fund, so I’m going for the Aberdeen Emerging Markets fund, which comes seventh in the table.

This is a managed fund where a fund manager picks the shares. When it comes to emerging markets, I think you can make a stronger case for investing in an actively managed fund. That’s because I reckon it’s easier to beat the average in younger, less sophisticated markets. Aberdeen’s fund is a top-performer so I can quite understand why it’s popular.

So what are my conclusions?

-          A fair chunk of investors are going for tracker funds. Great!

-          Corporate bond funds are still pretty popular but they don’t deserve their popularity. Ditto for absolute return funds.

-          It’s good that emerging markets remain popular. Managed funds can be OK in this area.

Whatever decisions you make, good luck!

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