Low interest rates driving expat investors to risky bond funds

As savings returns hit the floor, what’s a newly-retired Brit expat living overseas to do with his savings?

Retirement overseas is the dream for many Brits and, more often than not, involves selling the UK home and investing the cash in order to provide a supplementary income over and above pension payments. Conventional investors who’ve left their money in traditional bank savings accounts are also desperately seeking better returns than the record-low payouts common nowadays, especially if they’re also looking to quit the UK for somewhere warmer and more welcoming.

Unfortunately, both investors in the UK and expat retirees overseas are being driven by desperation to plough their cash into bond funds at the same time as financial experts are warning they risk losing part of their investments. Over £11 billion was poured into bond funds between January and the end of October last year – a record amount demonstrating the popularity of this strategy.

The term ‘bond fund’ is used to describe what is essentially an IOU note issued by governments and major companies in which regular interest is paid by the issuer to the fund. The interest is passed on to investors, but the value of capital investments grows or shrinks in tandem with the value of the bonds themselves. Average swings aren’t as wild as those in the stock market and the products are expected to have a lower risk profile as well as providing more stability.

The bad news is that financial gurus are predicting rising interest rates between now and 2020 which could affect the performance of bond funds due to the fact that, when interest rates increase, bond prices tend to fall. The Bank of England is looking to increase rates to one per cent by 2020, causing bond fund investors to lose value on their savings.

According to a representative of a leading stockbroker firm, everything is pointing towards a negative result for bond funds, and it’s worrying to see huge amounts of capital pouring in. Satisfactory options for cautious investors looking to increase their income streams are few, with individual retail bonds and equity income funds both considered traditional investments. Equity income funds invest in entities such as Lloyds Bank and service provider Vodaphone, with retail bonds covering household names such as Tesco. At present, both give attractive returns but can only be accessed via a stockbroker.