"There has been only 2.41% GROWTH in the value of our 100 largest companies in 20 years"

How to find high investment returns in a low-yield market

If you are like most investors, you are either looking to grow your capital for the future or intending to create an income stream to support your lifestyle now. For the last 20 years, the mainstream financial market has failed to deliver decent levels of profit or income unless you are an exceptionally gifted (or lucky) investor!

We'll take a look at what's gone wrong with the two major categories of investment, what the implications are for you and your future financial security, and consider what options you have to do far better than you are now.

Most importantly, we'll introduce you to the concept of 'Loanership' as opposed to 'Ownership' and how it really can deliver annual income (or growth) consistently in the range of 10%-15% annually which makes a big difference to your income and financial security!

Stocks and Shares

For as long as I can remember, investors have been recommended to hold a significant proportion of their investment portfolio in shares. It could be as much as 70% of the value. Conventional wisdom has it that despite the inevitable ups and downs, over a reasonable period, shares have typically returned about 4%-5% annually. The problem is that it is not happening, and hasn't for more than 20 years!

Let's take a quick look at the FTSE 100 index back at the end of 1999, almost exactly 20 years ago:

At the end of October 1999, the FTSE 100 index stood at 7128.

And a few days to the end of October 2019, the FTSE 100 stands at 7300.

It is truly extraordinary! There has been only 2.41% GROWTH in the value of our 100 largest companies in 20 years. If you had invested, which is about half of your working life, then you would have nothing to show for it. Looked at another way, if you were in your 40's, and had saved a chunk of money for your pension, your fund would not have grown.

Now, this graph doesn't take into account two critical factors. The first is it doesn't show growth, including reinvested dividends. Over the years, the average dividend yield across the FTSE is about 3%. So the zero growth doesn't reflect this positive contribution.

But before you get too excited, the second element missing from this chart is inflation, which has also averaged about 3% annually. In other words, the dividend yield has just about kept up with inflation, leaving the table above pretty accurate.

For you, the big questions are simple:

  1. Is a 20 year zero growth tolerable when planning your portfolio strategy for the next 20?
  2. How much faith do you have that shares are going to consistently show growth, year after year, in the years ahead?
  3. There is no security attached to owning shares, no guarantee of any level of return, and notorious volatility sometimes connected to national/world events or sentiment that have a huge impact you cannot control.

In recent years there have been many quoted companies that have gone bust, leaving shareholders with none or a fraction of their original capital.

Savings Accounts

The second area of mainstream investment is the vast array of savings accounts from banks and building societies. In the past, when interest rates were 5% PA plus, savers could look forward to a decent return and an income which may have just covered their needs.

Lamentably, this is now not the case! Once interest rates hit rock bottom in the 2008 recession, savers had a nasty shock. Most savings accounts are paying between 0.5% and 2% pa, with £100,000 on deposit, savings income has reduced to an average of £1,000 pa, or £83 a month.

Here's a selection of the top-paying savings including ISA, available as of October 2019

Type of Account Rate
Cash ISA 1.45%
Easy Access 1.50%
One Year Bond 2.07%
Five-year Bond 2.36%

As a result of this low rate, many savers are not receiving enough income to survive, let along live the life they want. Many are forced to draw down capital to supplement their meagre income.

If they do this, the implications can be profound:

  • Maybe you won't have the capital needed to provide care later in life
  • You might not be able to cut down working hours
  • Or perhaps you won't be ready to leave a nest egg for the next generation.

The majority of savings accounts have a government guarantee (FSCS), even in the event of a failure it is unlikely you will lose your money. However, the level of income doesn't keep pace with the rate of inflation – and as a result, your nest-egg reduces in value year after year, even before you withdraw interest as part of your income requirement.

What are the savvy investors doing?

Given the terrible performance of the two major investment categories in the UK, private investors are looking to alternatives but often find it hard to access some of the best options.

The investment class favoured by our broad base of shrewd investors all have the following characteristics:

Typical income 7%-15% PA
Fixed Interest % Yes
Security in place Yes, first or second charge over assets
Exit strategy in place Yes, always defined
Fixed Timescale 12 to 60 months
Interest payments Options include annual, half-yearly, quarterly or occasionally monthly
Minimum investment Typically from £25,000
Due-diligence Available for inspection
Regulated No, the government doesn't regulate this class of investment
Risk profile Medium to high
Restricted investors? High Net Worth, Sophisticated and Professional

If you'd like to know more about these investments, then continue reading. You are also welcome to speak directly to our investment team who will be pleased to answer your questions and provide summaries of current opportunities to qualified investors.

The evolution of 'Loanership'

It used to be that almost all finance for business projects, ranging from property development to retail, manufacturing, service businesses and pretty much the high street banks supplied everything else.

In 2008 this changed with banks forced to reduce their business lending in the aftermath of the financial crash. This has continued, so to fill the void, innovative methods of project financing have arisen.

Our specific way of being part of this new world order is to bring together private investors with rigorously vetted projects, to deliver funding to make them a reality. Our team focuses mainly on property, so most of the projects we bring to market are property-backed, providing a convenient way to secure the borrowing. Property related projects are comparatively easy to value to recognise where the value lies.

The investment is by way of a loan (hence 'Loanership'), often supervised by a Security Trustee working on behalf of investors. The beauty of this approach is that it enables investors to take a share of a large project, which can often lower the risk, or even spread their investment across several projects leading to greater diversification of their portfolio.

Effectively our investors cooperate as the bank to the borrower. The projects have to be very profitable to pay such healthy returns. It often surprises investors that such big profit margins are available, but with a team that has been involved with property for more than 60 years, we are not surprised.

There is a lot more to share with you, and we'd be pleased to do just that. Maybe an initial conversation would be helpful so we can walk you through current opportunities?

Whatever you decide, we hope this article has given you food for thought and helped you to understand that there are investment options that can provide excellent returns, year after year. What a difference that can make to your income now, or the growth in your retirement fund for later!

The Avantis Investment Team

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