Anyone worried about British attitudes to saving will have found Scottish Widows’ Savings and Investment Report, published earlier this month, disturbing reading. The survey found a high degree of scepticism among its 2,000 respondents, 39% of whom are not saving anything outside of pension schemes. According to the Office for National Statistics, average savings between 2002 and 2006 were at their lowest levels since the 1950s.
The trend can be seen in a simple analysis of the household savings ratio. The ratio, which expresses saving as a percentage of total resources, has declined from over 8% in the first quarter of 1997 to 2.1% in the first quarter of this year.
While many commentators blame increased mortgage debt for the shift, the report says that the explanation is more complex. It highlights data from the Bank of England showing that 40% of households have at least £100,000 in equity.
An important factor, the survey says, is a general reluctance to trust savings to the stockmarket, with 71% of respondents expecting to “lose everything” in the event of a market crash. Dan Kemp, head of fund research at Williams de Broë, and David Wynn, investment director at Bentley Jennison Financial Management, say that investors have been slow to forget the last bear market. Kemp, a member of the Adviser Fund Index panel, adds: “The shell-shock created by the dotcom bust lives on in the minds of investors. It cannot be underestimated.”
Kemp says that investors have instead focused on property in recent years, a trend also noted by Scottish Widows. While only 32% of the survey respondents would choose a stocks and shares ISA as a long-term investment, 44% would pick property.
Wynn says investors’ continuing desire for property exposure is about to be tested. He adds: “People have seen fantastic property returns over the past 15 years and they think it is a one-way bet. Those invested in UK commercial property are now starting to feel the pain. It still has a place in a diversified portfolio, but not as a 30-40% allocation.”
The report also shows a general lack of knowledge on investment products. Almost 60% of respondents said they found it “difficult to understand how to go about” saving, with 55% saying they would be more inclined to save if they were better informed. The latter figure increases to 71% for those under 30. This led 46% of those surveyed to choose cash as the most suitable long-term Isa investment, making it more popular than both equities and property. Data from HM Revenue and Customs shows that there is about £82 billion in stocks and shares Isas, compared with nearly £140 billion in cash.
Wynn says investor education on efficient asset class diversification is paramount. “It is not just about the equity market. Investors should look at building a widely diversified portfolio including equities, bonds, private equity, hedge funds and commodities. You can achieve similar returns to equities but without taking on equity-style risk,” he says.
The growing availability of absolute-return portfolios will also reassure the retail market, Wynn says, although he adds that short-term performance measurement of the funds has discouraged many investors.
Widespread short-termism is highlighted by Scottish Widows as a significant factor behind the focus on ultra-lowrisk products. Only 53% of respondents considered a long-term investment to be for longer than five years, while about 60% defined short-term as a maximum of two years.
Kemp is not surprised by the findings. “Short-termism is endemic among professional and retail investors,” he says. “It is one of the great handicaps and the reason for cyclicality. We always encourage investors to think carefully about their time horizons.”
Reluctance to take a long-term approach has spilled over into attitudes on pensions, and about one-third of those surveyed said they would discourage their children from saving into a private or occupational scheme. Almost 60% expressed a lack of confidence in the industry as a whole, saying they found financial services companies “difficult to trust”.
The report blames the finding on poor stockmarket returns between 2000 and 2003, but adds that “various mis-selling scandals have not helped.” Kemp says he is “dismayed but not surprised” at the figure.
The report makes several recommendations, including a greater effort from government to encourage long-term planning, the introduction of a single tax “wrapper for life”, improved financial education and increased Isa limits. But while the premise of Scottish Widows’ report is that lower levels of savings are bad for Britain, Kemp says the trend towards greater spending has had a positive impact on the economy in recent years.
“Although the lack of savings in this country will undoubtedly be a problem in the long term, it has saved our bacon in the last few years,” says Kemp. “The economy would have been in an awful pickle if consumers were not out there spending.”
Further tightening by America’s Federal Reserve and the Bank of England, which should encourage saving, will have a detrimental effect on economic activity, he adds.
The Adviser Fund Index series – A summary
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 19 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).