Financial Advice

Interest rates at an all-time low, businesses are finding it harder to achieve healthy returns.

Putting Your Corporate Cash To Work

January 2017

In this modern financial world with interest rates at an all-time low businesses are finding it harder than ever to achieve healthy returns on their cash based deposits.  

Due to this, we regularly find businesses are retaining increased cash buffers to protect against a downturn in trade or for any future acquisitions or expansion. This means that many companies have large sums sitting on readily accessible deposit accounts at their local bank. Whilst we fully understand that there is a need to have some of these funds readily available to pay staff and/or dividends, to reinvest in the company and to purchase trade essentials to name but a few, it is also important that companies are aware of the potential pitfalls of leaving these sums in accounts that produce little or no income. The returns that these accounts produce are in most cases loss making once the effect of inflation and corporation tax has been factored in.

So what are the alternatives that provide businesses with additional interest without taking on too much risk? First of all there may be alternatives at their local bank. At the time of writing the best business savings account available is a fixed rate of 1.75% which yes is far better that the 0.25% or even 0% that the majority of business account holders are receiving, but is it really good value? In a word NO. In real terms (taking into account inflation and corporation tax) an investment of £10,000 at 1.75% in 2015 would have yielded an annual return of only £40. This is without considering that the funds would have had to have been tied up for a year without any access and the interest is only applied annually.

What may be a better option? And at what cost? We find due to the nature of corporate cash and the position of the decision makers, a company’s attitude towards risk and their capacity for loss tends to be very low.

The most likely tax efficient investment for most companies is an open ended investment company (OEIC). The downside with this vehicle, is that OEICs can fluctuate and the investment would be exposed to the highs and lows that come with equities.

So apart from a bank deposit or an OEIC what are the other options? We have seen a rapid increase in the amount of companies using investment bonds, both on and offshore, as a means of gaining a superior return than a bank deposit but at lower risk than an OEIC. With the end of surrender penalties and the changes in tax rules investment bonds have become a far more attractive proposition. However a bond is still an investment and consideration still needs to be given to the multitude of funds that it can be invested in. As we have mentioned companies are notoriously cautious by nature and are looking for a guarantee or a fund with a long proven track record of sustainable returns. There are a wealth of options available to you and your business ranging from bespoke portfolios of funds to the more cautious “smoothed fund” approach to negate potential market downturns and give a steady “smooth” return.

One such provider that offers a smoothed fund option uses target return figures to give an indication of expected growth rates which has achieved returns over the last 5 years of:

  • January 2016/17  4.9%
  • January 2015/16  5.4%
  • January 2014/15  5.7%
  • January 2013/14  8.4%
  • Janaury 2013/13  6.1%

Impressive results, but remember, in all circumstances past performance is not a reliable indicator of future results.

As you can see options are available to potentially obtain superior returns. At Woodward Markwell we have access to the entire market place and our adviser team can work with you and your company to ensure we find the right solutions and funds that specifically match your appetite for risk and individual requirements.

Jake Blackmore - Independent Financial Adviser