Seeking safe havens

At times of heightened market volatility, investors often seek safe havens for their money.

Whilst no investment is entirely ‘safe’, some are considered to be ‘safer’ than others. The degree of safety varies depending on the economic outlook and market conditions.

Some new research from Skandia has found that investors sought refuge from market volatility in the second quarter by investing in cash and fixed interest funds.

Sales of UK fixed interest funds with Skandia increased by 7% compared to the previous quarter and were up 18% compared to the second quarter of 2011.

This was the most popular investment sector on the Skandia platform in the second quarter of 2012.

Cash funds also experienced a spike in investments, up 28% from the previous quarter and 100% higher than in the same period last year.

But do cash and fixed interest funds really represent a safe haven for investors?

Whilst cash is generally considered to be a safe haven, ignoring the impact of price inflation over time and institutional risk that is not covered by the Financial Services Compensation Scheme (FSCS), cash funds can represent a riskier option.

Investing in money market instruments, cash funds can go down as value, unlike cash savings accounts. They are very different assets.

Fixed interest funds tend to be less volatile than equities, although in the current environment with such low Gilt yields, there is a reasonably high level of downside risk for investors.

When seeking a safe haven, investors should pay more attention to the value of diversification than to the typical risk characteristics of a particular investment asset class held in isolation.

Photo credit: Flickr/Alesa Dam