What to do with cash in an isa

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18th Mar '19 by Lordyjordy

24 comments 2880 reads

Good evening

I'm sure graham has a thread on this somewhere but cannot find it.

My question is as above - what to do with cash in an ISA.

Due to the almost non existent interest paid by aj bell I wonder if there is a way of earning say 1.5% Apr in an investment (I'm thinking etf's etc) that would approximate (risk wise) as holding cash.

Obviously I realise that there is always going to be an increase in risk whatever you buy.

How do you guys deal with this.

Thanks in advance

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Lordyjordy

Premium Member

24 comments

AnonymousUser858

18th Mar '19

I use corporate bonds and pref shares as substitutes for cash, and currently hold :-

BUR3 - Burford Capital 5% 2026 trading at £99.95 - GRY (gross redemption yield) = 4.48%

PM01 - Premier Oil Finance 6.5% 2021 trading at £98.85 - GRY = 5.8%

AV.B - Aviva 8 3/8% cumulative irredeemable prefs trading at 128p - current yield = 6.34%

I regard the first 2 as dead certs to survive until their expiry dates, to repay at par and to pay the coupons in the interval. I bought the BUR when they were first offered so paid par for them and will not make a capital gain. I bought the PMO well below par so am sitting on a capital gain already.

I mistimed the AV and am sitting on a loss. I'm not counting on making that up any time soon, but the yield is now better than when I bought them so that's some consolation.

HTH

William K

19th Mar '19

An alternative to buying bonds - where there may be as much as a 2.5% spread between buying and selling price - is to consider a high yield bond fund. These are petty safe but not as safe as bonds. For example (picked at random from a list) Aviva Inv High Yield Bond that currently buys and sells for 102.78 pence and yields 5.1% interest. There are dozens of funds like this.

Note: I don't hold any funds with high yield bonds currently although I have done in the recent past.

gus 1065

19th Mar '19

Hi Lordyjordy.

As with most things to do with investing, you need to figure out a few criteria before deciding where to park your cash e.g. what’s your time horizon, risk appetite, target return etc.. Asssuming you’re in cash for a longer term (i.e. not just parking it for a few weeks pending investing in shares), relatively risk averse (looking for capital preservation above all else) and exclusively £ based (not taking any FX risk with non £ denominated assets) then you’re probably looking for something U.K. gilts or high investment grade bonds based. This said, given Brexit fun and games, it’s notable that supposedly “safe” gilts have been volatile over the past couple of years (with negative returns in 2018). Also, in a rising interest rate environment beware of capital loss from long dated/long duration fixed coupon bonds as their secondary market price will fall as rates rise if you’re not planning to hold to redemption.

Further risk mitigation will come from diversification (even apparently high quality single issuer bonds can have event risk such as the recent spat over whether PIBs are really perpetual or not) so funds rather than picking individual issuers/bonds is probably not a bad idea. One thing I’ve found with fixed income generally (both bonds and funds) is that the transaction costs (either bid ask spread or OCF for funds/ETFs) tend to be quite high relative to the returns so you need to be quite picky and don’t expect to trade in and out of positions as you might with shares.

With all of the above in mind, I’ve parked some of my lower risk SIPP capital in High grade corporate bond ETFs from the likes of Vanguard or iShares. Relatively low OCF, decent yield, diversified and liquid they won’t set the pulse racing but give some steady ballast to a portfolio in uncertain times as an alternative to low yielding cash.

Here is a link to the Vanguard range of funds:-

https://www.vanguardinvestor.co.uk/what-we-offer/all-products

Suggest you look at the range under fixed income, possibly the U.K. short term investment grade bond index one .....

https://www.vanguardinvestor.co.uk/investments/vanguard-uk-short-term-investment-grade-bond-index-fund-accumulation-shares/overview?intcmpgn=fixedincomeuk_ukshortterminvestmentgradebondindexfund_fund_link

Gus.

Lordyjordy

21st Mar '19

Wow.. Great answers appreciate your time.

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What to do with cash in an isa

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Lordyjordy

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