It is the classic dilemma for investors – whether to play it safe and seek investments with guarantees, or take on a little risk in search of potentially higher returns from your investment. In one form or another investors have faced this same question all through the ages, but the decision is proving an especially tricky one for many at the moment, given the market volatility we have experienced over the past three years.
Cash on deposit, or the minor variations on that offered by banks and building societies, is currently offering a low return to investors. Whilst there is little or no risk involved in this form of investment, the potential for income is very modest.
Retired expatriates living in Spain are having a particularly difficult time on this subject for three principal reasons, the first I’ve just covered, the second is the reduced level of income from UK pension schemes purely because of the rise in the value of the euro against the pound. Lastly, everyone has experienced a sharp rise in the cost of living on the Spanish Costas largely as a result of the introduction of the euro in January 2002.
Another traditional home for liquid assets has been the stock markets but these have been both volatile and weak in recent years, and for many remains a somewhat risky prospect for investment. The FTSE all-share-index has recovered some strength since the ending of open hostilities in Iraq but is still seriously down since its peak over four and a half years ago. The dividend yield on the UK market has increased – but so too, apparently, has the risk of capital erosion.
The choice, then, for many retired investors living in Spain looking for a more attractive level of income than the building societies are currently offering, is to look at a variety of investment products denominated and paying income in euros.
European Bond Funds is one vehicle which could be considered. Investing in government or corporate bonds, either investment grade or high-yield. Of these, it would be fair to say that the Western government bond funds tend to have a lower risk profile. After all, the majority of the bonds they are invested in are sovereign debt so the potential for default is extremely low. However, they still have the potential to offer a level of income for investors which is considerably more attractive than available from cash on deposit.

Investment Grade Corporate Bonds for more Risk and Return
Investors seeking a higher level of income and prepared to accept a slightly higher potential risk to their capital, might also consider investing in a corporate bond fund. These have grown substantially in popularity in the last few years as deposit rates and dividend yields in the major equity markets have declined and investors have sought alternative sources of income. Instead of lending money to national governments, investors are effectively lending money to companies and being offered a return on that investment commensurate with the credit rating of that company.
A good example of a corporate bond fund is the successful Close Euro Income Bond Fund. It currently pays a quarterly income of 5.33%. The total return in 2003 was 8.55% and 9.75% in 2002.

High Yield – For Higher Return
Further along the credit spectrum are the high yield bond funds, investing in bonds issued by companies with lower ratings from the credit agencies and obliged to offer more attractive terms to raise the desired level of capital when issuing bonds. Since many of these bonds do not carry out investment grade ratings investments in this type of fund typically carries a higher level of risk to capital than investments into higher grade or government bonds. Again, though, this is compensated for by a further pick-up in the level of yield offered by investment in this asset class. Our choice in the area is Investec European High Yield Bond Fund which currently yields 7.02% and was top quartile in it’s sector over the last five years.
The final area that investors may wish to consider is investment into a new family of low-risk investments which centre around various forms of UK commercial property and funds of hedge funds where fund managers hedge sterling income into euros on a monthly basis to protect European investors from potential currency loss.
All the above diversified range of investments are promoted in Henry Woods newly published Investment Review including the successful “Six of the Best” investments which is available on request.
Ultimately, investors have to make a decision on the level of income they are looking for, and the level of risk to capital which is acceptable in seeking to achieve that income. Investment advisers specialising in servicing the needs of Spanish based investors are best-placed in providing up-to-date research on the best euro funds to select.