Five years ago, even with a Government guarantee; banks had to pay interest rates of over 5% pa to attract deposits. With economic conditions returning to normal and the availability of cheaper ECB funding, deposit rates have fallen sharply to 1% pa or below. Factor in Deposit Interest Retention Tax [DIRT] at 41%, and deposits are now very unattractive.

Many savers have switched to higher yielding investments giving a higher return but in return, are required to take higher investment risk with their money. While some investors are happy to take potentially higher returns for potentially higher risk, many savers have a big dilemma – how much extra risk should I take; what extra return might I expect and can my investment be protected from meltdown if something goes wrong?

In the search for suitable investments for low to medium risk investors, I recently attended a presentation given by Deutsche Bank and was very impressed with one of their funds. The fund is called the “Unconstrained Global Fixed Interest Fund” and it targets growth of 3 month Euribor [Cash] + 3% (gross of fees) with the objective to keep annualised volatility below 3% and preserve capital over 3 years.

Unconstrained means that the fund manager is not trying to outperform an index and it allows him to dynamically change bond allocation as market conditions change. The investment objective is to try and produce positive returns regardless of market conditions. It is important to note, however, that this is the funds objective and not a guarantee; the fund can still lose money.

The Fund invests in a very broad range of corporate and sovereign bonds and derivatives. The use of derivatives allows the fund managers to potentially earn positive returns regardless of whether bond markets are rising or falling. This fund is suitable for an investor seeking an alternative to Government or corporate bonds in a diversified multi-asset portfolio; who has a capital preservation bias over the medium term and wants a flexible bond investment strategy which can adjust to suit prevailing market conditions.