Bold savers are sure to find the best bargains

With building society and bank deposit rates tumbling to their lowest for a generation, savers must look elsewhere for the best returns.



Many have taken the next step up the risk ladder and invested in corporate bond Peps, making them the hottest selling Pep on the market.



Corporate bonds are basically an IOU issued by companies as a way of raising capital. The bond is launched on the promise to pay a fixed interest rate for a fixed term, after which the capital sum is repaid.



Although similar to gilts, they normally offer a higher yield, because unlike the government, a company could default on the loan.



Because of stock market volatility over the past six months, many investors are considering corporate bond Peps for capital growth rather than regular income.



This flies in the face of the widely held view that equities always out-perform bonds for capital growth. This view is reinforced by the Barclays Capital Equity-Gilt Study 1999, which analyses figures from 1918 to the present.



But Peter Ainsworth, a marketing manager at Investec Guinness Flight, says: "It is misleading to say that equities consistently out-perform gilts. The Barclays study shows how out-performance depends on a number of factors. In an environment of low inflation and below average growth, gilts are the winners, while equities do best when inflation is high."

The period over which the study is based was dominated by high inflation which eroded bonds' value.

But independent adviser Bob Young, director of Wilcox Young Personal Wealth Management, says that we are now in a period of low inflation which is favourable to bonds.

As shown by the study, the total return on equity investments was 10.6 per cent last year, compared with 21.7 per cent on gilts and 18.8 on corporate bonds. But despite gilts outstripping equities in nine out of 10 years, equities won over the decade as a whole, returning 11.1 per cent compared to 8.7 for gilts. (Table one shows how investment classes have fared.)

Mr Young believes that corporate bonds can provide good growth, but only over the medium term of about five years, after which equities come to the fore. John Kelly, investment director at Barclays Global Investors, says: "Bonds beat equities when inflation has ceased to be a threat, interest rates fall, yields go down and bond prices go up." He believes that this occurred last year and is unlikely to be repeated in the short term.

Aberdeen Prolific's Gary Marshall thinks it is not that simple. He believes that there are still significant growth opportunities to be had from funds of higher risk corporate bonds - often known as junk bonds - which are lower rated by assessment agencies. These are bonds issued by companies which have a higher chance of defaulting on the loan; therefore the yields tend to be higher to reflect the higher risk.

Investec's Peter Ainsworth believes that it is difficult to predict accurately whether equities or bonds will perform better in any given period.

He adds: "However, over the intermediate to long term we expect after-tax returns to be very competitive with equities and with less risk."