Three ‘low-risk, high-reward’ investment ideas

American shares – which make up around 70% of global indices - are expensive.

They trade on a forward (based on next year’s earning predictions) price-to-earnings ratio of 22 times, according to Factset. This is ahead of the 10-year average of 18.1 times.

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A higher valuation should indicate lower future returns. In fact, Vanguard thinks that valuations of US companies are “stretched” and therefore forecasts an annual return of between 3.2% and 5.2% over the next decade.

But even though some cash accounts pay 5%, keeping money on the sidelines is not sensible for long-term investors.

Janus Henderson, the fund group, calculates that cash savings have risen £51 billion year-to-date to reach £2.05 trillion.

It finds that savers have missed out on £165 billion of returns this year by comparing cash interest and the return on global equities. Over the past 30 years, it calculates that cash has lagged inflation by 3.4%, while global equities have risen seven-fold in real terms.

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But moving money out of cash does lead to more portfolio risk. However, fund managers have flagged some lower-risk investment ideas that could still lead to strong returns.

Short-duration bonds

One asset class to consider is shorter duration bonds. These are bonds that are maturing soon and therefore are generally less risky. This is because prices are less sensitive to interest rates changes, meaning that rate rises will be more forgiving on prices. However, falling interest rates will not lead to as much capital appreciation.

Stephen Snowden, manager of the Artemis Short Duration Strategic Bond fund, says that while the outlook for bonds of almost every variety is attractive, the outlook for short-dated, investment-grade bonds is compelling on a risk-adjusted basis.

Snowden says that these types of bonds have lower volatility compared to other bond types, at around one-half the level of sterling investment grade bonds and one-third the level of gilts.

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Snowden says: “As interest rates move lower, it is natural that cautious investors may look to the bond market to secure a higher level of income. At the same time, they may be wary of exposing themselves to the volatility that comes with owning an all-maturity bond fund. By buying short-dated investment grade bonds, investors can receive a healthy yield but with significantly lower volatility than they would experience in the wider bond market.”

Linked to this low volatility is their low “duration”, or sensitivity to interest rates. While this means that prices will rise less than regular bonds when interest rates drop, as is forecast, Snowden warns that markets are unpredictable.

“To be clear: we think interest rates are going down from here rather than up. At the same time, the past three decades have shown me how difficult predicting interest rates is and how often the experts get it wrong,” he said.

Yields on short-dated sterling bonds are roughly similar to those on the wider investment-grade market, at around 6%, so investors aren't sacrificing income by taking less risk.

UK smaller companies

Another area of opportunity could be small UK companies, where valuations are historically cheap, which gives investors some protection from further stock price falls.

Abby Glennie, who manages abrdn UK Smaller Companies Growth Trust, says: “Given the sentiment towards the UK in recent years, you’re able to access that growth on pretty appealing valuations.

“That gives some downside protection we believe, even if things get tougher, and on a five- year holding period, which is what we encourage from clients, we think this could prove an excellent buying opportunity for the fund.”

Glennie says that the earnings growth forecasts in the UK small-cap space are attractive, outweighing UK large-cap growth, and stacking up pretty well relative to other small-cap geographies.

“That’s no surprise, given 50% of revenues in UK small-caps are generated overseas,” she adds.

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On top of that, Glennie calculates that as an asset class, UK small cap is cheaper than it was six months ago, whereas UK large cap is more expensive than six months ago.

She finds that UK small caps trade on around 15 times earnings compared with global small-cap on 20 times.

Despite being cheap, UK smaller companies can be very volatile, so unlike short-duration bonds, small-cap funds and share prices may not be a smooth ride for investors.

They are also sensitive to the health of the UK economy, and so a domestic recession could lead to a decline in share prices.

Property

Among the sectors that suffered most during the period of rising interest rates was real estate.

Rising interest rates put pressure on income-producing assets, and also caused investors to question the valuations of unlisted investments, which are set by asset managers themselves.

This led to wide discounts and falling share price in real estate investment trusts (REITs). But there has been a recovery and discounts have narrowed as interest plateaued, then began to drop.

HSBC Asset Management says a core theme for the next 12 months could be “alternative” assets returning to form, offering portfolio “diversification” and “resilience”.

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Joanna Munro, CEO of HSBC Alternatives, said: “As markets continue to navigate persistent volatility in 2025, alternative investments are emerging as a critical avenue for diversifying and strengthening portfolios.”

She adds that the real estate sector also offers promise, while rising confidence in private and listed real estate markets reflects growing optimism, as well as improving economic conditions.

JPMorgan Asset Management is also positive on real estate in its outlook for 2025, saying that rising inflation could help boost returns from the sector, where rents often rise with prices.

“Their intrinsic value and tangible nature make them less susceptible to the erosive effects of rising prices, thereby maintaining purchasing power and protecting real returns during inflationary periods,” the fund group said.

TR Property is a Super-60 rated investment trust that owns listed and unlisted assets. The shares yield 5% and have delivered a 6% total return over the past 12 months.