Isa growing season

15 March 2010 8:00 am

With the Isa season in full swing, have you seen a difference in client sentiment compared with this time last year? Which sectors are attracting the most money?

McDermott: Our type of Isa buyers is hugely influenced by markets. This time last year, everyone thought the world was over, there was a worry about banks, people really did think the world was coming to an end.

With hindsight, there was no better time to invest because you would have made 50, 60 up to 100 per cent, depending on what you have invested in. But human sentiment is such that the time they are least likely to invest is probably the time they should.

Now here we are, the market is up 50 per cent and more people are investing. It is 50 per cent less cheap but that is just the way it is. UK and
UK income are still quite popular.

Davidson: Yes, absolutely. They are all much happier looking at the valuation. It is strange because we are relatively cautious but clients see the values going up and want to invest a little bit more. So yes, it is a much easier conversation to get clients to invest in Isas this year. What we might recommend and what they might want are sometimes two different things. I have had more interest in Far East and emerging markets, so clients seem to be prepared to go for something a bit more risky.

Dampier: No, not sure I have. We did a lot of Isa business last year. The difference is we were doing a lot more in corporate bonds this time last year than we are now. It was not the low point last year but it was damn close to it but although I can’t say I got the equity market
right, I got the corporate bond market right and said fill your boots.

I would say it is more bullish now. Interest rates have been 0.5 per cent for a whole year now and are still not likely to go up and people are
looking for an alternative, coupled with the fact they all know that taxes are going to go up.

Amazingly, the Government put the limit up to £10,200, which is actually an extraordinary high amount of money.

People are now well aware of what we have been drumming on about for the last few years - taxes are only going to go one way. Once they realise that, coupled with the changes in pensions for some people, it has brought Isas right back into fashion.

The FSA recently announced regulations for funds of alternative investment funds. What impact do you think Faifs will have?

McDermott: My concern is it is fee upon fee. If I want to buy an absolute return directly from, say, Gartmore, I will pay 1.5 per cent and 20 basis points, so I am already paying quite a decent fee in an individual absolute return fee.

By definition, a fund of funds has another layer of fees. If a fund manager has a track record of delivering 10 per cent after fees and you decide that is a profile you like, you appreciate he may well earn huge fees but you like what he has returned after fees, that is fair enough. The same could be said of the Faifs. If they deliver consistent absolute returns in excess of 6 or 7 per cent, does it matter what fee they take?

But I wonder whether they will find it more difficult to achieve that level of return, given the fee they take.

Davidson: In the last six months, we have really looked quite carefully at the asset allocation we use for our clients and the use of alternatives is really coming to the fore.

It is never going to be as much as, say, UK equities but it is there. This provides more diversification for clients which is a good thing but we will
still continue to use alternatives reasonably sparingly.

It is tricky for investors as they have been let down by equities and property and indeed fixed interest and bank deposits, so there is an appetite to look at alternative types of investments.

Dampier: I am not going to get carried away at the moment. Notoriously, these funds are a nightmare to examine and you have to be quite forensic. I have only very briefly looked them with my compliance officer and he said, do we have to buy any of this? My answer was, probably not.

Both Lord Mandelson and Lord Myners have both given speeches recently on the importance of institutional investors taking a long-term view when investing. Should fund managers be encouraged to take a responsible, long-term view or should they simply be left to make money for their investors according to their investment objectives?

McDermott: I am certainly seeing fund management groups, not at a fund level but at a group level, taking greater concern about corporate
governance and how they interact with their underlying holdings. It is not always hugely overt but making money for their investors is paramount but if they can do it in a way that benefits the wellbeing of the industry that is also sensible.

Davidson: I think fund managers have a really tough time in the short-term/long-term debate. In terms of socially responsible investing, if a fund is a socially responsible investment fund then it will have a mandate and will make that statement.

But if it is making no such statement, it would be unreasonable to expect that it was going to stick to those criteria. I think you can ask no more of a fund manager then they do what it says on the tin.

Dampier: Fund managers should be free to do their job. But if you speak to Neil Woodford, who is a genuinely long-term investor, he does
despair but he despairs of everyone because although people are blaming the fund managers, the fund managers react to the customers.

The pension funds want quarterly meetings, they want short-term performance and they are not prepared to sit on things. The hedge fund
industry is a classic case - if you have more than two quarters of poor performance, then all the money flies out. Is that the fund manager’s fault or the investors’ fault? It is a chicken and egg thing. But then a lot of the shortterm people provide a lot of long-term opportunity to people like Woodford. So the point is it is a market and what makes a market is that people’s opinions are different.

Transact chairman Ian Taylor recently said that many platforms have been indulging in suicidal pricing structures by charging too little while still making a loss. Do you agree?

McDermott: Ian, I would suggest, was very forwardthinking in the way he presented the charging structure of Transact but it does not cater to all parts of the market.

Clients of companies like ourselves tend to be a bit more cost-conscious. Whereas Transact’s clients, not the IFAs or the fund groups but the clients, pay a 0.5 per cent fee, I would suggest that the majority of non-advised clients would not want to pay that fee and therefore an alternative structure needs to be in place.

What we are seeing at Cofunds is they have achieved substantial assets under management but have struggled to make a profit, so I think his comments are fair.

But I think Cofunds are addressing that and are looking to cut costs and make it more streamlined. They are also looking to and have managed to increase their margins off some of the groups.

Davidson: If you have a new entrant in the market, there is going to be quite a lot of set-up and development costs. These will wash through the system the longer the wrap is around, so if you are comparing the costs of the business you may not be comparing like with like. In terms of whether costs will change? Yes, I think they will. No wrap or platform can act in isolation and there will be times when the compet itiveness of the market may dictate that price is altered. I also think there will be some consolidation in the market.

Dampier: If they are not profitable, then, clearly, they have got a problem. Maybe there is a volume problem as well. How many platforms do you need in the UK? How many real active investors are there? There are really not that many.

A platform is wonderful, it enables you to invest the money properly in a way you could not really do 10 years ago unless you were veryorganised. But if you run a business you have to make it profitable, the whole raison d’etre is to make a profit. If you are not running at a profit you cannot do anything, in fact, you are a danger, especially in finance, because you start to do silly deals and doing silly things, so it is very important that you do make a profit.

China is a hot topic, particularly with the launch of Anthony Bolton’s new investment trust due soon. Do you think there is any risk that the Chinese market will overheat?

McDermott: China from its lows of 2008 is up by about 100 per cent but from its peak to that low it was down by 70 per cent, so we are not even back where we were.

A lot of the emerging markets, China being the topical one, have performed extremely well and have pretty much doubled in 12 to 15 months.

But if you are asking if China will be up over the next one or two years, I cannot promise you that. But do I think that China is a good place to invest for the next five, 10 or 20 years? Yes, I do.

Davidson: With our asset allocation, we increased our percentage in the Far East, not dramatically but certainly to take advantage of these
emerging economies.

China is an interesting market. There is huge potential there and it is quite an exciting market. Will it overheat? Every economy overheats. When will that happen? I don’t know. I think it is sensible to have a portion in China but you need to have a balance.

Dampier: It depends on who you want to believe. I find it incredible that so many people are on one side or another. The Chinese authorities have acted quite early so I think they have been quite responsible. There is a danger of overheating when you are putting so much money in but
I don’t think so just yet.

In fact, the Chinese bubble story has been with us for months. I don’t think most of the markets look expensive but I don’t think they look cheap.

I am not that thrilled in the short term and but I am not that bearish. It will be interesting to see the Bolton launch. I might change my mind if we see a massive oversubscription.

 

 

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