This is somewhat of a departure from my normal subject matter as today I will focus on Isas and the recent market volatility.
I recently read in Money Marketing that Sesame had announced £12.5m worth of Isa business last year. It seemed very impressed with itself but for a group with thousands of advisers that is pitifully small. Perhaps it was a misprint but I have seen no correction printed.
Indeed, the Investment Management Association’s own figures show a noticeable drop in sales of stocks and shares Isas for this tax year although that has not been our experience at Hargreaves Lansdown. What could account for this decline? Are Isas not seen as a particularly good tax vehicle? If so, then I am afraid advisers are quite wrong about that.
The cumulative effect of the tax savings in an Isa can be dramatic. They were introduced in 1999 so investors have had the opportunity to allocate £56,000 to this tax shelter. A husband and wife will have been able to save double that amount. That would result in a very sizable amount sheltered from capital gains tax and the higher rate of income tax. That should be nothing to turn your nose up at, even for the very wealthy.
On a portfolio of that size outside an Isa, even 20 per cent growth would create a taxable gain, which could mean future decisions for tax rather than investment reasons. There is no good reason for an investor with sufficient capital to neglect their Isa allowance.
Even the recent market volatility should not put you off, since clients can put the full £7,000 in cash and invest it at a later date. I apologise if I am telling most of you how to suck eggs but I do wonder if some advisers are looking at this product properly.
I turn now to the state of the markets. I am sure I will get some criticism from Andrew Wilson if I try to make any asset allocation calls so I will resist the temptation. Just for his ears, I would like to say my point on asset allocation was that, while it may be a major driver of returns, most people are such poor asset allocators that they take away more value than they add. The less tinkering you do, the better. I have found few people who can asset allocate accurately – or perhaps I should say time markets accurately.
From a strategic point of view, it makes sense (up to a point) for clients to have a mix of asset classes but my argument has always been that if you can find top quality stockpickers, you should stick with them as they normally see you through the worst of times.
I have no profound thoughts on present market conditions but would recommend that you take newspaper headlines with a pinch of salt. Remember that you will never see an item on the news about how markets generally look OK at the moment. In fact, I think they like nothing more than to sensationalise a market fall but they always lose interest when things start to bounce back.
While problems in the US housing market do have a possible contagion risk, I think at present they are likely to be contained. Unfortunately, housing market data in the US is poor and no one knows how far the problem could spread to prime mortgages.
The last time they had big defaults was in the recession of 2002/03 when unemployment was around 6 per cent. Today it is 4.5 per cent so the US economy should be in a better position to cope with these problems.
It will take some time for the uncertainty around these issues to play itself out. Expect more volatility but keep a strong eye out on unemployment figures. If they start to rise, then things could start to get worse but at the present time this looks more like a squall than a hurricane.
Mark Dampier is head of research at Hargreaves Lansdown.