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Isa breakers

As low interest rates fuel a search for income, 2010 is gearing up to be a vintage year for Isas, says Chris Salih

Advisers are gearing up for a bumper 2010 Isa season as the new £10,200 allowance and investors’ search for income in a low-interestrate environment are expected to drive higher sales volumes.

Market sentiment has improved in the past 12 months and the FTSE is well up on the 3,500 mark of March 2009. According to the Investment Management Association, 2009 was a record year for fund sales at £25.8bn – up by 45 per cent on 2008.

The Isa limit was raised to £10,200 for the over-50s last October and the new allowance will apply to all from April 6 this year.

Isas had a strong 2009 on the whole, with returns of £2.8bn, compared with outflows of £1.6bn in 2008. Isa funds under management reached £93.8bn by December 2009, finishing 27 per cent ahead on the year-end 2008.

Between March 1, 2009 and April 6, 2009 – the last Isa season – the IMA recorded net inflows into Isa accounts of £529.1m, a 74 per cent rise on 2008’s inflow of £303.8m.

Despite the surge in the last few months of the 2008/09 tax year, the IMA records net Isa outflows of £975m. This compares with £1.7bn of outflows seen in the 2007/08 financial year.

The most popular sector for Isa investment in the 2008/09 tax year was UK all companies, accounting for 21 per cent of gross inflows. In net terms, protected/ guaranteed funds were the most favoured.

Isas are also being driven by record lows in interest rates, set to continue for some time. This means investors searching for income are likely to take more risks to achieve a decent yield.

Hargreaves Lansdown investment manager Ben Yearsley says: “People are being forced to look for income, so I imagine this year should see a significant increase on what it was last year, given the extra allowance and the migration out of bank cash accounts. It will not be so good for cash Isas and better for stocks and shares.”

Yearsley says he would be surprised if there was one dominant sector in 2009 despite the strength of some markets.

Skerritt Consultants head of investments Andy Merricks says bonds may well be the most popular after having topped IMA net retail sales for 2009, taking in almost £6bn of assets, but the past couple of months have seen net outflows.

He says: “If people are looking for income, which is the main benefit of Isa investment, you do not get tax-free dividends from UK equity income, so we would expect corporate and high yield bonds and the distribution-type funds to be the big sellers.

“The strategic bond sector may well take the most money, although we are still keen on highyield bonds which give a good level of income.”

Chelsea Financial Services managing director Darius McDermott agrees that despite a move into equities in the second half of 2009, low interest rates will keep investors involved in the bond market.

He says: “In core funds we are seeing a dependence on defensive managers such as Artemis’ Adrian Frost and Neil Woodford of Invesco, both looking for strong cash-generative firms in established markets.

“With regard to satellite funds, investors continue to pour into emerging markets despite fears that many developing regions may be

ndervalued.
“Since March, the MSCI emerging markets index has soared. There has been some interest in the underperforming areas such as Japan and commercial property as investors try to guess the next hot sector.”

Investors searching for income are likely to take more risks to achieve a decent yield

Absolute return and property are two areas garnering particular interest from advisers at present. Absolute return was the top-selling IMA sector in December 2009, with net retail sales of £511m, just beating property on £510.9m, which had been top for the previous two months.

Whitechurch Securities managing director Gavin Haynes says: “Absolute return is almost a separate asset class as it was traditionally used by institutional investors through hedge funds. In designing a balanced portfolio, a lot of investors would be underweight that area so it would not surprise me to see an inflow as people look to diversify. There has also been a raft of popular fund launches from the likes of Philip Gibbs at Jupiter.”

After a torrid couple of years, property has also rebounded and was the fourth most popular IMA sector in 2009 with £1.6bn in net retail sales.

Dennehy Weller managing director Brian Dennehy says: “I would be surprised if property was a big Isa seller this season. There is no prompted demand for it and it has suffered in the past couple of years. The IMA stats also show sales split between Isa and non-Isa, and the majority of property sales fall into the non-Isa category as they are bought by the likes of wealth managers and multi-managers.”

Haynes says investors and advisers will continue to top up with the names they have seen perform in the past, meaning some of the traditional best sellers will remain so.

He says: “The name at the top of the list is Neil Woodford and with his style expected to come back into vogue, I expect people to stick with him. The same goes for UK equity income, but this year is unlikely to see a dominant sector in terms of sales.”

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