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Isa breakers

March witnes-sed some of the most volatile market conditions of the past few years, with the FTSE plummeting back to 1998 levels. Do you think that nervous investors, who chose not to fill their Isas before the tax year deadline, were right to do so?

AB: There is no rule that states you must invest your full allowance into Isas each year. But the fact that the markets have fallen recently has actually offered a great opportunity for investment for med-ium-term investors who are prepared to take an element of investment risk.

There were also alternatives that could have been used, such as corporate bond funds and zero dividend preference share funds.

JH: Definitely not. Remember, Isas are a long-term savings allowance and it is illogical to forgo this on the basis of short-term worries about the market.

Investors need to break away from the herd mentality of pouring their cash in at the top of the market and then going on strike when the market dips. Investors worried about market volatility have the option of phasing their investments, so there is no reason why they should have ignored their allowances.

It is hardly surprising that many investors have ignored Isas this year when so many irresponsible IFAs and fund companies were complicit in puffing up technology funds last year. Those who fed tech funds to investors, like pushers feed junkies, have got what they deserved this year if their sales figures are as bad as rumours suggest.

MO: If investors are nervous, they are understandably going to be wary of volatile markets. Logically, people should be taking out stockmarket Isas more than ever at these lower levels, but we all know that investors always prefer to buy on an upturn or even at the top of the market.

It is an educational process, pointing out to people to try and look long term and not be totally dazzled by short-term uncertainties. If this was anything other than a financial product, people would be buying in their droves.

Some of this year&#39s most popular Isa providers have been boutiques such as ABN Amro and Exeter. What do you think has been their appeal over the bigger household names such as Schroders?

AB: Both companies have high-profile funds which have shown good consistency of performance. Over five years, ABN Amro has managed three of the UK&#39s top 10 Isas – ABN Amro UK growth, ABN Amro equity income and Solus UK special situations (until recently managed by ABN&#39s Nigel Thomas).

Exeter is also a consistent force. Its managed growth and global opportunities funds have been outstanding in their sector for well over five years.

JH: There is little doubt that some investors like the idea of feeling they are backing lesser-known groups. Perhaps it is something inherently British about favouring the perceived underdog over the big corporation.

Another aspect is that when markets have no overall sense of direction there is a case for choosing funds that are very actively managed. Volatile markets should suit fund managers with a strong trading instinct.

MO: IFAs are now more discerning in their choice of Isa provider. They want strong performance, which explains why some big groups, such as Fidelity, are still topping the Isa sales figures.

However, there are a number of less well known companies with a specific inv- estment style and strong performance-attracting attention, such as ABN Amro, SocGen and Investec. Name awareness is not the first priority for IFAs. They are more interested in factors such as risk, investment style, performance comparisons, etc.

The Pep transfer rules have been relaxed this month, allowing Peps to be switched into a wider range of funds. Do you expect to do much more Pep transfer business as a result?

AB: It is certainly a good opportunity for investors to review their Pep portfolios. We would expect that this increased freedom of investment will increase the amount of Pep transfers that occur, especially with regard to single-company Peps, where the change will be most dramatic.

At last, investors will be free to increase the diversification of their Pep portfolios and invest into the companies that they wish, with ease.

JH: I am sure that the Pep transfer market is going to be big. The danger is that some IFAs will encourage frivolous churning to generate commission.

Our whole business is structured around portfolio-based advice which is distinct from every other discount broker. We already provide our clients with analysis on their under asset allocation and recommendations are provided in the context of their existing portfolio.

The changes in the Pep rules should be seen as a call to action to reorganise your portfolio.

MO: We expect to transact more Pep transfer business. The change in rules allows us to start looking at Peps and Isas as one tax-free pot and try to allocate asset decisions now without the restrictions we had previously.

There must be huge numbers of single-company Peps locked up in shares that have been poor performers, such as British Telecom and Marks & Spencer. Although we might have to look at aspects of timing, there is the opportunity for investors to diversify risk.

SG Asset Management is launching a new range of higher-risk funds which will aim to beat its benchmark by 4 or 5 per cent a year. These will complement its existing range, which aim to beat the index by 1 or 2 per cent. Do you welcome such a methodical approach to fund management?

AB: It does depend upon the type of high-risk funds that are launched. Some new funds are concentrated versions of successful more diversified funds, such as the Gartmore Focus funds and we feel that these present good opportunities for the higher risk investor. However, other higher-risk investments such as hedge funds are still questionable in terms of suitability for the retail market.

JH: These are of interest but it is something of a me-too product line following the launch of the Gartmore Focus Fund range and the new Royal & Sun Alliance UK Prime fund.

This aggressively managed fund style comes naturally to some houses. It is ideal for an ABN Amro, Artemis, Gartmore or Jupiter. I am not so sure it is natural territory for SocGen which runs highly disciplined funds with a high degree of quasi-tracking but we await further details with interest.

MO: I am somewhat cynical about new launches anyway so I am not convinced we need a plethora of new investment funds in these more difficult markets.

If they are promising to beat the index by a margin of 5 per cent a year, I would expect the approach to be relatively high risk, paying less attention to benchmarks. SG generally though are one of those “new” groups pushing the old guard.

Autif is creating sub-sectors for tracker, ethical and active funds within the UK all companies sector. Do you think fund managers should be allowed to advertise their relative sub-sector performance or should they be restricted to comparisons within the entire all companies sector as Autif is proposing?

AB: There is certainly an argument for ethical funds to be kept separate from the rest of the field as there are obviously restrictions imposed on them.

It would be useful to be able to easily compare tracker funds, although in terms of performance comparisons active and tracker funds should still be compared together. After all, the role of an active fund is to outperform the indices that the trackers track.

JH: Personally, I think these mushrooming sub-sectors will not be very useful. If you are managing a UK growth fund you should be trying to beat the All-Share index and that includes index trackers.

Performance differences between trackers is pretty small and therefore the real assessment should be between their charges. How can it be that Virgin&#39s annual fee is double that of the Legal &General product? After all, they are doing the same thing.

MO: Yes, I think fund managers should be allowed to advertise their performance with respect to their peers. Therefore, an ethical fund manager should be able to compare directly with the competition.

It is not particularly helpful for us to compare it with companies in the huge all companies sector, which covers so many different types of fund.

Anna Bowes, investment manager, Chase de Vere

Jason Hollands, deputy managing director, Best Invest

Michael Owen, joint managing director, Plan Invest


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