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Isa flow

Have you had a busy Isa season? How did this compare with your expectations?

Lowcock: Isa season seems to have got shorter this year. We have seen a significant surge in Isas in the last couple of weeks, comparing well against last year. Considering the markets in 2008 and bad sentiment that was circulating in late February, we had expected this outcome but the late surge is much bigger than we had anticipated.

Burt: No, as it was a quieter 2008. I spent more time chasing clients to do Isas earlier in the tax year. There was also a decline in the normal flow of new clients wanting to invest generally due to the decline in the stockmarkets.

Hall: As usual, we have had a relatively quiet Isa season. This is not due to any economic concerns but because we start our Isa season at the beginning of the tax year and not the end. It amazes me that advisers and investors continually wait until the very last minute to take their tax breaks.

We are expecting to be busy as usual in the weeks following April 6 to ensure that all of our clients get their money into this onshore tax haven as soon as possible.

Do you agree with the Investment Management Association’s statement that Isas need to be reviewed and additional incentives, such as raising the annual allowance to £9,600, are needed to stimulate interest in them?

Lowcock: I agree that Isas need to be reviewed, raising the allowance to £9,600 keeps the limits within line of inflation I would also like to see the tax credit abolished, so Isas can once again be described and marketed as the truly tax-free wrappers they once were. Tidying up the rules of holding cash in an Isa would also remove confusion.

Burt: Yes, it would, as many clients look at the income they can generate from doing a £7,200 Isa and think it is not worth the hassle setting one up.

Hall: Isas do need to be reviewed as the original intent does not seem to be being met. Far from encouraging savings across the board, Isas tend to reward higher-rate taxpayers and those with existing savings and investments. For most savers, the Isa provides no shelter from capital gains tax because they invariably set gains against their annual allowance. Raising the thresh-old will only reward the better-off, reducing tax revenue at the time the Government need it most. They should, however, restore the ability for Isas to reclaim the 10 per cent dividend tax credit.

Is the new team at Liontrust the right one to replace for the outgoing pairing of Jeremy Lang and William Pattisson?

Lowcock: The announcement from Liontrust is good news for investors. Instead of spending 2009 with two managers who were on the way out, the funds will now be run by managers who have the motivation and interest to take the fund and company forward.

It draws a line under the situation and removes any uncertainty.

Gary West and James Inglis-Jones will need to prove themselves to stand out in what is a highly competitive sector. Anthony Cross and Julian Fosh have a combined experience which ticks many of the right boxes for managing this fund.

Burt: No, I switched my clients out on the news, as the investment was made purely Continued from previous page on the strength of Jeremy Lang for long-term income returns for my investors.

Hall: On paper, there are two teams to replace Lang and Pattisson at Liontrust. West and Inglis-Jones are to look after 1st income and the large cap fund, with Cross and Fosh to look after the growth fund. And on paper, each of these managers has the right credentials to manage these funds, highly rated, experienced and promoted from within.To be fair, each pairing will be following a particular model and if the model works, the funds will perform.

But what if the model is wrong, are we to blame the manager, the model, or Liontrust’s belief that their managers stick to the model?

Was the failure of the Government’s most recent debt auction to get 100 per cent take-up an irrelevant distraction or a warning sign for the gilt market?

Lowcock: The auction of this particular line of gilt is at the more difficult, longer-dated end of the market, with a yield of 4.25 per cent and maturity date of 2049. Long-dated gilts with lower coupons (interest) are most susceptible to inflation. It is therefore not a reason to panic but perhaps a reason for investors to consider alternatives.

It does suggest, in the long term, that the market is more concerned about inflation. Partly caused by low interest rates and the quantitative easing that was announced at the start of the month.

Burt: I think it was very useful in tempering the Government’s ambitions to do more fiscal stimulus and too much quantitative easing, considering their own budget problems. They overspent in the growth period of the economy instead of saving for the harder times, and they really should be constrained by their budget deficit.

However, I think that the 93 per cent take up was actually more due to technicalities at this stage than a lack of interest in gilt purchases by institutional purchasers. The gilt being issued was much longer-dated than the market wanted to purchase. In addition, it was also too long-dated to be purchased back by the Government as part of the quantitative easing programme, so there were two strong reasons why take-up was slightly down.

Hall: The recent failure of the gilt auction was in direct relation to Mervyn King’s comments about stimulus packages and investors’ concerns about debt issuance and inflation. This auction was for bonds maturing in 2049, a long way off for investors who might be casting an eye of inflation fears. Even the Bank of England pension fund has lost its faith in gilts, having switched a large proportion of its gilt holdings into index-linked securities. Who would want to be holding gilts if inflation did kick off? Certainly not the Bank of England pension fund, it seems.

What effects, if any, do you expect quantitative easing to have on fixed- interest markets?

Lowcock: The purpose of QE was to buy shorter-dated gilts to encourage investors to move to long-dated gilts. The demand would force up the price and drop the yield, making borrowing money over the longer term cheaper.

It would also make it easier for the Government to issue long-dated gilts at low coupons. This was working as gilt prices shot up on the announcement of QE, until Mervyn King decide to tell the market he may not spend all of the £150bn at his disposal.

Burt: At the moment, it has not done its job in decreasing yields in the gilt market, as yields increased again after the failed gilt auction and also because the BoE suggested that it may not buy as many gilts as first thought.

It has also only purchased the top quality investment-grade corporate bonds, where there are purchasers around already. It would be more useful if they bought lower-rated bonds and improved the liquidity in this area as well.

The recent offers to purchase back bank bonds by RBS, Barclays and Lloyds is helping to improve confidence in this sector of the market as well.

Hall: Quantitative easing has already driven up the price of gilts as banks buy them up ready to exchange for hard cash. Yields have therefore fallen, which is disastrous news for income-seekers. The longer-term effects, however, are harder to predict.

There seems to be a consensus forming that QE will eventually lead to a rapid rise in inflation, driving down the price of gilts with a corresponding rise in a flight to index- linked securities. All those purchasers of corporate bonds might also regret their purchases if inflation really does take a hold.

Do you believe the increase in the Financial Services Compensation Scheme investment adviser levy for 2009/10 following the failure of Pacific Capital is fair?

Lowcock: The purpose of the FSCS is to provide a centralised compensation scheme but falling markets do highlight inconsistencies and weakness within the system and the Pacific Capital highlights the need to review the categories and charge the relevant peer groups.

Burt: It is only £565 per adviser so far, but it is the principle that seems misplaced. I thought the FSA was there to police the outfits that were out for themselves rather than the consumers they were there to serve, and they had heard many stories about Pacific for several years beforehand and as usual done nothing. I think that the liability should be on other stockbrokers, rather than IFAs.

Hall: Of course it is not fair that existing advisers have to pick up the tab for the failures of Pacific Capital. How could it be but what are the alternatives? If we want the public to have faith in the financial system they need to see that there is a level of protection offered. It is less fair, however, for advisers to have paid so much money in FSA fees only for them to fail so spectac-ularly in regulating the banks. With several interim FSCS levies due this year, there will be many cries for an alternative method of funding. It is the better firms that pick up the costs and that can hardly be called fair.

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