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Isa lolly

Our panel look at Isa demand and how investors are splitting their cash, retail hedge funds and the growth of private equity.

The Panel:

Anna Sofat – director, AJS Wealth Management

Justin Modray – director, Bestinvest

Nigel Ledeboer – IFA, Beacon Asset Management

How much did the market fluctuations at the end of February and beginning of March affect investor demand for Isas?


At present, it has not really had much of an impact, demand is similar to last year which was a good year for Isas and I expect it to be the same this year.

However, some canny investors have been wanting to buy when the markets are down (a level ,of 6,200 seems attractive to some) while some clients with existing holdings have taken some profits at the higher level (circa 6,400). I am preparing my clients for a much bumpier ride as I am expecting greater volatility in the market this year.

Modray: Judging by industry figures, quite significantly. We have noticed our own sales drop a little on the discount side but thankfully this has been more than outweighed by an upturn on the discretionary side.

In general, fair weather investors appear to be flocking to cash Isas while more experienced investors view the setback as a buying opportunity.

There is no doubt that the fund industry is enduring a tough climate, the IMA monthly redemption figures must be causing some unit trust sales directors to choke on their brandy.

Ledeboer: Investor demand for Isas has remained stable and, in my opinion, the recent market fluctuations have not led to any dip in activity of note. Although the instability in February/March may have led certain investors to become more cautious, most now tend to invest in Isas throughout the tax year. The end of year rush therefore, is often not a factor so any fluctuation at this time is unlikely to have had a detrimental effect.

Will the increase in the annual Isa allowance from £7,000 to £7,200 make any difference to investor demand next year?


No, I do not think the slightly higher allowance in itself will make much difference but the recent changes will ally fears that Isas are here to stay. I also think that there is likely to be higher demand from investors wanting to transfer some of their cash Isas into an equity Isa especially if the markets continue this upward trend. In addition, the higher allowance will result in higher ad spend generating interest and demand among investors who have perhaps been reluctant to date.

Modray: If anything, it will probably reduce the amount of money flowing into stocks and shares Isas as the cash allowance will be increasing by 20 per cent to £3,600. Investors who regularly use the full £7,000 stocks and shares allowance will likely invest the extra £200.

However, investors who prefer to use mini Isa allowances will likely maximise the cash allowance and invest £400 less in the stocks and shares component as a result.

Ledeboer: Because the increase in allowance is minimal, the change is very unlikely to make any difference to investor demand. Those who are investing in Isas will, of course, utilise the slight extra scope but in terms of driving demand this will not be a factor.

An individual’s decision to invest or not to invest in an Isa is not dependent on allowance increases, perhaps a more interesting effect is the distinction between cash Isas and stocks and shares Isas.

There are many individuals who use their mini Isa cash allowance but not the stocks and shares element. This is often down to the fact that individuals are wary of the risks and do not understand how the market works.

There are, however, many cases in which this asset class could be an appropriate investment, and where a visit to an IFA could be extremely beneficial.

Are the FSA’s proposals to allow retail investors access to hedge funds and other alternative assets a good thing?


It is good news for IFAs who have sophisticated clients wanting more diverse products and who have been frustrated by the experienced investor rules in the past.

However, I do have concerns. I am concerned that they will become the latest fad and investors will be sold these products via adverts/media exposure and buy these without really understanding what they are buying.

Secondly, I think that many financial advisers will similarly buy into these products and end up advising on products they do not really understand.

I do therefore think that the FSA ought to give some thought to ensuring that there are proposals for appropriate adviser education in its proposals.

Modray: In general, yes, as funds of hedge funds and other unregulated investments should provide investors with a greater choice of non-correlated assets. However, there are tax issues to be ironed out before such funds will appeal to UK investors.

They need to have distributor status if they are to avoid all returns being subject to income tax and I gather this is currently hard to achieve. Until this issue is addressed, then LSE-listed funds of hedge funds will continue to be the only practical way for investors to access this type of investment.

In practice, I think Ucits III long/short funds will eventually become the most common way for retail investors to access hedge style investments.

Ledeboer: As there are so many hedge funds now in existence, it was probably only a question of time before the retail investor was allowed to invest in them.

However, there is a distinct lack of education surrounding the funds and much needs to be done to ensure that investors fully understand the associated risks and potential benefits.

In many instances, it may be that the correct route for the retail investor will be the fund of hedge funds option. Rather than buying individual funds, this allows individuals to spread their risk and be less exposed.

Will the appointment of Aiden Kearney to the Credit Suisse Asset Management team help to restore IFA confidence in the company?


The new appointment is a good start and has been welcomed in the market place. Kearney is well respected and had a good track record when he was at Artemis where he ran what is now the Credit Suisse multi-manager balanced fund. It is also good that he will be joining Rob Bowie, who he worked with at Artemis, as they should pick up quickly.

Now all he and Credit Suisse have to do is communicate better with their investors and the advisor community so they do not lose more funds and provide the returns.

Modray: A little, but I doubt IFAs will generally view him as a heavyweight replacement for Burdett and Potter. Kearney’s career record is reasonable but does not set the world alight.

I think Credit Suisse will struggle to convince the wider market that staying put is a better option than moving elsewhere.

However, I think CSAM’s problems run deeper than this. Manager turnover at the group has been farcical in recent years and CSAM probably needs to demonstrate several years of stability before IFAs start taking them seriously again.

Ledeboer: Credit Suisse Asset Management have a good long-term reputation and this move could help restore IFA confidence. However, it is likely to take the market some time to digest these moves and it remains to be seen if this appointment will make a considerable difference.

Private equity firms have been behind a lot of the market growth in recent years. But does the growth of investment funds and trust (such as the New Star private equity investment trust) signal that it is becoming a mainstream asset class?


Private equity is already becoming much more mainstream. Many discretionary managers have included a small element of private equity within their portfolios for a while now – 5-10 per cent has been usual. I am doing pretty much the same for my more sophisticated clients.

However the real question over the longer term will be whether private equity behaves in a very different way to the mainstream equity markets.

If not, then private equity cannot be classified as a new asset class. There should also be more transparency in respect of returns. Currently, we only ever hear about the deals where lots of money has been made but if you look at private equity firms, there are many where returns have been pretty poor.

Modray: I think soaring VCT sales between 2004 and 2006 really put private equity on the map as far as private investors are concerned. Arguably, they were more interested in buying a 40 per cent tax break than the underlying private equity investments, but VCTs nonetheless raised awareness of the asset class.

I doubt that private equity will become a mainstream asset class in the wider retail market as it does not suit open-ended fund structures but it will continue to play a valuable diversification role in higher-net-worth portfolios.

Ledeboer: I do not believe that private equity will become a mainstream asset class. This is a very specialised area of investment. Returns and hence valuations cannot be produced on a daily basis and it is therefore more difficult for mainstream investors to keep track of their fund or trust’s performance.

From experience, I have found that an ability to monitor an investment’s performance is often vital to mainstream investors so I believe this type of asset class will not be particularly appropriate for the average retail investor.

There have been a number of multi-asset funds launched recently. What investors will find these funds suitable and are you concerned about the risk of these funds diversifying away the potential returns?


These funds certainly seem to be flavour of the month as fund management companies take over from the insurance companies in product marketing.

I am not that fond of multi-asset funds as I prefer to have control over assetallocation decisions rather than delegating this important part of financial planning process. It is also much more difficult to assess just how effectively the different assets are invested – are you getting FTSE AllShare returns from the UK equity element for example?

However, these funds are good news for smaller clients as well as financial advisers who do not have the expertise or the inclination to do their own asset allocation and fund/stock selection.

Modray: In theory, these funds have the potential to be a great one-stop investment shop. They can provide a very sensible spread of investment which would not otherwise be practical for smaller portfolios.

The two key issues are charges and diversity. Multi-asset funds usually gain exposure to underlying assets via funds, which gives rise to double-charging.

However, several (such as Midas) use direct securities where practical to help keep overall costs at a sensible level. Asset diversity varies widely between funds, with some investing in just UK equities, bonds and property.

As a minimum, these funds should be global and ideally include other assets such as hedge funds, structured products and specialist fixed interest securities.

I would not worry about diversifying away potential returns, a good multi-asset fund should provide good long term returns with a fairly smooth ride along the way.

Ledeboer: Some of the original multi-asset funds restricted their options to just UK equities or bonds but as time has moved on so overseas equities and bonds and property have also been added to the mix.

The most recent steps have been for gold, hedge funds and leveraged bond funds to be included. They were originally really aimed at those investors who had a relatively cautious attitude to risk but where some diversification away from equities was relevant.

However, nowadays, the sales pitch from the investment management companies seems to be more along the lines that, by investing in such funds, clients can achieve an exposure to several asset classes which they might otherwise not be able to invest in and the responsibility of deciding when to go into or come out of a particular asset class is taken for them. They also argue that, in fact, risk is actually reduced for any potential level of return.

It is probably too early to know whether or not such diversification will mean that potential returns are actually diminished but if the back-testing that the companies have done is to be believed, then the answer would seem to be no.


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