Are the recent increases in the annual management charge for some Neptune funds justified?
Pendergast: It is hard to say. Neptune obviously feels justified in increasing its charges but it seems a strange time to do this when markets are so relatively high. Perhaps it is being hit by the discounted AMCs offered to wrap providers and is hitting back.
Fund providers will moni-tor their pricing structure on an ongoing basis and Neptune will have its reasons for increasing AMCs on certain funds. It remains to be seen whether performance will increase as a result as investors will be happy to pay slightly higher AMCs if the result is in an increase in fund success.
Norton: It is very easy for fund management groups to get away with increasing their charges while markets are buoyant. Neptune has increased the AMC on its global alpha fund from 1.6 to 2 per cent. That is a whopping 25 per cent rise on a fund that also carries a 5 per cent initial charge. In addition, the total expense ratio will be higher than the headline AMC. I find this level of charges obscene and this is one of the many reasons why Evolve Financial Planning uses index-tracking funds in client portfolios.
Wills: There is a real cost involved in seeking out appropriate areas of investment for Neptune and other top-performing groups and this will need to be passed to investors. If the performance is there, investors and their advisers will more easily accept increases in charges. If not, they will question the increases. We have seen high charges in past years. Investors and their advisers like value but they appreciate that costs can be significant.
There has been a lot of hot air over the launch of real estate investment trusts in the UK but so far only nine companies have converted to Reit status. Are you surprised by the low number of conversions? Pendergast:
Pendergast:A lot of companies seem concerned that Reit investments will be done via collectives rather than directly and this seems to be putting off companies from converting to Reit status. A lot of IFAs are still unsure that Reits will offer substantial benefits to clients and will in all likelihood use them as part of an overall portfolio strategy or, as forecast, within collectives. So, if companies are not happy with this, they may well choose not to convert and instead maintain their existing status, as the benefits may not outweigh the cost of conversion.
Norton: Not really. It is a question of wait and see. I am sure many companies will want to see what demand is like before going to the expense of converting. Also, this Government has a record of changing its mind in situations like this. The moment it saw that people actually wanted to take advantage of the tax breaks associated with pension term assurance and alternatively secured pensions, it did an about-turn. Who is to say that the Government will not change its mind on Reits too?
Wills: I feel it is likely to be a good few years before the market is sufficiently mature and investors will be able to benefit fully from an expanded and mature UK market. It has, for example, taken roughly 30 years for Reits to be established in Australia and from country to country they vary in their make-up and complexity.
The initial UK Reit market will be narrow for some time and UK investors are likely to seek to include the world’s more established Reit markets such as US and Australia. The first service apartment Reit was recently converted in Singapore and I believe we will see some good growth in the Asian property sector in 2007.
On the back of rising equity markets and the Treasury’s confirmation that Isas are here to stay, FundsNetwork is forecasting a bumper year for Isa sales. Do you share its optimism and is the forecast of a 30 per cent increase realistic? Pendergast:
Pendergast:I do not see any obvious reason for Isa sales to be massively more than last year. Interest rates have crept up and it is widely believed that there is not that much money sloshing round the system. I have not seen investors previously who have been put off investing in Isas because they might have been be withdrawn. Rather, they have been put off due to the minimal tax benefits now on offer via the Isa route. A cash Isa saves a basic-rate taxpayer somewhere in the region of 0.8 per cent of their investment a year in tax and an equity Isa’s benefits are so limited as to be almost inconsequential.
Norton: We may well have a bumper year for Isa sales which means we will probably be due a market correction some time around May. Thirty per cent sounds like a very optimistic estimate and suggests that a lot of people with the financial means did not bother to invest in an Isa in 2006. Wouldn’t it be better to save on a monthly basis and remove the markettiming risk from the equation? I am sure FundsNetwork has researched this thoroughly so who am I to argue with its 30 per cent figure?
Wills: Stockmarkets are relatively stable and there seems renewed optimism in equity investments among investors generally. An Isa is simply a tax-efficient vehicle alongside other investment products such as self-invested personal pensions and investment bonds. However, I do feel we will see some growth in the Isa market as we head for the close of this tax year. With the Government’s confirmed commitment to Isas, I am sure these will be high on clients’ agendas, along with pensions, during the months ahead. A 30 per cent increase seems high but let us wait and see We have 40 to 50 working days ahead of us yet.
With the recent launch of the Nucleus wrap and several other high-profile launches expected this year, will this be the year when wrap takes hold? Pendergast:
Pendergast:A lot of wraps available are restrictive in terms of minimum investment values, limits on monthly contributions and the ability for advisers to incorporate annual servicing fees within the wrap structure. Wraps will take off when these restrictions are lifted and when a provider comes up with a truly flexible wrap which can be used for all an IFA’s client base, rather than just the top 10 per cent of clients. Cofunds’ offering looks attractive but some of the other providers are still targeting the higher end of the market and there seems to be a gap to be filled at the lower end of the spectrum.
Norton: I would love wrap platforms to become more mainstream in 2007 and to do this they need an easy to understand, competitive charging structure backed up by good administration. It sounds like a simple formula but I do not think anyone has got it right yet. Wraps should be a way of bringing together all a client’s investments and reducing their overall cost of investing through economies of scale. For bigger clients, wrap charges are pretty competitive and a wrap is more than justifiable but I would like to see improvement at the £100,000 level too.
Wills: Definitely. Wraps are here to stay, with obvious benefits in terms of charges and simpler administration. Clients need to be educated in terms of eggs and baskets but those who are prepared to accept these products as a means of holding a diversified range of funds are seeing advantages. User-friendly links to available software systems will be one of the key differences between the providers, as well as the range of funds, together with flexibility and transparency of charges.
This time last year, Japan was the top tip for the bestperforming sector in 2006. This year, Russia and the Far East seem to be popular predictions. What do you expect to be the top-performing sector in 2007? Pendergast:
Pendergast:A number of our clients have invested in the Baring Eastern Europe fund, which has done consistently well over the past few years and shows no signs of abating. Certainly, the economic boost which EU entry has provided to certain states within Eastern Europe has had a positive effect on the performance of those countries’ investment markets and I would anticipate that this will continue during the year. Japan may recover but currency fluctuations seem to have had a negative effect on UK investors placing funds in the Far East so emerging Eastern Europe would be my tip.
Norton: That is anyone’s guess. If I could predict the future, I would be writing horoscopes for the News of the World and not working as a financial planner. The fact is that no one knows which way the market is heading and what will be the stars and dogs of 2007. Our stance is that clients should implement a buy-and-hold strategy with globally asset allocated portfolios that are designed to meet their appetite for risk while aiming to maximise all tax planning opportunities.
Wills: It will be a close thing between Japan and emerging markets. If you are prepared to take a higher approach to risk, you could see significant returns in these sectors.
With the FTSE 100 over 6,200 and close to its alltime high and with UK equities returning four straight years of growth, can the UK produce another positive year in 2007? Pendergast:
Pendergast:There is no reason why not, as long as Government policy remains stable and prudent. Issues with oil supply may have a short-term effect on markets during the first quarter but the economic factors still look good for the UK and, barring any unforeseen circumstances, there is no reason why the UK cannot see a further excellent year for investment returns.
Norton: Yes, it can but I would not bet on it. To avoid disappointment, clients should diversify into other global economies and also invest a reasonable percentage of their portfolio into fixed-interest funds. They should also rebalance their portfolio as four years of growth in the UK will have put their asset allocation out of kilter. If investing in the UK, clients should use low-cost index funds and rest assured they will outperform the average actively managed fund by at least 1 per cent over the year due to the lower annual charge.
Wills: How long is a piece of string? We may see a rise towards the end of 2007 to the region of 7,000 but no more. There is certainly plenty of opportunity ahead for investors who take a disciplined approach, with diversification across various sectors according to their chosen risk profile. I believe this will be another positive year for investors but they must know when to take their profits and shelter their gains.