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Pep and Isa portfolios can be tidied up with a multi-fund approach

The golden rule for Peps and Isas is minimise the paperwork and maximise performance. But how do you go about it?

Although the first Peps were restricted to very modest investment levels, the total that could have been put in over the whole 12 years they were available added up to a significant amount. In fact, taking investment growth into account, anyone who was a keen Pep investor could by now have a very substantial sum accumulated.

However, it might be spread over a number of plans managed by different providers. This could mean dividend payments are unco- ordinated and also that the investor gets several separate statements and valuations, possibly turning up at different times of the year. This multiplicity of paperwork can make it very difficult to monitor the portfolio as a whole as well as its component parts.

With no new money going into Peps, there may be less of an incentive to keep them under active review. Some investors may be unaware they can still move their Pep money from one plan to another, even though they cannot add to it.

With substantial sums involved, it is important to ensure the investments are still suitable. For a start, there is performance to consider. Although the funds may have been well chosen initially, over time, leaders can become laggards for a variety of reasons. The fund manager might leave or might fail to pick up on a trend until it is too late or previous good performance might just have been plain lucky.

It could be that the market has come to the end of a run and the fund is now languishing in the doldrums.

Even if the current performance is satisfactory, it is important to consider future prospects. If money is invested in a specialist area, now may be the time to take profits and move elsewhere.

Performance is not the only issue, the investor&#39s needs may also have changed. The Peps may have been chosen for growth to save for retirement and the investor may now be retired and needing income. His or her attitude to risk might also have altered – for older investors, risk aversion will usually increase over time while new fund launches may present more attractive opportunities.

Even with several plans, the investments themselves may not be diversified. Peps are not easy to diversify widely because of the distinction between qualifying and non-qualifying funds, a factor that may inhibit moving money between funds or between plan managers.

Another problem is aggregation. Many companies do not distinguish between plans from different years so a transfer must be all or nothing. Even if plans are held separately now, if more than one is transferred to the same plan manager it may not be possible to separate them again in the future.

With Isas only in their second year, they should not suffer these problems yet but there is the future to consider. Isas offer more scope for proliferation than Peps as an investor could have three separate mini plans each year. With Isas guaranteed to run for at least 10 years, that could mean up to 30 different plans.

But transferring an Isa can be complicated as money can only be transferred in the same type of plan. Many investors have barely got to grips with the difference between maxi and mini plans. How well are they likely to understand the impact it has on transfers? It is important for advisers to consider not only what will best suit a client&#39s current needs but also what flexibility it will have to adapt to future requirements.

So what is the best – and most cost-effective – way of maximising Pep and Isa performance while minimising the paperwork for the client?

For plans based on unit trusts and investment trusts, money could be moved from one fund to another within the plan manager&#39s range – assuming there is a range. This may at least improve performance but it will make no difference to paperwork if the investor has a multitude of plans.

The plan manager may also have been chosen originally for expertise in one particular market or sector, as happened to some extent with technology Isas. There may not be the right funds available for diversifying or the performance in other sectors may be mediocre.

One possibility would be to transfer to perhaps two or three large fund managers which have both a wide range of funds and a reasonable degree of expertise across the board. Performance may not always be in the top quartile but it should avoid falling into the bottom quartile and there will be a saving on subsequent transfer costs as “in-house” transfers are usually discounted. Overall, one could expect to achieve above average returns.

This approach does not offer the opportunity to consider “boutique” funds or specialist sectors that would merit a place in larger portfolios.A number of managers who have a broad range nevertheless lack funds in areas such as technology, green or ethical investment or a current favourite – healthcare.

To cater for all eventualities, it is worth considering the multi-fund approach through a consolidated or self-select plan. This gives the opportunity to choose from a huge selection of funds – in some cases, all those on the market – within the one plan.

Paperwork is reduced, as there will be one consolidated statement and valuation, which should help with monitoring performance but with no loss of flexibility.

The main potential downside is cost. Usually there will be a charge for the plan itself, on top of the usual management charges on the underlying funds but this will norm- ally be offset by discounted switching costs.

For a middle-of-the-road portfolio that can safely remain in the same funds for several years, picking two or three of the leading plan managers may be the best way to tidy up Peps and to plan for future Isas.

But for an active investor or those seeking exposure to specialist fields, the multi-fund approach is likely to be the most cost-effective answer for choice and efficiency.

Liz WalkingtonCommunicationsmanager,RJ Temple


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