With memories of the credit crunch still fresh in Sipp investors’ minds, one might expect their appetite for offerings at the esoteric end of the menu to be diminished.
But while pressure is growing on providers to be more selective in what they allow through the net, demand for non-conventional asset classes remains as strong as ever. Providers report interest in a wide range of esoteric assets such as biofuel projects, overseas holiday resorts, teak plantations, debt and litigation funds and commodity ETFs.
James Hay managing director Tim Sargisson says: “There are always going to be high-net-worth individuals who want returns that are outside what they would get from regular collective investments or cash accounts and who understand the risks of going there.”
The global economic downturn has hit virtually all sectors of the economy and esoteric investments in Sipps have taken their fair share of the flak. Losing money in a balanced portfolio is one thing but doing so on flavour-of-the-month investments is particularly painful.
Take GuestInvest, for example. In May 2008, GuestInvest created a flurry of excited articles in the personal finance pages of national newspapers, tempting Sipp and other investors with the chance to “earn money while others sleep”. By October, the company had gone into administration and Sipp investors were left sleeping on their losses. Investors in Dubai or Spain three years ago will also have been hit.
But such stories are not enough to put off your typical esoteric investor, however. If anything, the effect of the post-Lehmans’ crash is not a flight to security, rather a wider search for growth as returns on traditional asset classes plummeted.
Sippchoice managing director Hyman Wolanski says: “People still obviously want to keep their money safe but they want to keep it somewhere they can get a decent return. Basically, people are hacked off with getting 0 per cent interest.”
Sipp providers report increasing demand for unregulated collective investment schemes but separating the wheat from the chaff is a major problem.
Suffolk Life head of marketing Greg Kingston says the provider normally checks around 400 to 500 different investments a month but not all will make the grade. He says: “Looking over the list of funds and investments checked, the demand for checking of Ucis investments has doubled over the last two years at a fairly linear rate. There is a definite increase in demand but not sufficient that we would see it as a bubble.
“The main element that a Ucis would fail our allowability test on is liquidity. In order to pay out income old legacy demands of having to pay income every year under ASP plus the still current need to settle death claims we require any investment to be able to be liquidated or freely transferable inside 12 months.”
The FSA has had Ucis in its sights for some time. Its 2009 review of Ucis in Sipps found only 28 of the 109 recommendations it examined were suitable and the regulator remains concerned that the products are being marketed to non-sophisticated investors. The issue is clearly rising up the agenda of policymakers, with business secretary Vince Cable wading into the argument in April, writing to financial secretary to the Treasury Mark Hoban with the message that Ucis were on the face of it being used “for tax avoidance purposes” after hearing the case of an elderly investor who had lost £100,000 in one.
While Cable’s blanket approach to Ucis may not chime with the version of reality shared by most in the financial services industry, his comments have highlighted concerns over unregulated funds, even if “unregulated” for FSA purposes does not necessarily mean there is no regulator looking at the process somewhere.
John Moret, of consultancy More To Sipps, believes the distinction between the responsibilities of the adviser and the Sipp provider is blurring. While the adviser should be responsible for whether the investment is likely to generate a good return he argues, the Sipp provider’s responsibility should not go beyond whether the investment is taxable or not.
Moret sees contradictory forces at work in the regulation of Sipps, which could result in choice for investors being squeezed.
He says: “The FSA and HMRC are on a collision course. The FSA seems to be saying the Sipp provider has some kind of responsibility even though there is an adviser involved. But HMRC are saying you can have anything in the Sipp although it may turn out to be taxable. This attitude of the FSA may be in part related to the non-advised customers who they may feel the need to protect. Then on top of the FSA and HMRC rules you have the legal position straddling the two, presenting yet more challenges to providers.”
This mesh of regulatory issues is pushing Sipp providers to be more cautious, says Moret.
Sargisson is concerned that some players in the market risk bringing the Sipp sector into disrepute because, he argues, they do not have the scale to fully research investments, a process that involves drilling down to an understanding of all the counterparties and finding out precisely what sits behind the investment.
’There are good small players and there are dumb ones. But there is certainly no monopoly of expertise by the big boys’
Sargisson says: “The difference between the big firms and some of the smaller players is that we are able to do more due diligence. We have a robust due diligence process that is vetting what comes in and then on top of that we have a compliance team that is checking the checkers. Smaller players do not have that resource.”
As evidence of the potential risks of dealing with smaller players, Sargisson points to the Freedom Sipp debacle, which saw the provider close to new business in September 2008 and then wound up the following year although non-payment of VAT was given as the reason for the closure.
But Wolanski says small players can be just as thorough as big ones. He says: “There are good small players and there are dumb ones. But there is certainly no monopoly of exper-tise by the big boys, far from it. One of the joys of the internet is it means the small guys have as much chance of being ahead of the game as anyone else.”
So what trends are emerging in terms of asset classes? Wolanski is seeing increased interest in secondary lending. “We are working with secondary lending outfits, securing lending funded by both individuals and Sipps.
“The outfits arranging the deals are charging the borrower around 15 per cent, getting 3 per cent for setting up the arrangement, and the lender is getting 12 per cent. These are gener-ally short-term loans but as they are secured, they are less risky than mezzanine finance.”
Billy Mackay, marketing director of AJ Bell, says: “People going for esoteric investments are chasing growth above the market and we are seeing an increase in exchange traded funds for commodities such as gold and oil both through our direct and advised customers. But there are so many ETFs out there now giving exposure to all sorts of things, so people have got to look closely at what they are buying.”
Dentons Pensions business development manager Martin Tilley says the firm has approved Ucis investing in bio-diesel, where trees are planted and then harvested for their oil in locations around the world, and mining as well as non-mainstream assets such as collective debt and litigation funds.
Tilley says he has been approached about teak plantations but is less keen. “People think you can own acres of land with trees on, but as soon as you cut them down they become taxable movable property,” he says.
But probably the biggest theme identified by Sipp providers is an upswing in direct investments in commercial property.
Tilley says: “Commer-cial property represents a quarter of all our Sipp investments at the present. The lenders have turned the taps back on and Sipps are sensibly geared, so are at the cherrypicking end of lenders’ books.”