Octopus Asset Management is hoping to raise £15m through the launch of a VCT next month which will invest in smaller companies. Given the depressed state of the market, have the days when VCTs could easily raise this amount gone or will they stage a comeback when the stockmarket recovers and investors have capital gains liabilities to postpone?
Both: While it would be easy to dismiss anyone who is thinking of investing in VCTs at the present time as barking mad, it would also be completely wrong. Not only do VCT subscriptions attract immensely valuable tax breaks but, according to Micropal, over the last three discrete years, the average VCT has significantly outperformed both UK smaller companies and UK all companies on an offer-tobid basis. In fact, there is definitely a case for considering VCTs in preference to Isas and pensions.
McDermott: The demand for VCTs is likely to be considerably less than last year. This means that VCTs will have to work harder to raise substantial sums. Lower demand brings lower supply and subsequently there are only two new offerings this autumn – the Phoenix and Cornerstone VCTs.
Nevertheless, despite the depressed state of the market, investors still have some capital gains to shelter, whether from the sale of a property or business, and top-ups could be the answer. Most companies have opted to offer top-ups to their existing portfolios, thereby reducing costs and preventing a repeat of last year when three VCTs were withdrawn due to a lack of funds raised.
Top-ups require a very small level of subscription to go ahead and the client gets access to a fully or partially invested portfolio with all the tax breaks.
Bowes: VCTs have generally failed to raise their minimums over the last 12-18 months due to investors' increasing unwillingness to take such high risks. It is, therefore, conceivable that as investor confidence returns, the VCT market may pick up again. However, investors currently place more emphasis on retention of capital and their appetite for higher risk is likely to take some time to recover. This is true even when there are significant tax breaks.
The FSA is believed to be considering cutting projection rates for with-profit policies amid concerns that they may be overstating likely future performance. With life companies increasingly basing their asset allocation more on protecting or replenishing depleted reserves than on generating performance for investors, do you think the regulator should act?
Both: One of the reasons for the severity of the current stockmarket plunge has been the over-enthusiastic reduction of the institutions' reserves by a Government (and political “poodle” regulator) insatiable for tax to squander, ably abetted by insurance companies mostly too supine to argue their strong case for maintaining them at much higher levels.
Forcing insurance companies to dump their best equities to meet an ill-conceived benchmark has resulted in an avalanche of selling which has exacerbated rather than alleviated the situation.
Future performance, unless guaranteed, is just a guess. The regulator should remember that itself and simply impress this fact upon the public, limiting its role to ensuring that insurance companies are properly provisioned to meet in full any guarantees they have in force. Let the market decide for itself whether it wants low guaranteed returns or to take a punt on possibly higher (or lower) ones.
The FSA pretending that it knows what is going to happen in the future and blaming everyone involved for normal market fluctuations is a conceit that we can all ill afford again.
McDermott: Currently, with-profits illustrations show projected returns of 4 per cent, 6 per cent and 8 per cent. If the regulator enforces the change to lower figures of, say, 2 per cent, 4 per cent or 6 per cent, who is going to buy the product? Surely investors would look elsewhere. Ultimately, it is in the interest of the insurance companies for with-profits funds to generate competitive returns as an asset class and until there has been long-term underperformance below the projected figures, then the current rates should remain as they are.
Having said that, one can understand why there have been calls for a revision of the figures in view of the current investment climate. Now that we are three years into a bear market, returns of 4 per cent, 6 per cent 8 per cent within a low-risk environment seem far away.
Bowes: I feel that the current illustrative returns of 4, 6 and 8 per cent are fair. It is likely that a number of with-profits funds do not meet even these low projections but all companies should not be tarred with the same brush. What is important is that financial advisers have access to proper research in order to choose the stronger funds for their investors. It is also important that investors are fully educated to the fact that these are illustrations only and should not be depended upon.
The Investment Management Association recently published research from consultants Charles River Associates showing that past performance is a key indicator of a fund's potential for future top-quartile performance. Now there is factual evidence of a link between the two should the FSA introduce a standardised form at for the presentation of past performance in marketing material.
Both: It was always clear to anyone with at least half a brain that there is a strong link between a fund manager's past performance and their future performance. It is the link between the past and future performance of market sectors which is less predictable.
If the FSA emphasised that fact and stipulated that any institution which chose to publicise a fund's past performance must indicate any significant changes in the composition of the management of that fund over the quoted period, it would do the public far more of a service.
McDermott: We have always believed that past performance is useful when assessing a fund. However, some distinctions should be made. Is the performance advertised delivered by the same manager? It is misleading for fund providers to advertise strong past performance if it was attained by previous managers.
There should also be some reference both to the level of risk taken to achieve the performance and whether or not the same level of performance is achievable in the future, that is, it is widely acknowledged that the ret-urns achieved in the 1990s are unlikely to be replicated in the foreseeable future.
Bowes: It is no secret that the majority of actively managed funds underperform their benchmark index and this is more than likely to continue into the future. However, the role of the IFA is to research and recommend the better-performing funds. We have always felt that past performance is one important element to consider when deciding whether a fund is suitable.
We welcome a ruling by the FSA to provide one format that past performance figures must adhere to. This should be set to restrict the manipulation of past performance figures, that is, companies choosing a particularly strong investment period while removing poorer performance or using the past performance of a star fund manager who has subsequently left.
Class Law, the legal firm making a group litigation application against more than 100 IFAs and fund managers involved in the split-cap debacle, is threatening to take the FSA to court for gross negligence. It claims the FSA may have been in possession of – but failed to act on – information from the Guernsey financial regulator which pointed to the risks of split-caps. If proved, do you believe the FSA has a case to answer?
Both: What is the point of the issuer of a share having to get its prospectus approved by the regulator if the integrity of the claims made at launch is insufficient and where the regulator subsequently accepts the excuse of the managers that “it's not our fault – a big boy did it and ran away”? The FSA may enjoy eviscerating IFAs but, on balance, it does the public a huge disservice.
I think that individual regulators should be every bit as answerable for their actions as company directors, with the same penalties. In equivalent circumstances of gross negligence, they should be disbarred for life from holding positions of responsibility.
McDermott: This is a tricky question because, at the moment, no one knows exactly what Class Law is going to do. But I would find it worrying that the FSA had advance knowledge of problems with split-cap investment trusts and did nothing to protect investors.
Bowes: Many different problems contributed to the split-cap problem. We would be interested to know if the FSA had any forewarning of the socalled “magic circle”.
As we now know, this is being fully investigated but it is likely to be extremely difficult for even the regulator to get to the bottom of it. If it is disclosed that the FSA did have prior information, many people will claim that they are more responsible. However, at the end of the day, by the time they had got to the bottom of any information received, it is debatable as to whether investors would be in a better position today.
Many of the biggest UK fund managers have hit out at the Treasury's backing of the Sandler report, saying that it will do nothing to close the savings gap and could defeat its own objective. Do you think the Treasury is right to support Sandler or should it have tempered some of his more controversial recommendations such as pricecapping the stakeholder suite of products?
Both: The Sandler report will fail to address the perceived savings gap if it forces price capping on the market. If some companies think that they can succeed by offering products at significantly higher charges than others, let the market, not the bureaucrats of the state, decide.
The sales figures that I have seen for stakeholder pensions seem to indicate that their take-up has been a dismal failure, especially given the massive amount of publicity not only from the providers but also the Government sheep dogs.
Since the regulator seems to expect the stakeholder providers to lose money on them for over a decade, this perhaps makes their failure a “success” from the perspective of shareholders and with-profits policyholders. Why the Treasury is so intent in decimating the remnants of the UK financial services industry is a mystery – unless Osama bin Laden has secretly been put in charge.
McDermott: The Sandler report has good intentions with regard to a number of improvements in financial services but the solutions it offers appear rather inadequate. Therefore, the Treasury was unwise to support Sandler in so many areas. A particular topic where there is a problem is with the debate over price capping. I think price capping does not work and that has been highlighted by the failures of Cat-standard investments and stakeholder pensions.
Bowes: The Treasury should tread very carefully in fully supporting Sandler's issues. Stakeholder products raise concern – we are unconvinced that “dumbed-down” investment products being sold by unqualified people will help consumers make sensible provision for their future.
Product providers will be unable to afford to run these products long term on a 1 per cent annual management charge. If the best managers are not going to enter the market, people will be restricted to having their funds managed by banks and life companies. If the Treasury backs these products, they will be encouraging investors to place their capital in passive funds. In the current climate, a passive fund is not the best investment.
Michael Both, Proprietor,Michael Philips
Darius McDermott,Managing director, Chelsea Financial Services Anna Bowes, Savings and investment manager,Chase de Vere