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Stop single approach to boost Isas

All the signs are that this will be the worst Isa season on record. Estimates vary from a drop of 25 per cent to as high as 75 per cent from last year&#39s season. Given that last year was much lower than the one before, the picture just keeps getting blacker and blacker.

Although it is early days and much of the evidence is anecdotal, all the indicators are bad. Consumer spending is booming, and providers have already slashed their Isa advertising budgets.

What is the cause? The market downturn? Low interest rates? Or could it be that we as an industry have been doing something wrong?

The reasons for investing in an Isa are as valid today as they have always been. Have we, ourselves, been guilty of killing off the goose that laid the golden egg?

As an industry we have developed a schizophrenic approach to investment. On one side, fund supermarkets offer a wide range of funds to investors while actively pushing their own personal flavour of the month for marketing reasons. Some providers use high charges as barriers to switching between funds.

The technology boom is a more extreme example of the dangers of the single-fund promotion approach. By focusing on individual themes, we are encouraging investors to take risks they do not need or understand.

The plain truth is that investment decisions should be based on something more scientific than a fashion trend or, for that matter, a perceived ability to read the future.

When the bubble burst, as it did with technology, or fund performance hits a low, invest-ors are left confused and disillusioned and their faith in the whole system is shaken.

One IFA told me recently that investors now see Isas as “bad news”, a far cry from the easily accessible tax-efficient investment they once were.

When you think about it, the scenario is not all that surprising. Pep and then Isa sales levels were built on the back of a raging bull market where investors&#39 expectations were built up to levels that could not be maintained in the long term.

Many investors now find themselves holding a ragbag of past “flavours of the month” and a portfolio of holdings bearing no relationship to their investment objectives.

If we, as an industry, continue with this approach of plugging the past performance of single funds, we will end up killing off the Isa market.

There is no other conclusion than that we have to change the way we promote our offerings. Instead of pushing “hot favourites” on the basis of high performance,we should be helping the investor to understand the nature of risk and providing solutions that mean we can meet their expectations better.

Layton Blackham Financial Services marketing director Paul Fox said recently: “With the recent few years&#39 stockmarket performance, clients are looking for much more than just buying single funds.

“We as an industry are doing the investing public a disservice if we continue as we have in the past.

“We only have ourselves to blame if they throw the towel in. It has taken many years of hard work to switch the public on to investing in the markets and it would be a pity to throw it all away so unnecessarily.”

At Selestia, we have developed an approach to portfolio construction based on diversification, which provides clients with a more realistic and much less risky approach while still providing full market returns.

Using our system, we have looked the differing effect on returns of putting investments purely in the technology sector as opposed to a properly diversified portfolio.

The figures clearly demonstrate the risks of focusing on a single market or theme. Between March 1, 2000 and December 24, 2001 returns on the technology sector would have meant £7,000 invested purely in this sector would, on average, have fallen in value to just £2,156.

The results from the Selestia range of funds would have been completely different. The results varied across different risk profiles and ranged from £7,346 for the lowest risk to £5,340 for the highest risk.

Is it any wonder that the public would rather spend than invest again?


Gerald Gregory

Lives: On the edge of the Peak District in Derbyshire.Born: Buckinghamshire.Career: Graduated from Nottingham University in 1976 with a degree in economics and joined Lloyds and Scottish Financial to go on the road selling financial products. Took on a sales role at General Guarantee before moving to Girobank, later joining its Treasury department.Joined Britannia Building […]

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