Secrets Of Success: It's time for your yearly ISA review

With only a few weeks to the traditional end-of-financial-year rush, this is a good time to reiterate some themes about the art of picking a fund for your individual savings account. The Government's recent decision to make the ISA regime permanent is helpful, although it still shows no sign of wanting to raise the upper limit from the £7,000 it has been stuck at for some time.

The first point to make is admittedly unhelpful; this is not the best time of year to make your ISA selection. Given the strong seasonality common in stock markets, you will normally obtain better results if you make your decision in October, when markets are entering their traditionally strongest six months.

But, human nature being what it is, large numbers of people don't seem able to get round to this decision without the help of a deadline, in this case the end of the tax year. The mighty sales machine of the funds industry is certainly primed to make its biggest effort around this time of the year, and advisers naturally tend to take their cue from that.

The second point is that, for those who value income, using an ISA wrapper to hold fixed income securities can make a real difference to your annual return. In today's markets, simply holding a gilt (government bond) in an ISA wrapper is not a dumb thing to do.

Mark Glowrey of Stockcube Research, which has launched an excellent free website devoted solely to UK bonds (www.fixedincomeinvestor.co.uk), points out that an investment that yields 5 per cent is worth 8.2 per cent to a higher-rate taxpayer if it is held within a tax-free wrapper.

In the current market environment, with a mildly inverted yield curve (long-term bonds yielding less than short-term ones), and most other assets looking quite richly priced, the short end of the gilt curve looks attractive. As ISA rules require a minimum five-year holding period for bonds, the Government's latest issue, Treasury 5.25 per cent maturing in June 2012, looks a good bet for those wanting income. (Only if you are worried that big inflationary pressures are building does that look risky.)

In this context, I can't help reiterating my con-cerns about the value of bond funds. It is bad enough that most equity funds fail to beat their benchmarks over periods of a few years, but the record of bond funds is worse. In the United States, hardly any bond funds beat their benchmarks; and in one recent survey of UK gilt funds, I noticed that not one of the 22 funds in the UK gilt sector managed to beat their comparable benchmark.

When you think about it, this is not really surprising. When gilts yield between 4 and 5 per cent, and the yield curve, while mildly inverted, is fairly flat, there is precious little that any manager of a gilt fund can do to add value. Yet, as most funds continue to charge an annual management fee of close to 1 per cent, taking 20 to 25 per cent of the potential return in fees is a huge potential drag on performance. At least with equity funds, you can cling to the notion that there could be large capital gains to offset the management fees, but with gilt funds there is no such compensation.

Nor, at current levels, is there much to be said for corporate or mixed bond funds, where not only do the same considerations apply, but, as the broking firm Collins Stewart pointed out this week, fund managers have recently been forced to take increasing risks with capital to sustain attractive-looking headline yields.

So the third point to make about ISAs is my by now traditional warning: beware of commission-driven advice, however well-intentioned. The FSA has finally started to talk tough about the distortions that sales commission can introduce into fund choice. Its Treating Customers Fairly initiative lays out six principles advisers should meet.

Yet many of these aims, as the fee-based advisory firm John Scott & Partners pointed out this week, sit uncomfortably with the way many IFAs operate. "The qualification hurdles to become a financial adviser are astonishingly low," it said. "The relevant examinations can be passed after relatively little study and no practical experience.

"Financial advisers rely heavily on inducements from product providers. Many larger 'independent' financial advisory companies are now partly or wholly owned by product providers. Product providers also provide financial support to advisers for marketing activities, annual conferences and even Christmas parties."

A fair point. There really is no mystery as to why so few advisers recommend gilts, investment trusts or exchange-traded funds (which pay no commission) in preference to open-ended funds (which do), or continue to press the case for investment bonds (which pay higher commissions still) over sensible lower-cost alternatives. Listen carefully to advice by all means - but don't act on it unless you are clear about the basis on which it is given.

The fourth point concerns rebalancing your portfolio. Most people who have money in ISAs typically contribute a lump sum or regular payments each year. This can build up into a sizeable sum. It then becomes just as important to keep the overall balance of this portfolio under review as it does to find the "best" fund for the current year.

Do you still have an appropriate balance between income and capital growth? Is the mix of equities and bonds sensible? Is there enough diversification? Are there any clear cases of extreme overvaluation? Just adding a new fund every year is highly unlikely to produce an optimal result, particularly if that new fund is simply the year's flavour of the moment. According to a recent study of the behaviour of investors in Vanguard's retirement plan, 80 per cent remarkably make no changes at all to their holdings as the years go by.

That is good in one sense, as constant tinkering is the surest way to disappointing results, but it may be taking sensible passivity to extremes. For those investing to build a pension, it makes no sense not to adjust your mix of assets as retirement nears. A once-a-year review of the shape of what you have should be added to your annual ISA checklist.

jd@independent-investor.com

Sport
The Pipes and Drums of The Scottish Regiments perform during the Opening Ceremony for the Glasgow 2014 Commonwealth Games at Celtic Park on July 23, 2014 in Glasgow, Scotland.
Commonwealth gamesThe actor encouraged the one billion viewers of the event to donate to the children's charity
Sport
Members of the Scotland deleagtion walk past during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
PROMOTED VIDEO
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
Life and Style
fashion Designs are part of feminist art project by a British student
News
Very tasty: Vladimir Putin dining alone, perhaps sensibly
news
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
News
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
News
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
books
News
i100
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    PMO Analyst - London - Banking - £350 - £400

    £350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

    Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

    £300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

    Insight Analyst – Permanent – Up to £40k – North London

    £35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

    Test Lead - London - Investment Banking

    £475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

    Day In a Page

    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
    Climate change threatens to make the antarctic fur seal extinct

    Take a good look while you can

    How climate change could wipe out this seal
    Should emergency hospital weddings be made easier for the terminally ill?

    Farewell, my lovely

    Should emergency hospital weddings be made easier?
    Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

    Crowdfunded novel nominated for Booker Prize

    Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
    Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

    Vladimir Putin employs a full-time food taster

    John Walsh salutes those brave souls who have, throughout history, put their knives on the line
    Tour de France effect brings Hollywood blockbusters to Yorkshire

    Tour de France effect brings Hollywood blockbusters to Yorkshire

    A $25m thriller starring Sam Worthington to be made in God's Own Country
    Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

    Will The Minerva Project change the face of higher learning?

    The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
    The 10 best pedicure products

    Feet treat: 10 best pedicure products

    Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
    Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

    Commonwealth Games 2014

    Great Scots! Planes and pipers welcome in Glasgow's Games
    Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

    Jack Pitt-Brooke

    Manchester City and Patrick Vieira make the right stand on racism
    How Terry Newton tragedy made iron men seek help to tackle their psychological demons

    How Newton tragedy made iron men seek help to tackle their psychological demons

    Over a hundred rugby league players have contacted clinic to deal with mental challenges of game