Secrets Of Success: It's time for your yearly ISA review
Saturday 17 March 2007
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.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Questions of Cash: Bupa costs bore no relation to what I'd been quoted
Problem gambling: Amid heavy advertising and a surge in remote sports betting, more and more 16 to 24-year-olds are now seen as 'at risk'
The HiFX guide to managing corporate foreign exchange and international payments
How to start your own internet business
Be warned of the dirty tricks the bailiffs pull
- 1 'Women should not laugh in public,' says Turkey's Deputy Prime Minister in morality speech
- 2 The secret report that helps Israel hide facts
- 3 Is Ebola coming to Britain? UK health officials issue warning to doctors as outbreak fears grow
- 4 Richard Dawkins says 'date rape is bad, stranger rape is worse' on Twitter
- 5 Danish TV reporter is all business up top, all party down below
The secret report that helps Israel hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Boozy, ignorant, intolerant, but very polite – Britain as others see us
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
- < Previous
- Next >
iJobs Money & Business
£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...
£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...
£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...
£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000