All that glistens is not gold: investors should read between the advertising lines, writes Jean Eaglesham
HOW TO SAVE IT, HOW TO SPEND IT, HOW TO MAKE IT GROW
THE RITUAL springtime battle between investment companies for the hearts and the wallets of personal equity plan investors has now started in earnest. More than 100,000 people are expected to buy PEPs over the next couple of months.
Investors only have until the end of the tax year on 5 April to use their annual tax-free PEP allowances or lose them. That deadline is a gift to the advertisers of PEPs and competing investments. So is the fact that, this year, millions of Tax-Exempt Special Savings Accounts (Tessas) are coming to the end of their five-year term; the advertisers' hope is that at least some of these maturing savings can be recycled into other investments, such as corporate bond PEPs.
Savers should ensure that they are not overwhelmed by the resulting tidal wave of junk mail and advertising. While all adverts in the UK should be "legal, decent, honest and truthful", some investment adverts employ a degree of economy with the truth that would put many politicians to shame.
The key to not being taken in by such adverts, and to decoding the detailed product literature, is to remember that what is left out of an advert is sometimes more revealing than what is put in. This is particularly true when it comes to headline inducements based on an investment's past performance or low costs.
Typical marketing ploys that are currently being used in investment adverts include:
o Dubious claims about past performance. Adverts for the Abtrust corporate bond PEP, for example, sing the praises of the underlying fixed interest fund. Until recently the advert, headlined "9.5% Look No Further For Established Corporate Bond Performance", claimed that the fund has come top of its sector "for the past three, four and five years. While underlying capital has grown by 103%".
Not strictly true. Investors who withdrew income from the fund would, in fact, have seen their capital grow by just 40 per cent over the past five years, not 103 per cent, according to performance analysts, Micropal. The 103 per cent claim refers to growth if income had been reinvested throughout that period, an important distinction, not least for a fund which is aimed at people seeking income now.
An Abtrust spokesman conceded that "the text could have been ambiguous". He pointed out that the wording has now been altered to refer to the total return, rather than the growth in capital, although he said that Abtrust had "not been leaned on by the regulators".
o Potentially misleading comparisons with competitors. One of the oldest tricks in the advertising book is to use selective data about your competitors to show your product in an artificially flattering light. Take, for example, an advert for the Fidelity PEP, which tracks the performance of the FT- SE 100 index of leading UK shares. The advert stresses how cheap the PEP is. Headlined "I could choose any index PEP. But why pay more than I have to?", it boasts that the PEP offers "unbeatable value". To back up this claim, the advert includes a table which compares the Fidelity PEP's annual charge of just 0.5 per cent with the 0.75 to 1 per cent annual fee charged by the Gartmore, Virgin, Morgan Grenfell and Lloyds Bank tracker PEPs.
However, this table of "a selection of other tracking PEPs" omits the Legal & General PEP. This not only has the same (low) annual charge as the Fidelity fund but has other lower costs, and the 0.5 per cent annual charge is waived for a year if investors also take out a Legal & General PEP in the 1996/7 tax year.
A Fidelity spokesman defended the omission of the Legal & General PEP on the grounds that "the premise of advertising is to promote one's products. If L&G want to run a similar table that doesn't include Fidelity's product, then I'd understand." Investors, however, might not realise that the information they are being given is incomplete.
o Not comparing like with like on total investment returns. A variation on the theme of selective comparisons is to compare the product with a different type of investment altogether. The millions of maturing Tessa accounts have prompted a spate of adverts comparing the income or returns from unit and investment trusts (where there is some risk to your capital) with building society accounts (where there is no such risk).
An advert for the Scottish American investment trust (Saints) PEP, for example, states that: "typically pounds 1,000 invested in a building society in 1991 would now be worth pounds l,357, but a similar investment in a New Saints PEP would have grown to over pounds 2,000".
True, but the Saints trust is in fact ranked 16th out of 17 trusts in its investment trust sector for five and ten-year performance. Taking the same example used in the advert of pounds 1,000 invested five years ago with tax-free income reinvested, the top-ranked investment trust in the Saints PEP sector would have grown to more than pounds 3,600, against the Saints trust's pounds 2,000.
o Not comparing like with like on income. A pinch of salt should also be taken when
reading ads comparing yields on corporate bond PEPs with building society savings rates.
Allied Dunbar includes in one of its bond PEP adverts a table headlined "See How Our Rates Compare" which shows the 7.43 per cent income on its corporate bond PEP alongside the 4.45 to 4.7 per cent rates on Nationwide Woolwich and Halifax savings accounts.
All well and good. But corporate bond PEPs, unlike building society accounts, involve a risk to capital.
So advertising the income difference without highlighting the difference in risk is a classic case of telling just one side of the investment story.
In addition, why does not Allied Dunbar compare its PEP with Tessa rates? Because, with Tessas typically quoting rates of 7 per cent or more, the comparison would not be nearly so favourable.
o Creative use of the English language. Always be wary of hyperbole; if it is accompanied by exclamation marks, then be extra cautious.
General Accident, for example, is running an advert headlined "62.9% After Tax! Past Performance. The Guaranteed Investment Bond".
In fact, as the advert goes on to explain, "the Guaranteed Fund is a completely new fund so we cannot show actual past performance.
"However, we can show what this fund could have achieved if it had been available five years ago".
This hypothetical five-year performance may sound impressive - "a pounds 10,000 investment would have been worth a staggering pounds 16,295".
But is this really staggering? Take a typical unit trust. While the returns are not guaranteed, they are on average much higher than the GA fund and pounds 10,000 invested in an income-oriented UK unit trust five years ago would, on average, now be worth pounds 18,436, after basic rate income tax.
Put the unit trust in a tax-free PEP wrapper (not an option with the GA fund) and the returns would be even higher.
o Jean Eaglesham works for 'Investors Chronicle'.Reuse content