InvestmentsFeb 26 2015

Coming of age at sweet 16

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

It is that time of year again. Tax returns have been completed and submitted. Thoughts are now turning to using what remains of our tax allowances and, in particular, where to invest this year’s Isa.

The beginning of 2014 was a bit of a no-brainer. We were coming off the back of a stronger-than-expected economic recovery, with inflation below 2 per cent and unemployment approaching 7 per cent. There was even talk of interest rate rises before the year was out. The FTSE 100 had also had a strong run, finishing 2013 up 18 per cent. UK equities were bound to be popular.

And indeed they were. The swing from bonds to equities continued apace with clients, and the three best-selling Isa sectors at one firm were all UK shares (see table below). Property was also popular among income investors, although the resulting asset flows caused headaches for fund managers as they looked to acquire new properties. Also the strong price uplift in commercial property meant that yields had fallen quite a bit.

However, in the end, 2014 turned out to be not such a great year for UK equities, with the FTSE 100 index up less than 1 per cent. This was mainly due to the large proportion of natural resources stocks within the index and the impact of a plummeting oil price. Mid-caps did slightly better, up 3.6 per cent. The Investment Association’s North American sector average showed that US funds had continued their remarkable run – posting a 17.76 per cent return. Asian and emerging market equities were (and still are) very much out of favour, despite the efforts of many IFAs to get clients to increase their exposure.

On the wealth management and discretionary side of things, the latest Pridham report shows that, in terms of net sales, BlackRock topped the charts as low-cost passives gained in popularity. That was despite their largest tracker making an appearance in a recent report of consistently poor-performing funds.

Meanwhile, a second-place showing for Woodford Investment Management, underlines that Neil Woodford’s support has is still strong, assisted by the strong outperformance of Woodford Equity Income. Henderson secured third spot, while Artemis and Royal London also did well when it came to equity income fund sales.

Now 2015 has arrived, and interest rates remain at record lows, with no sign of a rise. Indeed, in the last report, the Bank of England suggested they were in no rush, and any rises could be small and over a number of years. The result has been that UK 10-year gilts have fallen to record lows of less than 1.4 per cent. Twenty and 30-year gilts are also at record lows at 1.9 per cent and 2.1 per cent respectively. I am still no fan of bonds, although they have held up surprisingly well in the past couple of years.

Deflation is an issue in Europe and a temporary concern in the UK, while growth has also slowed. The UK market has had a more volatile start to the year, with surprise moves from the likes of the Swiss and the European Central Bank, and the upcoming UK election starting to raise its ugly head.

All the major political parties have agreed that the deficit needs to be cut, so while it is unlikely there will be any shocks in the Budget next month – George Osborne is unlikely to want to upset the general public so close to voting day – experience tells us that tax rises are likely within the first 12 months of a newly elected government. There is also the very real possibility of a referendum on our membership of the European Union. This could cause further volatility down the line and sterling could take a hit, as we saw with the Scottish referendum.

So far this year there has been a bit of a change in sentiment to reflect these issues. UK equities are still favoured to some extent, but global equities and targeted absolute return funds have both seen a change for the better. Funds which should do well in a low-growth environment and income producing-options are, for now, top of the list, and I do not see this changing dramatically.

Woodford Investment Management’s Neil Woodford hit the headlines recently when he announced he will be launching the Woodford Patient Capital Trust – an investment trust investing in unquoted and early-stage businesses, which are his passion. This launch has been on the cards since day one of his new venture and his excitement is palpable. He is targeting 10 per cent annual returns over the long term – a figure that will be attractive to many.

WIM is looking to raise £200m, so it is not being greedy, and Neil himself will have true skin in the game – the trust will have no annual management charge, and instead he will receive a performance fee in the form of shares invested back into the trust. The offer looks, however, that it will occur in next year’s Isa season. We all await the full prospectus, due mid-April, but it is likely to reach capacity and go to a premium straight after launch.

One of the big differences between this Isa season and last, however, has less to do with new fund launches and more to do with the chancellor, who has at last looked to improve the lot of savers. A host of new rules have been introduced to benefit those who are more prudent with their money. Some of these changes have already been made, while others will come into play on 7 April. Either way, as the Isa approaches sweet 16, it has certainly come of age. From a decent £7,000 back in 1999, an individual can now invest a significant £15,000 and have no tax to pay. Isas can also now be passed on to a spouse or civil partner, tax-free when we die. Isa season now warrants some very serious discussion.

And let us not forget venture capital trusts. They had a good 2014, according to the Association of Investment Companies, with more than half yielding in excess of 5 per cent. Share price increases were good too. The generalist sector was up 10 per cent on average and even Aim-quoted VCTs were up 2 per cent while the Aim market itself was down in double digits. A benign economic environment, low interest rates, more private equity deals and some high-profile exits, have all contributed to VCT fortunes. Equally, 2015 is looking very similar and, for once, there are a number of very good VCTs open for further investments. Current offers include those from Albion, Downing, Foresight, Maven and Proven – all providers I rate highly.

So, no shortage of choice for would-be investors to consider in the coming weeks.

Darius McDermott is managing director of Chelsea Financial Services

Key Points

Last year, the swing from bonds to equities continued apace with clients

Deflation is an issue in Europe and a temporary concern in the UK

An individual can now invest a significant £15,000 and have no tax to pay.