The Financial Times’s weekend features have been dominated by a series of articles about “tax-friendly savings”, including a goodly number about ISAs – which, says the FT, are finding new favour among higher earners trying to make up for the ridiculously reduced lifetime savings allowances for pensions.
But it’s not all been straightforward, as Kate Beioley points out. In particular, the government’s hopes that its new “innovative finance ISA” idea would sweep the board have been somewhat stymied by the slow start for Peer to Peer instruments, which were once held out as the great white hope of the new flexi-vehicles.
Yes, it’s true that not a single P2P provider was offering an IF Isa instrument when the new option came into force in April 2016. And just 2,000 IF Isa accounts were opened during the 2016/17 tax year, bringing in a piffling £17 million of new money subscriptions. But now that there are thirty P2P platforms offering ISA options, you’d expect that the new vehicles would be doing more business?
You’d be wrong. There’s been huge demand from investors for P2P ISAs, some of which promise returns of anything between 5% and 15% (depending on risk). But, says the FT, the demand from borrowers has failed to keep pace, with the result that many or most P2P issuers have been unable to find enough investments – meaning that ISA offers have been significantly reduced and have even dried up in some areas.
There are more issues in the pipeline. Because Zopa, Ratesetter and the rest have been extending the risk range of their loans, the default rates have been creeping up. And that has dented the returns available to ISA investors – not by vast amounts, says the FT, but still sufficiently to force the lenders to raise their expectations of future defaults. Zopa, for example, says that 3.19% of its 2016 loan book has gone bad, and that its original forecast of 4.19% defaults for the year has been scaled up to 4.93%.
This is not to say that things are going worse than expected – rather, that the extension into higher-risk loans has impacted the overall return picture, and that lenders have been scaling back their risk portfolios accordingly. By the 2017 lending year, says Zopa, things were starting to normalise. Long may it last.
Money Mail has been reviewing the lessons learned from Warren Buffett’s ten-year bet with a major hedge fund supplier, in which he effectively bet a million dollars that a passive tracker fund would outperform a typically aggressive clutch of funds-of-hedge-funds over a decade-long period starting at Christmas 2007.
Buffett’s latest letter to shareholders tells the whole story. He originally agreed with Protégé Partners, which took the other side of the gamble, to fund a $1 million prize that would go to a charity pf the victor’s choosing. Accordingly, they each bought $318,500 worth of zero-coupon US Treasury bonds, which they knew would be worth a cast-iron $500,000 at the end of the bet. And battle commenced.
The Mail doesn’t make it entirely clear whether the hedge fund gambit would have paid off if it hadn’t been for all the stacked-up management costs that conspired to drive it out of the water. It does, however, make it clear that the hedge funds were at perfect liberty to change their portfolios at short notice, whereas his preferred tracker was locked into its predetermined course of action.
The results, though, seemed clear. Buffet’s S&P 500 tracker made a final gain of 125.8%, compared with just 87.7% for even the best of the fund-of-funds (and allegedly barely half for the other four). Either way, Buffett had parlayed the original $1 million bond bet up to around $2.22 million by switching his own bond stake out of the pathetic 0.88% yield that they were expecting by November 2012, and by cashing the money into a stake in his own Berkshire Hathaway shares. The end result being a double victory for the Sage of Omaha. And a $2,222,279 gift for chosen charity. Nice one.
Yet again this weekend, the Sunday Times Money section leads with a report on another adviser in the spotlight because of the nature of the advice given in respect of transferring pension schemes. In what the article’s title describes as “Phoenix firm burnt through my savings”, it proceeds to examine the case of two individuals who had taken professional advice about their defined benefits pension schemes and were advised to transfer to a SIPP. Consequently, they suffered losses partly by investing in unregulated funds – namely the Premier New Earth Recycling Solutions fund, which The Times reminds us, collapsed in 2016 leaving investors with nothing. However, the hub of the article isn’t just about the nature of the advice given to transfer. Mainly, it focuses on the adviser in question (Terence Brimble of Knightsbridge Financial Management) then liquidating the business, setting up another business by the name of Knightsbridge Personal and Corporate Solutions. This meant that former clients could not seek redress yet he is still in practice. The FSCS did make compensation payments at the maximum allowed, but this was not enough to restore the individuals to their former positions. The article includes comment from Baroness Altmann who suggests that those who give bad advice should be struck off.
For what it’s worth, we think that it is a shame that articles like this, which give such high profile to examples of bad practice, may well impact negatively on consumer confidence about the value of advice. Never has the need for professional advice been greater, yet examples like this are likely to deter many people from seeking the very advice which they need to help them map out the most appropriate retirement solutions from what has become an increasingly complex range of options. The vast majority of advisers operate ethically and put clients’ needs first. It’s a shame that the small minority who don’t operate this way, end up getting so much coverage in the media. Rant over!
Inflation is at the centre of Ian Cowie’s Personal Account column which is always very readable. This week, Cowie reports on research from M&G, which was released to coincide with the fact that the Darwin Tenner has now ceased to become legal tender. It reviews how inflation has dented the value of the tenner since it first appeared in November 2000, which would now have the purchasing power of just £6.17 due to inflation. Ouch! Rather poetically, Cowie describes inflation as “the silent thief that robs savers whether they notice or not”. How true that is. The M&G research points out that tenners kept in bank or building societies would be worth just £7.27 whilst a tenner invested in the FTSE All Share Index would be worth £14.90. Cowie goes on to remind readers of the value of doing their research and investing in pooled funds to get diversification and minimise the “insidious effects of inflation”. He also highlights research done for the Sunday Times by FundCalibre, to look at which funds have most consistently outperformed their sectors over the past five years. The list produces names such as Morgan Stanley, River and Mercantile, Baillie Gifford, Unicorn, Man GLG, Old Mutual and others – most of which as Cowie explains – with the exception of Baillie Gifford and Old Mutual, are hardly household names.
Given the paltry returns on cash deposits, Sally Hamilton in the Financial Mail on Sunday is trying to encourage readers to consider investing surplus cash that they won’t need to call on for some time (after keeping a prudent amount for emergencies etc) in order to obtain better returns. She highlights a series of tips from Ben Yearsley of Shore Financial Planning such as using collective funds rather than individual shares, doing your research, reducing risk, even saving into investments monthly. All good advice – but will people take action? Let’s hope so.
In its fund focus column, this week the MoS looks at the investment trust JP Morgan European Smaller Companies and its smaller investment fund clone JPM Europe Smaller Companies. They are managed by Francesco Conte who is assisted by Edward Greaves and Jim Campbell respectively.
The MoS points out that the two funds have impeccable performance records generating respective five-year returns of 166 per cent and 133 per cent. The trust’s record is better, it explains, because unlike the fund clone, it has been able to borrow cheap money and invest it profitably, thereby boosting shareholder returns further. While the two investment vehicles ostensibly invest in smaller companies across Europe, the ‘smaller’ label is a bit of a misnomer as Conte comments: “The companies we buy are anything up to a market capitalisation of €5.5 billion euros [£4.8 billion]. That means they are big enough to be global leaders but still small enough to grow and generate ever increasing profits.’
It rounds off by saying that Conte, an Italian by birth, was unfazed by last month’s market correction which saw some European small company stocks fall sharply in value. His view is that it is ‘normal and healthy’ for markets to correct. What excites him more than anything else is the beginning of the fourth industrial revolution – labelled ‘industry 4.0’. He believes the world is on the cusp of great change as automation and the exchange of data revolutionise industries.
Over at the Sunday Telegraph, Laura Suter reports on the subject matter of “closet tracker” funds. She highlights that investors will be paid £34m in compensation from asset managers that overcharged them for investment funds, while another asset manager is being pursued by the regulator.
This follows on from the FCA saying that a number of asset management companies had taken the move to compensate investors, after it investigated the widespread issue of “closet tracker” funds.
The article says that this is not an official redress scheme from the watchdog. These managers will also have to change their marketing material, and in the more serious cases of misleading investors they will have to notify existing investors. Of the 84 potential closet tracker funds the regulator looked at, it demanded changes to the marketing material on 64 funds, to “make it clearer to consumers how constrained they are,” said Megan Butler, of the FCA, who is quoted in the article. In it, she said the remaining 20 funds were already adequately describing how the money was managed.
The FCA flagged the issue of closet trackers in its review of the asset management industry last year and will reveal its final set of proposals by the end of this month.
Its initial recommendations included clearer figures on what investment funds will cost, asset managers passing on more cost efficiencies as funds grow in size, and making it easier for investors to switch between funds and different “share classes” of funds according to the Telegraph.
The other main topic covered by Sunday Telegraph Money is about “which will be the next company to cut its dividend: the warning signs you need to know”. With most advisers unlikely to be advising on individual shares, if this is something you’re interested in then we’d suggest you read the article.