Money news, advice and predictions for savers and spenders. This week: should you buy shares?
By Jeremy Gates
Facing a recession as deep as any seen in the last half century, is it sensible to use the annual ISA (Individual Savings Accounts) allowance enabling us to invest up to £7,200 each in equities - usually funds rather than individual shares - for the financial year ending on April 5?
Despite turbulent stock markets over the past 18 months, many small investors still think it is - although 2008/9 won't match the £10.4bn invested in stocks and shares ISAs during 2007/8.
Income from corporate bonds is luring ISA investors this year. Wealth manager Hargreaves Lansdown (HL) says £210m has gone into its strategic bond fund, invested globally to promise an underlying yield of 6.9%, since its February launch.
ISAs are for longer term savers who don't want all their savings locked in pensions - which won't be accessible until the age of 55 from 2010.
With tax breaks, (capital gains are tax free, while dividends are taxed at 10%), equity ISA savings should grow faster than cash in normal times.
Malcolm Cuthbert, chairman of financial planners Killik and Co, says a couple investing their full ISA allowance (£14,400) over the next 25 years could have £720,000 safely inside a tax free wrapper at the end, based on annual growth of 5%.
I have just switched £3,600 from an account paying a measly 0.40% to a corporate bond ISA indicating a likely annual return of 6%-plus. It won't guarantee my capital, like the savings account, but I am taking a risk in search of decent income.
Andy Parsons, advice team manager at The Share Centre says with cash deposits virtually worthless, now could be a good time to make the most of the tax-free allowance to accept some risk and invest in the stock market.
"See-sawing markets have no doubt left some wary of investing in equities, so investors can try to minimise the risk by spreading money across a range of investments.
"With a diversified portfolio, returns from better performing investments can help to offset any which aren't performing well," says Parsons.
Geoff Tresman, chairman of Punter Southall Financial Management agrees.
"If you are looking to invest over the medium to long term, ie five years plus, and have a balanced attitude to investment risk, the UK Equity market offers significant opportunities."
Tresman says portfolios must be skilfully balanced in tough times and suggests 40% fixed interest, 35% UK shares, 20% global shares, 5% natural resources.
HL's Tom McPhail believes a strong case for ISAs - both cash and shares - is the probability of soaring tax bills in the next few years to meet huge Government deficits which ballooned in the rescue of the stricken banks.
"Investors really should use tax reliefs wherever they can," says McPhail.
For investors who can't be bothered to sift through more than 2,000 managed funds to choose an ISA, Hargreaves Lansdown offers multi-manager funds - strategic bond, fixed interest, cautious or balanced managed and others - each holding several funds selected by its research team.
McPhail says investors have different priorities. Somebody with a 20 year savings plan might try higher risk funds like Jupiter India or Allianz RCM BRIC, targeting the emerging economies of Brazil, Russia and China.
Seekers of short term security might try the HL Balanced Managed Fund, a defensive blend of shares, cash and bonds.
For pure income seekers, the new Enhanced Income Fund from fund manager Fidelity, promises an initial yield of 7.1%, with a target yield of 150-200% of the yield generated by the FTSE All Share Index.
Based on mainly blue-chip stocks with potential to increase dividends, the Fidelity fund uses the complex instrument of covered call options to boost returns. There's no initial charge on applications by April 5.
Many managers and advisors are cutting initial ISA charges, with 1.5% a standard annual fee. Alliance Trust, for instance, levies no set up charge or annual administration fee. Dealing charges on later investments cost £12.50 online, or £20 by phone.
The Scottish Investment Trust, founded 1887, offers ISAs through SIT Savings which makes no initial charge, with an annual charge of 0.6% capped at £30 plus VAT. Over the years, that boosts returns for steady savers.
Any equity ISA in current market conditions must be something of a risk.
Purely as suggestions, I gathered these ideas this week from specialist advisors in the sector:
:: Discount broker Chelsea Financial lists Artemis Income, yielding 6%, and Jupiter Income (5.80%) among core funds, along with Invesco Perpetual High Income, run by the celebrated Neil Woodford.
A discount broker, Chelsea Financial charges a minimal fee on dealings.
:: The Share Centre nominates Invesco Perpetual Corporate Bond Income Fund for low risk investors, with the Newton Higher Income Fund for medium risk and Allianz RCM BRIC Stars A - focussing on Brazil, Russia, India and China - as a high risk option.
As a single share ISA, The Share Centre likes Glaxo, trading at 1012p and yielding 5.4%. In its product pipeline are two new cancer treatments and 25 other new drugs.
As a high risk, The Share Centre tips Tullow Oil; the yield is less than 1%, so this is a bet on finding oil in unlikely places.
:: HL head of research Mark Dampier fears there is no 'cautious' equity ISA selection until markets and house prices stabilise on either side of the Atlantic. He fears UK shares will fall further, as earnings fall.
He thinks two highly volatile funds, JPM Natural Resources and Artemis UK Smaller Companies, could bounce from a revival in the commodities and mining sectors.
For the bold, he suggests investment companies in two out of favour sectors: Melchior Japan Investment Trust, picking up after reviewing investment policy in 2008, and Electra Private Equity, a £269m fund in a sector in turmoil. Electra's current share price around £7.40 might conceal real value, he says.
:: Mick Gilligan at Killik & Co has a 'buy' note on Jupiter Financial Opportunities, where manager Philip Gibbs positioned himself brilliantly ahead of last year's big plunge. Some 67% of his fund is still in cash.
:: Paul Penny at discount broker Financial Discounts Direct says the crisis has persuaded more investors to tighten up portfolios, enabling them to react faster in a crisis.
"You can't over-estimate the importance of dividends in this market," is Penny's mantra for the next 18 months.
He tips Invesco Perpetual Income and the Artemis Income Fund for income seekers. For those expecting a faster recovery in emerging markets, he tips the M&G Global Basics Fund, while BlackRock UK Absolute Alpha has shown derivatives can sustain performance in tough markets.
:: Angus Rigby, chief executive at broker TD Waterhouse, which lists 1,120 funds from 35 providers, says clients are taking a more diversified approach this year.
Their top three choices so far are BlackRock Gold & General followed by Invesco Perpetual High Income (Accumulation Units) and Gartmore China Opportunities.
:: Tony Aherne at discount broker Moneyspider.com, says he is worried by money pouring into corporate bonds.
"It is usually a bad sign when so much cash goes in one direction.
"I expect the US to sort things out first, so would go for US Opportunities funds by Martin Currie or Neptune.
"The US will then lead the Pacific rim out of recession, where I like First State Asia Pacific."
:: Information: Hargreaves Lansdown (0117 980 9950); www.Moneyspider.co.uk (01784 264 220); The Share Centre (0800 800 008); Financial Discounts Direct (0500 498 477); Alliance Trust (08000 326 323); Fidelity International (0800 358 7435); Scottish Investment Trust (0800 424 422); Chelsea Financial Services (0207 384 7300); TD Waterhouse (0845 607 6001); Invesco Perpetual High Income Fund (0800 085 8677); Killik & Co (0207 337 0520).
Association of Investment Companies free ISA factsheet available on 0800 085 8520 and www.theaic.co.uk.
Poundnotes
:: Only 14 out of 367 instant/easy access accounts pays a rate of 3% gross or more on balances of £5,000, says Sainsbury's Finance.
But Sainsbury's Internet Saver promises to pay at least 2% above Bank base rate for the first 12 months, and currently pays 3% on deposits of £5,000-upwards.
Meanwhile Cahoot, online arm of Abbey, has a two-year fixed rate bond paying a competitive 4.01% gross on minimum £30,000 deposits. Close Brothers new Premium Gold Fixed term promises a competitive 3.75% AER for three or four years on its fixed term deposit which is collecting funds between March 23 and 31.
Enquiries: Close Premium Gold (020 7392 1772); Sainsbury's Finance (0500 405 060).
:: The M&S Advantage Cash ISA, which has attracted a large number of savers since its launch in January, is among the top five easy Access ISA Accounts listed by finance website Moneysupermarket this week. It pays 3.10% on minimum £100 deposits until April 2010, then reverts to 2.10%.
M&S Money is part of HSBC, so the first £50,000 per customer of any cash savings is 100% guaranteed.
The Moneysupermarket top five Easy Access ISA accounts include Barclays Golden ISA (3.61%); NatWest Cash ISA Plus (3.51%); Abbey Reward ISA (3.50%); NatWest e-ISA (3.25%); and M&S Advantage Cash ISA (3.10%).
Meanwhile the Post Office Cash ISA offering 1.75%, guarantees never to be more than 1% below base rate on minimum £1 deposits.
M&S Money enquiries: 0808 002 2222 and www.marksandspencer.com/isa; Post Office enquiries: 0800 169 7500 and www.postoffice.co.uk/savings.
:: Hargreaves Lansdown pension specialist Laith Khalaf says workers managing their own pensions should grab the opportunity to top up pension pots for 2008/9 before the deadline of April 5: a £1,000 pension contribution attracts a £250 cash injection from the taxman, and higher rate taxpayers can claim up to a further £250 back through their tax return.
Even non-taxpayers (or spouses or parents on their behalf) can pay in £2,880 by April 5 each year and the taxman bumps this up to £3.600.
HL enquiries: 0117 980 9897.
:: Soaring energy prices added £4.3bn to household energy bills in 2008, says uSwitch.com, the price comparison service - and price cuts announced so far wipe only £650m off this, cutting the average annual household energy bill from £1,293 to £1,237.
Ann Robinson, uSwitch director of consumer policy says to cash-strapped consumers, the small reduction in prices seen so far seems like a drop in the ocean.
"While suppliers have cut prices by £56, consumers could actually cut energy bills by up to £350 just by switching. They should move to a dual fuel, pay by direct debit and sign up to an online plan to enjoy lower prices straightaway."
For customers on the standard plan, uSwitch says the cheapest deal for total energy bills is available from EDF Energy (£1,211 per year), followed by Scottish and Southern Energy (£1,259); British Gas (£1,328) and E.ON (£1,297).
:: High five savers:
Phone No Rate Account Period Deposit Interest paid
ICICI Bank UK www.icicibank.co.uk 4.10% HiSAVE Fixed Rate 24 Month Bond £1,000 OM
Halifax 0800 234 6065 4.10% (F) Web Saver Five Year Bond £500 Yly
Abbey 0800 234 6060 4.01% (F) Fixed Rate Savings Bond 01/04/11 £30,000 Yly
West Bromwich BS 0845 3300 622 3.50% High Income Over 65 90 Day (D) £5,000 Mly
FirstSave www.firstsave.co.uk 3.50% 90 Day Notice 90 Days £100 Yly
:: Top five borrowers:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.89% for term 80% £799 Yes
HSBC 0800 494 999 2.95% for term 60% £799 Yes
Hanley Economic BS 01782 255 000 3.14% for two years 80% £799 Yes
Market Harboro' BS 01858 412 250 3.49% for two years 75% £595 Yes
Co-Op Bank 0800 633 5286 3.64% to 31/03/12 75% £995 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
