Why are ISA sales so strong this year and what are the implications for investors?

1st Apr '10 by Edward Croft

5 comments 2105 reads

According to the IMA, retail sales for stocks & shares ISAs are the strongest for 8 years.

http://www.investmentuk.org/press/2010/stats/stats0310.asp

Net retail sales of £1.9 billion - the highest ever February, following the highest ever January
Funds under management at £484.7 billion reach an all time high
ISA sales the highest February since 2002 - a strong start to the ISA season
£ Strategic Bond the best selling IMA Sector in February

We've been pondering the reasons for this and have come up with a few ideas...

Tax shelters seem attractive given the likelihood of tax increases post election
Financial insecurity means there's a shift away from credit fuelled consumption toward savings
Indexation of the ISA allowance means ISAs have been in the news
Increase in the allowance for over 65s
The big rally in the market over the last 12 months has highlighted the value in the stock market

Of course the best investors buy at the bottom and don't get drawn into rallies... so is this ISA rally a contrarian indicator? Are private investors being lured in at the wrong time?

Anyone here have any thoughts...

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djpreston

1st Apr '10

Ah, its always interesting to note the fund flows and then short or avoid the popular choices.

Remember Technology/property funds seeing tremendous inflows right before the bubbles burst? The IFAs need a theme to tap into to drive their sales and the tremendous run in bonds over the past year ha sprovided just that option this time around.

So this time around its Strategic Bonds. Easy sell (for the IFAs) - "Yes, Mrs Bloggs, you can get 3 times your cash account income, tax free, from these low risk assets - just look at how you would have done in the past twelve months!"

At least this time they are pushing strategic bond funds, which give some flexibility as to where the FM invests. If it was plain Corporate bond funds or gilt funds then I would be extremely worried. Higher yield funds still seem to offer some real potential for the investor but you arent going to see the returns of the last twelve months and gilts? Well Im a massive skeptic on those for the usual reasons - issuance/inflationary worries over the medium term/higher interest rates as they revert to more "normal" levels. Overseas bonds could be better due to Sterling devaluation.

Returning to the OP, why have fund flows increased?

As youve said Ed, greater propensity to save, risk appetite improved (but not enough to make investors focus on equities just yet), tax shelters, low interest rates on cash....

D

rick

All points (1-5) are valid but secondary IMO. I think the main reason behind the money inflow is very simple..

The extremely low rates on cash are driving money into risk markets (check out the rates at moneysupermarket.com) the best of the bunch only keep pace with inflation. Bonds and now stocks increasingly look the place to be even for the risk averse.

Clearly the money inflows are a very convinient/tempting time for city money to cash out.. but keep your eyes on the April US reporting season, this may yet kick off a further run up in stock prices, all in time to sell in May and go away!

Rick

Rick, not going to disagree re the potential for markets to go higher from here at all. Valuations look quite reasonable to be honest and the cost cutting that's gone on should ensure growth ib profits even if growth is anaemic.

The main driver is the huge pile of cash still sat on the sidelines.

What does worry me somewhat is that most people are talking the same plan when it comes to uk investors - strong market position, good cashflows and overseas earnings (sterling a worry). I hate being part of a crowd but find it hard to argue with that. Mind you, I'm keeping a very close on on what's being dismissed as there's going to come a time when they're just too cheap.

Sometimes it is sensible to be part of the crowd (or at least be aware of where the stampede is headed - to take advantage), sometimes the crowd all head off the cliff together (tech stocks, REITS). Personally I think there is currently a wall of money headed back into the stock market. Whilst it may be a matter of 1-2 months before all the good news is in the price, I think a heavy stock weighting at this time is advisable. Just my current opinion, but I agree this is one from a short term trading perspective - a veiw point not for everyone!

Rick

snaj

4th Apr '10

In response to the author's first question, I think his 5 points are all valid and on the basis that 1 to 4 are at least as important as 5, then it is difficult t argue that the sales figures are forming a contrarian indicator for the market(s).

That is not to say that the answer to the second question is definitely 'no' as Darron has pointed out, the sector leader (Strategic Bond) is also one of the leading risk-adjusted winners over the past 12 months - so increased possibilty that it won't be for next 12 months but not conclusive that the sector will do absolutely badly either.

Investor need is paramount, and these funds still offer decent yields for those that need income and can put up with volatility in capital values.

S

Why are ISA sales so strong this year and what are the implications for investors?

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Edward Croft

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