Fool's Eye View

[ April 3, 2000 ]

ISAs: last chance saloon

By Christopher Spink (TMF Eagle)

Great Titchfield Street, London -- If you're anywhere near as disorganised as me you will be spending the next day or two deciding how best to invest in an ISA. The tax year ends on April 5th. That means applications have to be with most ISA providers by midnight on Wednesday evening. If you haven't already seen the Fool's Guide to ISAs, I urge you to go over and take a peek now.

There seems slightly less urgency than there was a few weeks ago. Before the Budget it seemed as if this would be the last year when £7,000 could have been placed in an ISA. The limit was due to drop to £5,000 for the next tax year. This is no longer the case because Gordon Brown has extended the £7,000 maximum ISA size for another year. If you are still undecided this should make you relax a little since you have £2,000 extra to play with next year. Therefore the rush need not be as intense.

However, it would be a pity to miss out on this year's allowance, particularly if you have more than £7,000 cash spare to hand. You will lose out on the opportunity of salting away that cash behind a tax-free shelter. That brings us onto the eternal question: where should you place this money? Which investments should you back?

No doubt you have seen a frenzy of adverts from Wise fund managers urging you to place your hard-earned money with Whizz-Bang's Growth fund or Sage-Stuffing's Income trust. You may have been wooed so much that you are on the verge of just getting shot of your blasted cheque and ensnaring it with such Wise guys.

But before falling into their clutches it's well worth reminding yourself why that would be a silly thing to do. Firstly such fund managers charge outrageous fees for looking after your investment, ranging from 1% to 5% per year, not including so called initial charges and little-mentioned exit expenses as well. And secondly nine out of ten have failed to match the market average over the past 25 years.

A cheaper and better alternative is of course that Foolish favourite the index tracker. This is not only cheaper, with charges commonly of less than 1%, but also it performs at or near the market average. Thus index trackers beat 90% of Wisely managed funds hand over fist. Easy! Anyone who has visited the Fool only a few times knows that. In fact, you might almost be saying: "So what? I know that already".

I think this simple point needs bringing out again. This is because index trackers also have other wonderful qualities. Perhaps one of the best things about them is that they are completely transparent and easily understandable.

You know what you're going to get and it is very simple to follow the performance of such a fund. Its sole purpose is to track a particular index, normally either the FTSE 100 or the FSTE All Share. These indices are widely published. Anybody can follow them and see how their investment is performing.

If you take out a Wise managed fund, how can you possibly tell what exactly is going to happen? You know with an index tracker that it will more or less keep in line with its chosen index, deviating very little from that line.

When you employ expensive active managers you've handing over complete control to an all too fallible human being. He, or she, or even a committee will take control and decide what to do with your money. You will be completely oblivious until you receive a heavily edited annual report, explaining the unfortunate circumstances why that fund failed to match the market benchmark, which remember is what 90% of them fail to do over the longer term.

OK, you might say, that has been said before, change the track, you're sounding like a stuck record. But this year more than ever before this mantra needs to be repeated and reinforced. Followers of the fortunes of financial services companies will be aware of the number of mergers and acquisitions that have beset the sector recently.

To name but a few, over the past year Scottish Widows has been bought by Lloyds TSB (LSE: LLOY), which in turn owns Hill Samuel Asset Management; the Royal Bank of Scotland (LSE: RBOS) has won the fight to acquire NatWest (LSE: NWB); insurance giant CGU (LSE: CGU) will merge with Norwich Union (LSE: NU.); Schroders (LSE: SDR) has merged part of its business with Citibank; Dresdner Kleinwort Benson will join up with Deutsche Morgan Grenfell; Halifax (LSE: HFX) has bought 60% of St James's Place (LSE: SJP), which owns J Rothschild Assurance; and only last week Gartmore, owned by Natwest, was bought by Nationwide Building Society.

Phew! What a shake-up! This also means that if you have a fund, or are thinking of taking out a fund, with any of these 16 Wise finance providers that there is going to be an almighty rationalisation of these businesses. The person who is currently managing your money may shortly be sacked in this shake-up and be replaced by his counterpart at the bank his employer has recently merged with.

In any case if you can follow this labyrinthine maze confidently, then you are perfectly competent to manage your money. Why not be truly Foolish, do your own research, ask questions on discussion boards and pick your own stocks within a self-select ISA? If you don't feel ready to do that, don't worry there's always next year. But instead of leaving it to the last minute, start researching for 2001 now. That's after you've sorted out your index tracker for 2000.

Please post feedback to the Fool's Eye View board.

Part 1: ISAs: last chance saloon
Part 2: Practical Steps to taking out an ISA

Related links
• Fool's Guide to ISAs
• Personal Finance piece on Index Trackers
• ISAs / PEPs discussion board
• The Ten Steps to Foolish Investing