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Assuming that the number of subscribers remains unchanged from previous levels, CoreData has estimated that the total market for cash ISAs will increase by 87.1% from £38.8 billion to £72.6 billion for the 2014/15 tax year. Meanwhile, inflows into stocks and shares ISAs are predicted to rise by 23.4% from £18.4 billion to £22.8 billion. The combined impact of these trends would see total ISA sales rise from £57.2 billion in the 2013/14 tax year to £95.4 billion this tax year, representing a phenomenal 66.7% increase.
Wrong choices?
Whether this expected surge of money into ISAs will be allocated to the areas most likely to deliver the growth or income that individuals crave is, however, a major concern. For many individuals, cash ISAs have become a default option, as evidenced by the fact that over three-quarters (78%) of ISA subscriptions in the 2013/14 tax year were to cash ISAs, even though interest rates were at an all-time low. With the amount of money that can now be held in a cash ISA almost triple the previous limit, the fear is that old habits will die hard and the opportunity to invest differently could be lost.
According to the BlackRock Investor Pulse Survey, people are more likely to respond to the recent ISA changes by holding even more cash, with nearly a third claiming that they intend to do so, compared with fewer than one in 10 who said they will increase their stock holdings. The report also demonstrates the extent to which UK savers have a high dependency on cash ISAs, with six in 10 of the people surveyed holding an ISA and nearly three-quarters holding all of their ISA wealth in cash. The report notes: “People with cash ISAs generally keep more of their total wealth in cash than the overall population. So while the ISA proves its worth as a gateway to savings, people are not using their ISA as a gateway to investing.”
This reluctance to consider the merits of stocks and shares ISAs is particularly disappointing in view of the fact that the average cash ISA rate has fallen even further over the last year, from 1.63% to just 1.46%. This is reflective of the lack of competition within the cash ISA market. Providers simply have no real need to secure savers’ funds as an ongoing consequence of the Funding for Lending Scheme.
The value of stocks and shares ISAs Demonstrating the higher returns consistently delivered by ISA funds could ultimately be key to improving the uptake of stocks and shares ISAs. Indeed, HMRC cites the strong equity performance in 2013 as one of the main reasons why an increasing number of savers chose a stocks and shares ISA rather than cash in the 2013/14 tax year.
Graph 1 shows the performance of the average stocks and shares ISA fund in each tax year since ISAs were introduced, and highlights the extent to which individuals choosing this option have been rewarded. As
Graph 1: Average stocks and shares ISA fund performance (% growth) by tax year
Source: Lipper Investment Management.
things stand, 2014/15 is on course to be the third consecutive tax year in which the average stocks and shares ISA fund has delivered positive growth. The average ISA fund has grown by 7.4% so far this tax year, following on from even stronger gains of 13.8% in 2012/13 and 9.4% in 2013/14. It is also worth noting that, despite considerable market volatility and uncertainty, 975 out of the 1,075 ISA funds surveyed (90.7%) have enjoyed growth during the current tax year. In terms of Investment Association sectors, the standout ISA performers over the last year have been North America (18.9%), Technology & Telecoms (18.9%), Japan (17.3%), China/Greater China (16.8%) and Property (15.2%).
While these figures are encouraging, the case for stocks and shares ISAs becomes even stronger when you consider some of the other findings from our latest ISA survey:
• The average stocks and shares ISA has posted positive growth in 10 of the 16 tax years since the introduction of ISAs in 1999.
• The average stocks and shares ISA fund has now grown by 174% in almost 16 years since the introduction of ISAs.
• Only three funds out of 458 stocks and shares ISA funds that have been available since ISAs were launched five funds have achieved double-digit growth.
Fragile investor confidence Although the FTSE 100 and other global indices have recently recorded all-time highs, investor confidence remains fragile, something that could hamper the flow of money into stocks and shares ISAs during this ISA season. The degree of hesitancy being displayed by investors is shown by the latest Association of Investment Companies (AIC) investor confidence research, which found that the number of investors preparing to invest in the stock market over the next few
months is seven percentage points down on the same period last year. According to the survey, the three biggest worries among investors this year are a Eurozone crisis, a stock market correction and the UK election.
“Investors should take a long-term view when making any investment decision,” says Tony Mudd, Divisional Director, Development and Technical Consultancy, at St. James’s Place. “We have seen markets quickly shrug off doubts about Greek debt, the Eurozone and China’s seemingly slowing economy. The old adage that it’s not about timing the market but time in the market rings true today. Investors in a broadly-diversified well-managed portfolio should not be afraid to invest now.”
As to where investors will be looking to invest, the AIC research suggests that UK, North America, Europe and Asia Pacific will be the preferred regions of choice. “With markets at their current levels, we feel that many individuals are likely to be attracted to place their allowance into areas that have performed well over the last few years, namely developed equity markets and commercial property,” adds Frazer Wilson.
Indeed, property funds, the second most popular Investment Association sector among all investors last year and the fifth most popular choice among just ISA investors, are expected to feature prominently within stocks and shares ISAs in the coming months. “Investors within the commercial property sector have seen strong returns over the last year and undoubtedly this will encourage further investment within the 2015/16 tax year,” says Frazer Wilson. “However, clients tend to have long memories and will recall the falls experienced after 2008, so there will still be many who are wary of this asset class. Historically, property has been a useful investment to add diversification to a portfolio, and as long as a sensible return is expected (rather than the 10% plus returns this year), then this asset class will remain attractive.”
March 2015 Investment Life & Pensions Moneyfacts ® 17
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