The New ISA: Embracing investment companies

A view from David Prosser, former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine.

Some investment commentators are calling it the super Isa – others prefer the term ‘new Isa’, or Nisa for short. But whatever name you want to give the generously increased individual savings account allowance, it represents a fantastic financial planning opportunity.

Since 1 July, savers have had the option of investing up to £15,000 through their Isas, a substantial hike from the previous limit of £11,880. Not that an Isa is an investment in its own right – rather, it’s a shelter in which you can hold a very wide range of assets in order to shelter any income and gains they produce from tax.

As part of the Isa reforms introduced this summer, the Government has abolished the distinction between cash Isas and stocks and shares Isas – the former used to have a lower limit. But while you can now opt to invest your full £15,000 Isa allowance in cash, why would you given that interest rates remain stuck at all-time lows?

Equities versus cash

For many investors, stock market assets will represent a more attractive option. And while that, in turn, begs the question of how you best get stock market exposure, it’s interesting to see how many financial advisers are now suggesting investment companies might be an excellent solution.

In part, that reflects the retail distribution review: these reforms, introduced at the beginning of last year, outlawed commission payments to advisers recommending investments. That levelled the playing field for investment companies, which have never been able to make such payments.

There is also a recognition, however, that investment companies offer attractive opportunities for large numbers of investors, even if their individual objectives differ.

Income-seeking investors, for example, have every reason to embrace the investment company sector, where there are 16 funds that have raised their dividends in every single one of the past 25 years. The funds with the most impressive record, City of London and Bankers, have so far clocked up 47 years of consecutive dividend increases.

The sector has an advantage, of course. Investment companies are entitled to retain income in good years in order to fund payments when their assets are not performing so strongly – that’s not an option for other types of fund. Indeed, under certain circumstances, investment companies can even pay income out of capital.

Buy and hold

Not everyone wants income, of course. But if you’re more motivated by long-term capital gains, the investment company sector represents a good option too. Studies repeatedly show that where investment companies go head to head with open-ended funds with similar investment mandates, they come out on top, particularly over the longer term.

In the most recent of these studies, published this week, Winterflood Investment Trusts looked at the performance of comparable investment companies and open-ended funds over five years to the end of May. Investment companies, on average, outperformed in 13 out of the 17 sub-sectors Winterflood examined.

There are several explanations for this. Investment companies have in the past generally featured lower charges. They also have the option of taking on borrowing, which can boost returns when markets are rising. Plus their managers have a fixed pool of assets to manage, rather than having to worry about the fund’s size continually changing as investors take money out or put money in.

All in all then, investment companies have a very strong pitch to make to investors now considering how to take advantage of their higher Isa allowance, whether they’re after tax-free income or capital gains. And if you don’t have the resources to take full advantage of the super Isa, don’t despair – the investment company pioneered regular savings schemes, which allow investors to drip-feed smaller sums into the funds each month.