IN FOR A PENNY, IN FOR A POUND
Cash ISAs are no longer the popular choice, so how should we invest our hard-earned money?
For millions of households, straightforward saving via Cash Individual Savings Accounts has been the compelling choice to build a nest egg. They are easy to understand and are tax-sheltered (though not tax-free).
Signing up and checking out could hardly be more simple. But for managers of ISA funds, that is proving to be their Achilles heel. As interest rates have remained ultra-low – and indeed on many ISA funds they have been further reduced – investors have been voting with their feet and cashing out.
Cash ISAs are no longer hoovering up everything in front of them. In fact, not only are the numbers of investors in Cash ISAs falling, but there is now a backlog of applications to withdraw. That leaves a problem: where else to store cash?
A similar dilemma faces investors limping out of the once hugely popular Neil Woodford Equity Income fund, struck down by such a rush to the exits that withdrawals were blocked for seven months. The exit price is well below that when the shutters came down last summer.
After such a scalding experience, there is an understandable reluctance to re-invest in other funds for fear of repetition. So what are the options for investors here? And for those thousands disenchanted with their Cash ISA returns but who do not want to expose themselves to high-risk equities?
Research by peer-to-peer lending platform Sourced Capital reveals the Cash ISA exodus is causing a backlog with the big bank lenders.
It was recently advised by HSBC that transfers were taking a while to process and were requesting no calls for updates due to the substantial backlog.
This trend has been evident for some time. Such are the minuscule rates now on offer it is a wonder that they bother with the term ‘deposit accounts’ at all, looking at the infinitesimal rates now being applied.
Santander announced that it was cutting the rate on its popular Santander123 current account from 1.5% to just 1% from 5 May.
Magnifying glasses at the ready: in February the giant NatWest lowered the interest rate on its Instant Saver Account from 0.2% to 0.1% for balances up to £25,000. Clydesdale Bank has dropped the rate on its fixed-rate cash ISA by 0.14 percentage points to 1.26%. Sainsburys Bank has cut the rates on its various savings accounts by up to 1.54 percentage points while Barclays had cut the interest rate on its Cash ISA to 0.06%. Lloyds Bank has already lowered the interest rate for its Easy Saver customers from 0.2% to 0.1%, while First Direct followed suit with a rate cut from 0.15% to 0.1%.
Around £660 billion is held in easy-access accounts, equivalent to some 80% of all cash savings, but little wonder that the cash ISA bubble has burst. Since 2008 the number of accounts subscribed to a Cash ISA has declined every year except one, with the total number down by more than 36%. The number of such accounts has fallen from 12.2 million from 2008 to 2009, to 7.8 million from 2017 to 2018.
HSBC’s managing director Stephen Moss says that ‘a prolonged period of extremely low-interest rates has been great for some and has helped stimulate borrowing and spending activity, most notably across the UK property and mortgage sectors.
‘However, it hasn’t been great for those attempting to accumulate a sizeable savings pot with the return on their hard-earned cash remaining really rather
poor. It comes as no surprise then that the declining health of the Cash ISA seen in recent years has now progressed to an almost fatal level as more and more investors remove their cash and look elsewhere for a more favourable return.’
But where might cautious investors look for alternative investment funds that can offer a better return? Even if longterm returns look attractive, no equity fund can offer 100% capital protection from the vagaries of markets. But there are several which merit consideration.
One such as the Edinburghbased Personal Assets Trust, a notably defensive investment trust that has made capital protection a priority. Core holdings in its £1.2 billion portfolio are gold, near cash (55% in global indexlinked bonds and money market instruments), blue-chip defensive consumer stocks such as Unilever and Nestle, and 10% in commodity and energy linked investments. This defensive trust tends to underperform when markets are buoyant but holds more of its value in downturns. Over the five years to February, its shares have gained 32%, against a 42% gain by its benchmark. But annualised volatility is markedly low.
Interactive Investor head of research Dzmitry Lipski highlights the £1.2 billion Vanguard FTSE UK Equity Income Index fund
– the only passive member of the Investment Association UK Equity Income sector – as an option for those who are now less than enamoured with active management.
‘The experiences of trapped investors of the Woodford Equity Income fund could sour appetite for actively managed funds in favour of passive solutions,’ he says. ‘Whilst we think the case for good quality active managers
“The declining health of the Cash ISA has reached an almost fatal level
remains strong, there’s a place for good passive options too. And it is certainly a better option than taking fright from fund managers altogether.’ Ongoing charges are just 0.14%.
Popular website TrustNet features the £2.3 billion Allianz Gilt Yield fund recommended by Andy Parsons, head of the Share Centre’s head of investments. It aims to outperform the FTSE Actuaries UK Conventional Gilts All Stocks benchmark
‘in a relatively consistent and incremental manner without taking significant relative risk’.
Parsons says that ‘Investing in gilts is perceived to be more of a defensive portfolio investment and traditionally has offered attractive income yields with moderate potential for some capital growth. However, unusual economic conditions since the financial crisis have led to record low-interest rates and low yields on government bonds.
‘Despite this, investors are still attracted to gilts due to the perceived safety in comparison to other assets.’ It has made a return of 14.10% over the past three years to mid-December, outperforming the FTSE Actuaries UK Conventional Gilts All Stocks (12.16%). It has a yield of 1% and an ongoing charges figure is 0.55%.
Another cautious fund featured by TrustNet is the £6.3 billion BNY Mellon Real Return fund picked out by Adrian Lowcock, head of personal investing at Willis Owen. The managers’ first priority is capital protection and they seek to deliver 4% above cash per annum over the longer term. Over the past three years to mid-December the absolute return fund has returned 14.8%.
Other funds to feature in the cautious category include BNY Mellon Sustainable Global Equity Income and the Royal London Short Duration Global High Yield Bond. As with all investment choices, diversification and spread of risk are key.