2006 promises to be a good year for Isa product providers. New rules allowing tax breaks for property mean greater potential for greater portfolio diversification
The Inland Revenue delivered early on its New Year's resolutions this year. The introduction of the new Isa rules in time for this year's Isa season was a pleasant surprise for advisers and product providers alike. With Non-Ucits Retail Schemes (Nurs) and particularly commercial property now qualifying for tax advantages, the new rules widen the potential for diversification for the retail investor. How significant are these rule changes? And, after several lacklustre years, what impact are they likely to have on this year's Isa season?
As yet, it is the inclusion of property that is making headlines. Asset allocation specialists generally recommend an allocation of up to 15% in commercial property. None of the £82bn currently in Isas is allocated to commercial property, so it is easy to see why the providers of the few property funds on the market are rubbing their hands together.
Gary Shaughnessy, chief executive of M&G Securities, says: "This is definitely good news. Property was the only major asset class outside the rules. A key issue is diversification. This is a sensible thing for all investors. The new rules allow people to balance their portfolios."
Phil Wagstaff, managing director of UK sales and marketing at New Star, believes that the demand for property funds has been there for some time. He says that property has now firmly entered the investing mainstream. He is expecting good demand in this year's Isa season, adding: "Investors are returning to the market, but are particularly concerned with the downside risk. They are more worried about what they could lose than how much they will make. As a result they are looking for alternative assets."
Property could provide a robust alternative to fixed income funds this year. With the fixed income market looking highly valued, property provides a similar income stream with perhaps more potential for capital growth. The box-out shows the Investment Property Forum's predictions for commercial property returns in 2006. Wagstaff points out: "The commercial property market is generally more stable than the fixed interest market. Valuations are based on income streams already secured rather than supply and demand in the market."
The groups set to benefit, apart from New Star and M&G, include Standard Life, Aberdeen, Britannic, SWIP and Norwich Union. Property funds offer a variety of different approaches. The Aberdeen fund, for example, holds no direct property, only property shares. This gives it a different return profile to, say, the M&G fund, which is 100% invested in bricks and mortar.The first approach has the advantage of greater liquidity, but will be more correlated to the stockmarket than a bricks and mortar fund, which therefore offers greater diversification.
Groups with Nurs funds also stand to benefit. This includes many of the major multi-manager providers such as New Star with its new Cautious Managed fund, CSAM with its new Innovator funds and Cazenove. Tony Hogbin, head of product management at CSAM, believes that other providers will follow this lead now the Isa status has been confirmed: "For certain product types Nurs is extremely useful, particularly fund of funds. A number of providers have been delaying adoption of the new rule book. I can certainly see more products being launched on the back of the change."
Funds launched under the Nurs rules can make investments in offshore funds, hedge funds and other more sophisticated financial products including money market or loan note funds. Mark Harries says that such a facility enables him to bump up the yield on his new Cautious Managed fund at relatively low cost. He believes the structure enables a sensible approach to investing and risk management. Equally, funds like the Credit Suisse Incubator fund will now qualify. This invests in smaller funds, including offshore funds, and aims to uncover hidden gems among the fund manager universe.
Hogbin says: "The new rules aim to ensure that the UK market is competitive with that of Luxemburg or Dublin. The FSA has produced the regulatory framework for Nurs as a key retail investment structure. As the Isa is a key part of the Government's framework for savings, there is obvious value in linking the two."
So could these products liven up a dull Isa season? Probably. But product providers are expecting a better year in 2006 anyway. Shaughnessy says: "Inflows into unit trusts have been moving up through the year and we are expecting a reasonable Isa season. We expect it to be well-ahead of last year."
Groups that have had the foresight to launch these products may benefit from both an increase in wider demand for Isas and an interest in portfolio diversification. Either way, they give advisers more choice - or another decision to make - for this year's Isa season.
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