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| Self-select
ISAs Making your mind up Helen Pridham considers the ISA options for those investors who want to make their own investment decisions ISAs nowadays are often thought of simply as tax-efficient wrappers for unit trusts and open ended investment companies (OEICs), because it is these fund managers who do most of the advertising of their ISA wares. But they can be much more than that. Many investors overlook the benefits of self-select ISAs, in which you can hold a wide variety of investments ranging from UK and overseas shares to exchange-traded funds and permanent interest-bearing shares (PIBS). These ISAs can give you full control over your investments and allow you to consolidate and tailor your plans to meet your individual requirements within a transparent charging structure. The most obvious group likely to benefit from self-select ISAs are those investors who like to choose their own shares. And with most investment experts agreeing that the outlook for the UK stock market this year is more positive than negative, helped along by continuing merger and acquisition activity, holding shares in an ISA where they will be free of capital gains tax makes sense, especially if you are an active investor. Keith Loudon, senior partner at stockbrokers Redmayne Bentley points out that “For frequent traders, there are potentially huge savings to be made by sheltering trading activity within an ISA. In addition to an upward trend in the market that we expect this year, we can foresee wide swings in share values during the year. This volatility is not a reason for concern but should be a real positive, giving investors tremendous opportunities for short-term trading wins, and within an ISA these gains are sheltered from capital gains tax.” If you have existing shareholdings, it is also worth considering transferring them into a self-select ISA. Although it is not normally permitted to switch shares directly into an ISA, many providers at this time of year offer ‘Bed and ISA’ arrangements, which means they will sell your shares and buy them back inside an ISA for you, but will only charge you for one of the deals. The only occasion when it is permitted to transfer shares direct into an ISA is when employees acquire shares through an employer’s ShareSave scheme, and the transfer must take place within 90 days of the shares being acquired. Self select ISAs are offered by a variety of providers from traditional stockbrokers such as Charles Stanley and Redmayne Bentley, to purely online brokers such as Squaregain. Financial advisers such as Hargreaves Lansdown and Alliance Trust Savings, a subsidiary of a major independently run investment trust, also offer them. Choosing between them will partly depend on how wide an investment choice you want. Although self-select ISAs are generally thought of as primarily a vehicle for those who want to invest in shares, they are also useful for investors who want to hold a combination of investment funds and shares. For fans of investment trusts, for example, Alliance Trust Savings ISA is a low-cost option with no annual management charge which gives access to all UK investment trusts as well as all other UK shares, gilts and bonds, although its choice of unit trusts is limited to 40 bond funds. Hargreaves Lansdown’s Vantage ISA offers a wide range of unit trusts, as well as shares and investment trusts. An alternative to traditional collective funds are exchange-traded funds (ETFs), which are becoming increasingly popular as their charges are typically lower than ordinary funds. Investors in Squaregain’s self-select ISA can purchase ETFs free of commission. Collective investment funds can help to reduce risk. Investors who stick to shares only will need to give greater consideration to achieving a diversified portfolio. Richard Hunter, head of UK equities at Hargreaves Lansdown, says: “It is always important to remember the old adage about not having all your eggs in one basket. Fortunately, the low dealing charges on many self-select ISAs mean that it is possible to have a spread of holdings even within a £7,000 plan. Holdings of £1,000 are quite feasible. You need to try and get a spread of sectors, so if you hold privatisation or demutualisation shares in one or two sectors, look for businesses operating in other areas. “ Don’t restrict yourself to the FTSE 100 – look at the FTSE 250 if you want more UK-oriented firms. And remember markets are moving a lot quicker nowadays, so don’t just buy and hold. Set a price target when you buy a share, and when that is achieved move on to another one. While diversification is a good thing, don’t try to spread your holdings too thinly. Monitoring 20 to 25 stocks will be almost impossible. If you have that many, you might as well buy a managed fund.” You need not necessarily restrict yourself to UK shares only in a self-select ISA. You can also hold foreign shares. Not all ISA providers will facilitate this, but many will, providing settlement is possible via Crest (the London Stock Exchange’s electronic settlement system, which is the case nowadays with many North American and European shares). However, dealing commissions are often higher for foreign shares. Ironically, although overseas shares are permitted, it is not possible, at present, to invest in shares quoted on the UK’s Alternative Investment Market (AIM) via a self-select ISA. Because they can hold all sorts of investments, one of the attractions of self-select ISAs is that they allow you to consolidate all your past ISAs and PEPs in one place. So they can help to reduce your paperwork and plan your portfolio strategy better. You can often transfer shareholdings and investment funds from previous ISAs into a self-select ISA ‘in specie’, so you won’t have to cash them all in, though there will normally be an administration charge for each stock transferred and there may also be a closing fee. Squaregain is currently offering to refund up to £100 of transfer fees to investors who open one of its self-select ISAs. However, it may not make sense to transfer unit trust holdings if your new provider is going to include them in the value of your portfolio when calculating your annual management charge. Some, such as Hargreaves Lansdown, will exclude them. Some providers set minimum investment levels for their self-select ISAs. At Barclays Stockbrokers, for example, it is £1,000. But normally, it is the costs which dictate practical minima. Investing a few hundred pounds is not likely to be very economic. There are three main sets of charges to take into account with self-select ISAs: 1 Dealing charges – Dealing charges usually vary according to whether the deal is conducted over the internet or the telephone. Minimum charges vary from £2.50 to £35. Online dealing is cheapest and may be carried out for a flat fee. If you are planning to trade actively, consider special deals for frequent traders. Barclays Stockbrokers, for example, charges only £7.50 if you deal online more than ten times in a quarter. With The Share Centre, a Trader option costs £20 a quarter, allowing you to deal at a flat rate of £7.50. 2Annual fees – Most providers make a percentage charge for the ISA wrapper subject to a minimum and a maximum fee. If you have a large portfolio consisting of several years worth of ISAs, you will normally get the cheapest deal from providers with flat fees or, if the investment choice is adequate for you, from Alliance Trust Savings which has no annual management charge at all. 3Exit costs – Check your exit strategy: if your provider is not up to scratch you may want to transfer elsewhere, so make sure you are aware of what this will cost. You will normally be charged between £10 and £15 per holding, plus an extra fee for closing the account, but some providers cap their exit charges. A further consideration to take into account when choosing which self-select ISA is best for you is your preferred method of dealing. Some, such as Stocktrade, offer a telephone service only; others provide the choice of dealing via either the internet or the phone. Charles Stanley and Redmayne Bentley run either telephone or branch-based accounts, or low-cost online dealing through their web-based services (Fastrade and RedM). Squaregain, unusually, charges the same for both internet and telephone dealing. Take a look at providers’ websites to see what services they offer. By their nature, self-select ISAs tend to be execution-only, so you will be left to make the investment decisions yourself. But providers will often offer access to helpful information and research via their websites. They may also provide guidance on basic investment techniques. TD Waterhouse, for example, has free advice in a ‘learn about investing’ section on its website which explains how to identify companies that are undervalued, by means of measures such as price/earnings ratios, ways of assessing profitability and the use of different trading tactics. Investors who open an ISA with TD Waterhouse will also have access to a research centre, which it provides in conjunction with investor information provider Hemscott. Some providers send out newsletters or are also prepared to discuss investments with clients. Keith Louden, of Redmayne Bentley, says “Most investors seek a helping hand and/or need to ‘bounce’ ideas off an experienced broker. In addition, they may have new cash accumulated through dividends and corporate actions. For example, many of our clients have just received cash from the takeover of O2 and require investments to find a good home for their cash. Our clients have the option to call a broker and discuss ideas and/or benefit from a range of regular communications with varying recommendations and other investment ideas.” If you want to be able to discuss your investments with someone, you may have to pay for an advice-based product, but The Share Centre makes no extra charge for access to its telephone-based advice team to discuss UK shares and investment trusts as well as a corporate actions team to deal with queries arising from such things as takeovers and mergers. But the main point of self-select ISAs is to allow you to back your own judgement and take responsibility for the failures as well as the successes. Good luck! Related Articles:
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sites in the group David John Crawshaw and Myles Antony Halley of KPMG LLP were appointed joint administrators of Charterhouse Communications Plc and Charterhouse Communications Group Ltd on 8 April 2008. |