Alan Steel: Choosing shares over property can deliver money for nothing

ONE of the national Sunday papers has a feature in which celebrities discuss their financial affairs. In the last three years not one of them has said they invest in shares or tax-efficient equity individual savings accounts (Isas), preferring to invest in property over pensions.

Despite the last two years of falling property values, last weekend's celebrity was no exception. Why anyone in their right mind would ignore the merits of equity funds and pensions in these circumstances says much about who they listen to before making critical investment decisions.

The motto for the Royal Society – an academy of science founded in the 17th century – is "Nullius in verba". I was never very good at Latin at school, but I gather that it roughly translates as "Take no-one's word for it." That's good advice. For when it comes to investment, ideas and beliefs perpetuate without sound foundation or facts.

Experts constantly claim there's been a lost decade for equity investment and that only a handful of fund managers outperform an index. The FTSE 100 index is the one most commonly recognised by investors when tracking the performance of UK shares.

If you dig into performance statistics up to February, there were 185 UK equity unit trusts with a ten-year record. If you check the numbers you will find that 50 per cent of the managers beat the FTSE 100 index total return, including reinvested dividends, according to Money Management magazine.

There were also 60 UK equity income unit trusts with a ten-year record, 82 per cent of which beat the FTSE 100 index total return. That's some handful in my book.

The pick of the ten-year records belong to Anthony Bolton and Neil Woodford, who beat the FTSE index by 130 per cent.

But it is the continued blind belief that property is better than pensions that takes the biscuit. Apart from the explosion of easy-money mortgages, simple demographics was enough of a warning that an oversupply of property and a fall in demand would lead to sharp falls in property prices.

Last year, in late February, I reminded Scotsman readers that stock market levels had fallen so heavily that there were bargains galore to be had. It was a glorious opportunity to stick a few bob into a pension plan and invest in equity funds, especially for higher-rate taxpayers who can leverage returns considerably while there is still 40 per cent tax relief on offer.

At the time, a lot of funds, including those investing in commodities, emerging markets and small and mid-cap UK shares, were especially cheap on any historic basis. Many of these funds have more than doubled since the beginning of March last year.

Higher-rate taxpayers brave enough to invest a lump sum into a pension could today be sitting on a 230 per cent gain, thanks to a heady combination of tax relief, leverage and sharply rising stock markets.

A further increase of only 22 per cent would mean investors could remove their tax-free cash from their pension funds and then purchase with the balance of their funds an income for life, absolutely free of charge.

For example, last year a 10,000 investment, costing only 6,000 after tax relief, less than a couple of years from now will return the net outlay and additionally produce a gross guaranteed income for life of 900. And that, as Dire Straits remind us, is money for nothing.

• Alan Steel is chairman of Alan Steel Asset Management.