The last-minute stampede into Individual Savings Accounts to catch tax reliefs for the year just ending is one of the more insane features of the personal finance market. It flouts considerations of investment timing and selection. It creates mistakes that are impossible to rectify. And – as this year’s experience has vividly shown – it can cost investors dear.
Consider someone cajoled into taking out an ISA in February “to beat the tax deadline”. The rushed investor would have been encouraged to commit up to £10,680 in a 2011-12 equity ISA with the FTSE 100 grazing the 6,000 level. Not only would this have been substantially above the average level for 2011-12 as a whole, but would have also set the investor up for an instant loss. Last Friday the FTSE 100 closed at 5,651.8 – a fall of 1.3 per cent on the week and 4.2 per cent down on the level in February. Add on initial charges and the hapless investor would now be down almost 9 per cent.
By putting the desperate lunge for a moderate tax shelter ahead of considerations of market level and timing can seriously damage investor wealth. But every year thousands are urged to charge, lemming-like over this cliff.
Bryan Johnston, divisional director at the stockbroker Brewin Dolphin, reminded us in a note last week that most savers leave it until the last minute to open an ISA, but it makes better financial sense to invest at the beginning of the tax year, not the end.
He wrote: “Early bird savers who invest in an ISA at the start of the tax year can be thousands of pounds better off in the long run because of compound effect – getting a return on the return from your original capital.”
The ISA limit for 2012-13 is £11,280, so an “early bird” can invest up to £940 a month. And not only does this investor get round the problem of mis-timing, but on most investment platforms the fund selection can also be changed later in the year if desired. For this year I have selected five investment trusts (see table) on my fund platform, with 20 per cent (£188 per month) going into each trust. So not only do I spread the timing risk across the year, but I also secure some geographic and sector diversification.
It is a defensive selection, offering a reasonable geographic spread, with income a key consideration. All the trusts are standing at a discount to net assets, thus giving exposure to a portfolio of investments greater than the nominal investment would buy. And all offer a dividend yield significantly higher than the FT All-Share Index – the average is 5 per cent against the All-Share average of 3.5 per cent.
One of the problems in focussing on dividend income is that you can quickly end up with many different trusts but each holding a similar portfolio of shares (Glaxo, Centrica, BAT, AstraZeneca, Aviva etc), so a range of separate trusts can offer little real diversification. I have thus gone for the Henderson Far East Trust and the Aberdeen Smaller Companies High Income Trust to offer a greater spread. The first investment is due at the end of the month, and I will report on performance later in the year.
A second look at Japan
There is one investment I would like to include but for hesitancy over timing. Heading my reserve list is Baillie Gifford Japan, having heard an outstanding presentation by manager Sarah Whitley at an investment seminar earlier this month.
“Japan” is so often automatically followed by the words “lost decade” or “lost two decades” that investors are reluctant to revisit a market which has incurred heavy losses over the years. It has also had more of its fair share of false dawns.
Against the instant brush-off as a debt-laden busted flush with an ageing population, Sarah reminded the audience that Japan is still the world’s third largest economy; the world’s second largest holder of foreign reserves; personal financial assets amount to some 250 per cent of GDP; its population continues to rise and it runs trade surpluses with Taiwan, China and Korea.
Against all the negatives there are positives: an economy engaged in reconstruction, recovery and reflation; GDP growth of 2.5 per cent and company earnings per share growth of 20.7 per cent, well above the global average.
Investors should not overlook the fact that there are successful companies in Japan, on ratings well below those of their peers in other countries. Japan, she concludes, “can offer a portfolio of growth companies, attractively priced”. Thus Baillie Gifford Japan heads my reserve list in any reshuffle later in 2012.