Dan Neidle is the founder of Tax Policy Associates, a think tank established to improve British tax policy.
ISAs have been a huge success: about £70bn invested. The phrase “if it ain’t broke don’t fix it” comes to mind. But there are reports that Jeremy Hunt is considering creating a British ISA to encourage, or even force, savers to invest in UK companies.
People who manage British funds are, unsurprisingly, very much in favour of pushing more money into them. It’s unclear why the rest of us should be.
It’s conventional wisdom amongst economists and investment professionals that a significant challenge for investors is “home bias” – investing a higher percentage of your savings into the local market than is objectively justified. The FTSE makes up about four per cent of global stock market (by market cap).
It can be rational to allocate more than four per cent of your investments into the UK market (e.g. because of exchange rate risk). But the average British portfolio allocates 25 per cent, and that will, in most cases, be unwise.
Over-allocation to the FTSE is particularly dangerous given that it is such a concentrated index: 40 per cent of the value of the FTSE is in its ten largest companies. It has too many banks and mining companies, and not enough tech companies.
It’s perhaps for these reasons that the FTSE has underperformed most other worldwide equity markets over the last 25 years.
All this is why a rational investor should be diversifying and investing most of their investments abroad. British pension funds and insurance companies used to own 52 per cent of the FTSE. They now own four per cent, and the fact that’s equal to the UK’s share of worldwide market cap is no coincidence.
It used to be hard for retail investors to invest abroad, for a mixture of regulatory and practical reasons. Today, the availability of cheap global tracker ETFs makes it dead easy.
Diversification of our investment portfolios isn’t a failure – it’s a success. It means that British investors have more diversified holdings and receive better returns. Investors abroad have been doing the same thing; the flipside of the statistics above is that 56 per cent of the FTSE is now owned by international investors.
So the basic concept of requiring ISA investments to go into UK companies is a bad one. But the idea really breaks down when we look at the detail.
Let’s start with an easy question. What is a UK equity? Antofagasta is a UK headquartered FTSE 100 mining company, which undertakes none of its business in Britain. It’s far from the only one. Something like 75 per cent of the underlying business of the FTSE 100 is outside the UK.
Conversely, plenty of non-UK-headquartered companies, such as Google, have thousands of highly paid employees in this country. What legitimate interest does the Government have in encouraging you to sell your shares in Google and buy Antofagasta?
Wnd what about funds? Scottish Mortgage Investment Trust is a FTSE 100 company – but it’s an investment trust and invests four per cent of its funds into the UK (that four per cent figure again!). Could you buy it in a “British ISA”)?
Or what about an investment fund that tracks the FTSE 100? Surely that could go into a “British ISA”? But the most cost-efficient ones are Irish ETFs. Do they qualify? What about a fund that’s incorporated in Ireland and tracks equities across Europe, including the UK? How does that work?
And so on, and so on.
I can imagine solutions: lists of approved companies and funds; exceptions and exceptions to the exceptions; regulations setting out what percentage of underlying investment/index has to be in the UK; special rules for when that percentages changes. Pages and pages of complexity that would make my tax-lawyer’s heart soar.
Let’s not do any of that. A better idea would be some boring changes to make ISAs work better for people.
For example, why is it so hard to move between cash ISAs and stocks/shares ISAs? As Tom Stevenson of Fidelity has suggested, the distinction between the two serves no useful purpose. People should be able to open combined stocks/shares/cash ISAs, and this should be regarded as the default.
Boring policy changes that incrementally improve things are exactly what governments should be doing. But ministers have no business giving British investors bad investment advice; much less forcing them to follow that advice.
Dan Neidle is the founder of Tax Policy Associates, a think tank established to improve British tax policy.
ISAs have been a huge success: about £70bn invested. The phrase “if it ain’t broke don’t fix it” comes to mind. But there are reports that Jeremy Hunt is considering creating a British ISA to encourage, or even force, savers to invest in UK companies.
People who manage British funds are, unsurprisingly, very much in favour of pushing more money into them. It’s unclear why the rest of us should be.
It’s conventional wisdom amongst economists and investment professionals that a significant challenge for investors is “home bias” – investing a higher percentage of your savings into the local market than is objectively justified. The FTSE makes up about four per cent of global stock market (by market cap).
It can be rational to allocate more than four per cent of your investments into the UK market (e.g. because of exchange rate risk). But the average British portfolio allocates 25 per cent, and that will, in most cases, be unwise.
Over-allocation to the FTSE is particularly dangerous given that it is such a concentrated index: 40 per cent of the value of the FTSE is in its ten largest companies. It has too many banks and mining companies, and not enough tech companies.
It’s perhaps for these reasons that the FTSE has underperformed most other worldwide equity markets over the last 25 years.
All this is why a rational investor should be diversifying and investing most of their investments abroad. British pension funds and insurance companies used to own 52 per cent of the FTSE. They now own four per cent, and the fact that’s equal to the UK’s share of worldwide market cap is no coincidence.
It used to be hard for retail investors to invest abroad, for a mixture of regulatory and practical reasons. Today, the availability of cheap global tracker ETFs makes it dead easy.
Diversification of our investment portfolios isn’t a failure – it’s a success. It means that British investors have more diversified holdings and receive better returns. Investors abroad have been doing the same thing; the flipside of the statistics above is that 56 per cent of the FTSE is now owned by international investors.
So the basic concept of requiring ISA investments to go into UK companies is a bad one. But the idea really breaks down when we look at the detail.
Let’s start with an easy question. What is a UK equity? Antofagasta is a UK headquartered FTSE 100 mining company, which undertakes none of its business in Britain. It’s far from the only one. Something like 75 per cent of the underlying business of the FTSE 100 is outside the UK.
Conversely, plenty of non-UK-headquartered companies, such as Google, have thousands of highly paid employees in this country. What legitimate interest does the Government have in encouraging you to sell your shares in Google and buy Antofagasta?
Wnd what about funds? Scottish Mortgage Investment Trust is a FTSE 100 company – but it’s an investment trust and invests four per cent of its funds into the UK (that four per cent figure again!). Could you buy it in a “British ISA”)?
Or what about an investment fund that tracks the FTSE 100? Surely that could go into a “British ISA”? But the most cost-efficient ones are Irish ETFs. Do they qualify? What about a fund that’s incorporated in Ireland and tracks equities across Europe, including the UK? How does that work?
And so on, and so on.
I can imagine solutions: lists of approved companies and funds; exceptions and exceptions to the exceptions; regulations setting out what percentage of underlying investment/index has to be in the UK; special rules for when that percentages changes. Pages and pages of complexity that would make my tax-lawyer’s heart soar.
Let’s not do any of that. A better idea would be some boring changes to make ISAs work better for people.
For example, why is it so hard to move between cash ISAs and stocks/shares ISAs? As Tom Stevenson of Fidelity has suggested, the distinction between the two serves no useful purpose. People should be able to open combined stocks/shares/cash ISAs, and this should be regarded as the default.
Boring policy changes that incrementally improve things are exactly what governments should be doing. But ministers have no business giving British investors bad investment advice; much less forcing them to follow that advice.