What caught my eye this week.

Nobody really needs more than a couple of articles about the Spring Budget. Alas for me, I only concluded this after reading dozens of them.

For all the noise, this wasn’t a Budget that will move the dial for most people. Even the welcome reduction in National Insurance won’t really be felt as such, given it just blunts the impact of ongoing higher taxes due to fiscal drag.

The coincident OBR figures paint a sobering picture too. What good news it has will mostly arrive next year – apparently.

Those of us who have followed every Budget and Autumn Statement for the past few years can only ask: “Are we there yet?” We’ve heard we’re close before.

The following graph from Martin Wolf in the FT [search result] doesn’t tell us anything new – but wow it’s striking:

Wolf – an economic commentator who attract critics mostly on the back of being right – warns:

To put it bluntly, the British policy process and the institutions in charge of it are broken. Yes, that is true elsewhere, too. But that is not an excuse.

Can one plausibly imagine that stagnation on this scale can continue without dire consequences for the stability of our society?

The Spring Budget didn’t – and probably couldn’t – do much about any of that. And with Labour 25% ahead in the latest polls, the man delivering it knows he almost certainly won’t be around to see the consequences.

Time will tell if the opposition can do any better – it hasn’t got much to play with. I still think Hunt could have made a good Chancellor in another era. Unfortunately for him and us, this is the one we’ve got.

Still, there are actions to take. In particular, make sure you’re paying attention to the Child Benefit threshold changes. Many more should be able to claim that. Consider making pension contributions if it helps you qualify.

Spring Budget announcement roundups

What changes did Chancellor Jeremy Hunt announce? – Which

Really nice roundup, especially re: non-doms – JP Morgan

What you need to know – Be Clever With Your Cash

What does the Budget mean for you? – BBC

Biggest budget winners revealed – This Is Money

Hardcore economic action

Five things we learned from the Spring Budget – IFS

The Office of Budget Responsibility’s latest data and forecasts – OBR

National Insurance cut by 2p

National insurance calculator [with new rates] – Which

How much will the new NI rate cuts save you? – This Is Money

What is National Insurance and should it be scrapped? – Guardian

New UK ISA and British Savings Bond

Does it pay to be patriotic with your savings? – Which

Some investors are keen to use the UK ISA – This Is Money

British ISAs are a gimmick that won’t move the dial – Guardian

Do we really need another Isa allowance? [Search result] – FT

NS&I to offer three-year fixed-rate ‘British bonds’ – NS&I

Property matters

Property tax and stamp duty changes – Which

Hunt hands buy-to-let landlords a CGT tax cut – This Is Money

Child benefit and loose ends

What the child benefit threshold rise to £60,000 means to you – This Is Money

A parent earning up to £80,000 can now still benefit – BBC

Spring Budget small print – Which

Rich non-doms ‘dismayed’ by Hunt’s decision [Search result] – FT

Verdicts

Why fix a tax trap when you can kick it down the road? – This Is Money

Pensioners and wealthy big losers from Tory government, say think-tanks [Search result] – FT

The IFS response – IFS

Hunt was hamstrung by Britain’s sickly finances – This Is Money

Have a great weekend.

[continue reading…]

You’ve been crying out for a UK ISA, right? I mean, even the investing platforms said they didn’t want one but somebody must have asked for it.

Perhaps it was you?

Well, you and Chancellor Jeremy Hunt, who presumably wanted another bone to throw to the electorate.

And so the Dad’s Army ISA has marched on the parade ground.

Or rather it’s marched into a consultation phase.

The basic idea is clear enough. We’ll get an extra £5,000 annual ISA allowance to invest in UK-listed companies.

And – thankfully – the existing £20,000 annual ISA allowance remains unmolested.

But beyond that there are lots of questions. The consultation will run until 6 June 2024, and we won’t get specifics until well after that.

I wouldn’t expect the fine print to be written – and the platforms to be ready to implement the UK ISA – until the Autumn Statement at the earliest. Perhaps not even until April 2025.

You’ll just have to wait to fill your boots with M&S and Tesco shares while playing Land of Hope and Glory on the gramophone.

Fool Britannia

The UK ISA consultation is specifically not asking whether a UK-restricted ISA vehicle is a good idea, stating:

This consultation does not ask for views on the principle of introducing a UK ISA or alternative options for achieving the policy objectives.

No surprise there. The Dad’s Army ISA UK ISA is a political bauble, not a serious bit of legislation.

You and I may believe that UK equity markets are in a funk because the country has been in political tumult for the best part of a decade, Brexit damaged our terms of trade and is costing £100bn a year in GDP, the UK economy is stagnant, and foreign investors have stepped back from buying UK shares accordingly.

We also know it’s the resultant de-rating of UK shares – made even cheaper by a weaker pound – that’s driven the rash of UK takeovers by foreign companies.

But the Government – supposedly – believes that UK equities languish because the average Joe Bloggs has £5,000 lying around that they would just love to invest in British companies inside a tax wrapper, if only they hadn’t filled their existing £20,000 annual allowance with, I don’t know, a global tracker fund?

Never mind that only 15% of ISA savers use their full allowance anyway.

Non-party political broadcast

The idea that the UK ISA is designed to meet an investor need – or even the needs of the London stock market – is absurd.

It’s a political bung in a post-Brexit Britain where slapping the Union Jack onto things is about the only tangible ‘positive’ outcome from leaving the EU.

However such clear-eyed cynicism doesn’t mean we shouldn’t use it to improve our investing returns.

British bonds for a British ISA

Politics aside, my main concern with the UK ISA is it enshrines home bias and could distort behaviour for no good reason.

Particularly so when it comes to passive investing, which should be into global equities and domestic bond funds.

However on reading the consultation paper, the intention is currently to allow the new wrapper to hold gilts (UK government bonds) and UK corporate bonds.

If this makes it into the final UK ISA legislation, then passive investors should simply be able to put their UK ISA allowance towards their bond allocation.

That bond allocation would usually be UK bond funds anyway.

Like this, we’ll get an extra £5,000 a year of tax-free wrapper to build up the 40 in a 60/40 portfolio.

Of course doing so won’t help UK equities re-rate.

But as I’ve said that’s not happening on the back of the UK ISA, and it’s not really the point anyway.

None of your funny foreign shares

What about equities?

The devil will be in the detail and the consultation doc acknowledges there’s a lot of ways things could go. It looks back to the previous PEP1 era, which constrained investment to UK-listed companies, noting:

This approach would enable the UK ISA to support a range of UK companies, from small companies trading on AIM, to medium or large UK companies that are listed on the London Stock Exchange. It could also support UK companies across a range of sectors such as construction, healthcare and technology.

This approach also means that it would be easy for investors and ISA managers to identify eligible companies. However, it would not take into account the proportion of the listed group’s commercial activities conducted in the UK, as defined for example by source of revenue or location of assets.

The alternative approach – maintaining a list of ‘permitted’ companies – wouldn’t be hard to create. At least not with the resources of a government.

Such a list might be based on sources of revenue or where the workforce is located (UK or abroad) or where a company pays its taxes. Or any number of other things.

No, the difficulty would be keeping that list up-to-date on an ongoing basis.

Moreover, presumably the aim of the UK ISA is not to see an ambitious UK company that acquires an overseas rival suddenly made an ineligible holding.

How will that – and countless other similar issues – work out?

The same questions arise with funds and investment trusts, which are also intended to be allowed in a UK ISA.

If Apple shares fall and a mostly UK fund manager wants to buy them, will they be dissuaded from doing so because they stand to be booted out of the nation’s Dad’s Army ISAs? Will there be a grace period?

It’s all a finickety nonsense – but I suppose you know my view by now.

UK ISA operating instructions

Talking of which, I know what you’re thinking…

What about ISA transfers? Or investing in two UK ISAs in the same tax year? Can you turn your UK ISA into a cash ISA? Who will police all this?

To be fair the consultation paper raises all these questions and more. For now the answer is again we’ll have to wait until it’s finished before we know the rules.

To me this laundry list once more highlights that the UK ISA is a dumb complication everybody could do without.

It’s silly and it’s not investing related. End of.

And before the usual suspects accuse me of running Britain down – like I apparently do when I bemoan our leaving the EU for hurting the UK economy (go figure) – then au contraire, my jingoistic chums.

I too lament the state of the UK stock market – and the City generally.

I cut my teeth investing in UK-listed companies. Even today my (very actively managed) portfolio tends to hold an order of magnitude more UK stocks than a global tracker does.

However I’m very sure the UK ISA won’t meaningfully help with anything that truly ails the UK market.

Better for Blighty

What would, you ask?

Sadly we can’t undo the foolish decisions of the past. At least not for a while anyway.

But there were other helpful actions that Hunt could have taken.

The government shouldn’t have raised UK corporation tax, for starters, and preferably further cut it.

I would also have abolished stamp duty on LSE share dealing. It’s a pernicious cost of putting money into UK shares – and meaningfully so for the big international money that could actually drive a re-rating.

But as I’ve repeatedly said, the UK ISA has very little to do with the investing needs of us, nor even the wider environment for UK stocks.

It’s all about enabling Barry Blimp to put £5,000 into Rolls shares in a specially-designated UK ISA and then to boast about it at the golf club.

Indeed given it’s only really about politics and optics, I suspect the government will eventually allow any old UK-listed company to be held in a UK ISA.

At least that will save on compliance costs and paperwork.

How to use your UK ISA allowance

To be clear, those of us who can use this extra allowance should absolutely do so. On a personal level, we should take all the tax mitigation measures we can get.

For passive investors, at this stage this looks like holding some of your UK government bonds in your UK ISA.

For active investors, we can hopefully rejig where we hold our stock picks and fund purchases to meet the UK ISA requirements.

Of course I welcome the de facto rise in the annual ISA allowance to £25,000. It’s been frozen for years.

But it’s a shame it’s being lifted via this dopey vehicle.

It’s all good news for Monevator though. More complications means more confused people coming to our site asking “WTF?”

But I’ll leave it to other media outlets to hang out the bunting.

Want to comment on the UK ISA consultation paper? You’ll find it on the government website.

1. Personal Equity Plan [↩]

The best way to understand a fund is to read the fund web page. But having done so, you may well feel like an ancient king after consulting his soothsayer – bemused, wary, and like you haven’t really got a straight answer.

We’re all told to “do your own research”. Yet how on Earth can you navigate the explosion-in-a-metrics factory that’s the average fund web page while still having time for things like, y’know, going to work and remembering who your spouse is?

Luckily most of the information is irrelevant to ordinary investors. It can be happily ignored.

In fact once you know what to look for you can breeze through the key information in a few minutes. It’s just a question of speaking the language – and ignoring the stuff that doesn’t matter.

Below we’ll crack the code for an equity index tracker. I’ll take you through all the vital statistics and explain what the terminology means.

Fund web page: name and objective

Fund name – This typically decomposes into fund manager (e.g. Vanguard), the index provider (e.g. FTSE), and the geographic region or market covered (e.g. Developed World excluding the UK). If you’re looking at a passive fund then that’s normally mentioned too: tracker, index, or ETF are the usual tells.

Word to the wise: not all ETFs are passive. Double-check that your pick tracks an index and not the mood swings of some fund manager.

Objective – The magic words we’re looking for here are something like, “Fund X seeks to track the performance of the index.” Or something to that effect. We’re just after reassurance that this is definitely an index tracker. Not some other confounded contraption.

We can also hope the objective might confirm what the fund does. For example, “Fund X invests in large and mid cap company shares in developed and emerging markets around the world.”

Key fund facts

Income / Accumulation Shares – How the fund distributes dividends. If you own accumulation shares then your fund automatically reinvests its dividends for you – fattening itself up until the day you need to sell. In contrast, income shares deposit dividends into your account. Thereafter you are master of their fate.

Inception date – The date the fund started trading. It takes a while for new funds to bed down and so it makes sense to avoid one that’s been around for less than a year. The longer a fund’s track record, the more you can rely on its performance data.

ISIN – The International Securities Identification Number is the best way to identify your tracker across platforms.

Fund names are often hideously mangled by online brokers. There can be multiple versions with very similar titles. For example US Dollar (USD) and British Pound (GBP) variants. It’s a world of confusion that can be solved by using the ISIN number. The Ticker symbol or SEDOL code for the London Stock Exchange will also do nicely.

Benchmark index – This is critical. What index does your tracker actually track? Does it cover the asset class you want? Does it expose you to the right securities? The best advice is to google the index and find out more. To choose the right tracker you need to choose the right index.

Domicile – What is your fund’s country of residence? It’s worth knowing for two reasons. Firstly, if it’s anywhere bar the UK, Ireland, or Luxembourg, then you’ll be exposed to withholding tax. Secondly, the UK compensation scheme doesn’t apply outside dear old Blighty. Here’s a handy list of UK-based index funds to get you started.

Investment structure – Index funds are most likely to be Open-Ended Investment Companies (OEICs) or Unit Trusts. Less common but also on the guest list are Investment Companies with Variable Capital (ICVCs) or SICAVs (société d’investissement à capital variable) and FCPs (fonds commun de placement).

Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are fine too.

Total assets / Net assets – How big is the fund in millions of pounds? The larger it is the less vulnerable it is to being wound up if panicky investors flee. Big index trackers are rarely if ever closed. Closure results in your assets being sold and the proceeds returned to you in cash. The major downsides of this are you’ll be out of the market for a time and you may incur capital gains tax if your fund is liquidated outside of a tax shelter. Anything over £100 million is typically profitable enough to survive.

Currency – This is a tricky area. The terminology is clear as mud.

A fund’s underlying currency determines your exposure to currency risk. Underlying currency equates to whatever the fund’s securities are actually valued in. For example, a global tracker will hold US shares (valued in USD) and Japanese shares (valued in yen). Thus a global fund includes many underlying currencies and the only way you can eliminate currency risk is by choosing a GBP-hedged version.

Base or denominated currency – The currency a fund reports its Net Asset Value (NAV) in. It distributes its dividends in this currency, too. You’ll often see this currency mentioned on the fund web page in the fund’s name. For example: Vanguard FTSE Emerging Markets UCITS ETF (USD). But note that base currency has nothing to do with currency risk. You aren’t exposed to the dollar in this case because the fund does not hold dollar-traded equities.

Trading currency – The currency in which the ETF trades on the London Stock Exchange.

Knowledge of the latter two currency types will help you avoid FX fees. (This is only an issue with ETFs. Index funds marketed in the UK trade and report in GBP.) As mentioned, currency exposure depends on fund’s underlying currency and is a fact of life unless you hedge. This piece on currency hedging equities can help you think through that decision.

Ex-dividend date – If you buy shares in this fund before its ex-dividend date then you will be eligible to receive its next dividend payment. If you sell your shares on or after the ex-dividend date, you’ll still receive the dividend.

If you buy shares on the ex-dividend date then you won’t be eligible for the upcoming dividend payment. However the fund price typically falls by the amount of the dividend on this date, too, so you shouldn’t lose out.

Distribution date – Dividends are paid on the distribution date.

Management charge

OCF/TER/AMC – The main cost of a fund is expressed as the Ongoing Charge Figure (OCF). An older and still widely-used name is the Total Expense Ratio (TER). Keep costs as low as you can because you pay it every year from your assets, regardless of whether your fund is a winner or a loser.

Our low-cost index funds page may help here.

AMC stands for Annual Management Charge. Ignore this if mentioned. It’s an old and misleading metric. Follow the money and find out what a fund’s TER or OCF is instead.

Transaction costs – Typically not mentioned on a fund web page but it should be because transaction costs amount to a significant chunk of your overall outlay. Learn how to uncover transaction costs. Fund managers generally hide these costs because ‘the regs’ don’t mandate that they must be published in locations that investors would find useful.

It’s also possible to measure the impact of transaction costs by digging into your passive fund’s tracking difference.

You shouldn’t pay any other fees for trackers, so ignore red herrings like ‘Zero entry or exit fee’ messages. Those imaginary wins are right up there with political nonsense like, ‘No meat taxes’ and ‘No compulsory car sharing’.

Performance

Past performance is over-rated as a useful measure of a fund. The past is no guarantee of the future. And passive investors believe it’s near impossible to consistently pick the best funds.

Instead, a passive investing strategy relies upon a diversified asset allocation to deliver your expected return.

If, for example, you decide you should own a Developed World fund in your diversified portfolio, then you don’t ditch it just because the developed world takes a beating for a few years. A down-at-heel asset class will very likely rise again if you give it time. Meanwhile you’re buying it on the cheap and potentially locking-in future success.

The main use of consulting performance figures on the fund web page is to check that your fund is doing what a tracker should. Which is hugging its benchmark for dear life.

The closer your tracker’s returns shadow its benchmark (that is, its index), the better. Look at the returns net of expenses and ignore all data of less than three years. The longer the track record, the more trustworthy the data. We really want at least five years of worth of results to make an informed decision. Ideally more.

Check out our post on the best global tracker funds for a good example of how to incorporate performance results into your decision-making.

A good tracker will generally trail its benchmark by around the cost of its OCF. You’ll need to understand tracking error to compare similar funds.

Portfolio data

First and foremost, you want the fund to be the near-identical twin of its index. Ideally the fund and index will share very similar characteristics – perhaps with their hair parted on opposite sides.

If you’re comparing the specs of two similar funds, look at:

Number of stocks – The more stocks the fund holds the better (up to the benchmark number). It will be more diversified and it’s more likely to replicate its index accurately.

Median market cap – If you’re comparing small cap funds, then the one with the lower median market cap holdings is more likely to capture the return premium (all things being equal).

Price/earnings ratio – The P/E ratio is a method of valuing stocks and markets. The lower the ratio the more likely it is that the underlying shares are undervalued. It’s far from guaranteed though and not much more reliable than “Red Sky At Night…”

Price/book ratio – The P/B ratio is an important measure of the value premium. If you’re after a value fund then the lower the P/B ratio, the better.

Turnover rate – Low equals good. The turnover rate is a measure of how often the fund trades. Trading incurs fees, so the lower the turnover, the less your return is being chiselled off by some Ferrari-driving stockbroker.

Weighted exposure / Top 10 holdings / Top country diversification – Think of this section as a quick peek at the contents of your fund before you buy. It should be enough to give you a feel for what you’re getting into.

Quoted historic yield – This is usually calculated by summing the dividends paid over the last 12 months and dividing it by the unit price of the fund on the day quoted on the fund web page.

I personally don’t think this is a particularly useful figure. Everybody seems to calculate it slightly differently, there’s no guarantee that future yields will be similar, and it’s the total return of the investment that counts, not just the yield. You may feel differently.

Down down, deeper and down

You can dip even deeper to discover every single stock in the index, if you like. That’s generally not necessary though, provided you’re sticking with broad based index funds that track the UK, the developed world, or the broader emerging markets.1

Your main task is to make sure you’re aware of any big beasts in the room.

Is the index dominated by just a few stocks, or countries, or economic sectors? If so, is that a problem? Does it mean your portfolio is under-diversified overall?

An All-World tracker shows you what a healthily diversified index looks like. This represents global capital’s best estimate of value. As such it’s probably a better choice than anything we can come up with on our own. It should form the bedrock of our equity allocation.

On the other hand if you’re invested say 50% in the UK, you’ll notice that the FTSE All-Share index is overweight in oil and gas and financials and underweight technology. The top five stocks account for more than 20% of the index. It’s not the most diversified index in the world, and the FTSE 100 even less so.

Diversification is the one free lunch in investing. Good reason not to pop too many Union Jack coloured eggs in your basket – nor any other tracker that’s hostage to the fortune of a few key players.

Sustainability characteristics

We’re highly sceptical about the reliability of ESG metrics, not to mention how comparable they are across funds.

Naturally, there’s no shortage of firms who will happily offer you methodologies and numbers in an effort to reassure you that your money is being invested in line with your values.

But if you’d like to question the veracity of those claims then try googling, ‘ESG greenwashing’. Or just try reading a few of the underlying methodologies and see if you can make head or tail of it.

There are certainly ways to express our values in favour of preserving the planet and a decent society. But we think you’re more likely to exert influence though voting and being mindful of how you consume, rather than by taking ESG scores at face value.

Other useful fund web page tidbits

Product structure / Replication method – An important thing to understand about any fund is how it goes about replicating its index.

• ‘Physical’ means the fund’s manager actually buys the stocks that make up the index being tracked.

• ‘Synthetic’ or ‘swap’ means they don’t buy the stocks that make up the index. Instead they use a financial derivative called a total return swap to deliver the index return. (Mad science! It’s enough to make you want to sharpen your pitchfork and storm the Doctor’s castle!)

• ‘Full’ means a physical fund owns every stock in the index. You should therefore expect faithful replication.

• ‘Blended’, ‘sampling’, or ‘optimised’ means that the fund’s managers ape the index with less than a full hand of the underlying stocks. Normally this is because the index represents an expensive or illiquid market (for example some emerging markets) that would make buying every stock very costly.

Reporting fund status – If your tracker is domiciled overseas then make sure it is a reporting fund. Otherwise capital gains will be taxed as nasty income tax rather than mild and gentle CGT (if the fund is held outside of an ISA or SIPP).

Look out for excess reportable income if you’re a higher-rate taxpayer.

UCITS compliant – UCITS is a regulatory standard for funds sold in the UK and EU. Among other things, UCITS lays down the law on niceties such as counterparty risk, conflict of interest management, and the amount of information funds are required to disclose to retail investors. It should come as standard on any index tracker you buy.

Securities lending – Many funds lend out their securities to the likes of hedge funds to indulge in a spot of short-selling. The resulting bunce reduces costs, assuming the revenue is split between the fund manager and the investors. A good fund manager should tell you if it’s running such a securities lending programme and how the revenue is shared, if at all.

Securities lending exposes investors to counterparty risk and collateral risk.

KIIDs and other animals

Your fund’s Key Investor Information Document (KIID) and factsheet are also worth a look. Sometimes they contain extra info not included on the fund web page. The annual report can also reveal useful nuggets, if you’re happy to continue down the research rabbit hole.

However, the best tip – if you’re missing any of the info I’ve cited above – is to head over to an independent data keeper like Morningstar or justETF. They’re both treasure troves of fund data and maintain individual web pages for most trackers plus useful comparison tools.

We’ve previously written a short-ish walk-through of how to compare funds.

But there’s one other trick someone naughty might try if they can’t find the information they want. Which is to reload the fund web page in another browser and tick the box that indicates they’re a ‘professional advisor’ or ‘institutional investor’.

You’ll often be trusted with much more information under this guise. Whether you should tick the box is your decision.

Best of luck out there. Once you’ve got your eye in, you’ll find a quick interrogation of a fund’s home page and a good grounding in the investing basics will give you the measure of most mainstream trackers.

And if the fund is into weird stuff then steer clear – unless you know exactly what you’re doing.

Take it steady,

The Accumulator

1. If you’re investing in niche products that expose you to aqua-farming or leveraged oil and gas futures or what have you (I wouldn’t) then you’ll need to do all the research you can! [↩]