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As featured in the Press

Telegraph – 21st September 2014

“It’s time for the fund management industry to be more honest with investors. There is nothing wrong with charging for a service if it delivers but too many people are being sucked into expensive funds that do not add value. The challenge for investors is identifying these sheep in wolves’ clothing.” 

Saul Djanogly speaking to the Telegraph 21st September 2014

 

This Is Money – 22nd July 2014

Did you hear the one about the rabbi and the sports cars with Skoda engines?

The man who wants to warn you about closet trackers

Read more at ‘This is Money’

The Sunday Times – 8th June 2014

Pump up your savings with the new Isa

Our five fitness tips will help you make the most of the £15,000 yearly tax-free limit

Anna Mikhailova

SAVERS are being encouraged to get their Isas into shape and avoid wasting money on pointless fees before the tax-free allowance jumps by a quarter next month.

On July 1 the maximum that can be put into an Isa each tax year will increase to £15,000 — up from £11,880 for those who kept their money in a stocks and shares wrapper, or £5,940 for those investing only in cash.

The government is also making it easier to move between cash and stocks and shares with the new Isas (Nisas). Previously investors were unable to transfer their money from stocks and shares into savings, but next month they will be able to. They will also be able to keep the whole £15,000 allowance in cash if they wish.

However, low rates have led to savers pulling their money out of cash Isas, with a record £2.7bn withdrawn in April, according to the Bank of England.

The figures are the clearest sign yet that savers are abandoning cash accounts that pay paltry rates of interest. The average rate on cash Isas fell below 2% for the first time since 2010, the data shows.

The average return on fixed-rate cash Isas is 1.99%, down from 2.6% a year ago, according to the Bank of England. This is only just above inflation: the Consumer Prices Index stood at 1.8% in April.

Investment advisers are reporting a greater number of savers moving into stocks and shares Isas instead. Hargreaves Lansdown, a leading fund supermarket, said this now accounts for 50% of transfers, up from 25% a year ago.

Fledgling investors should, though, be wary of high fees on investment funds, and of those charged by financial advisers to manage Nisas, as these will eat into the returns.

David Meckin, a financial consultant whose book How to Grow Your Own Money was published last month, said: “When using an adviser, on average 2% of your fund will go towards annual management fees, which amounts to £300 a year for a £15,000 Nisa and £6,000 over 20 years, rising further if the fund grows.”

It is possible to save on those fees by managing your own money. There are tools that can help you to invest while avoiding falling foul of punitive fund charges.

With the help of Saul Djanogly, who recently laaunched an online service called The Investment Fitness Club, Meckin and other experts, we have put together five fitness tips to get your Nisa off to a flying start — and help it to stay in shape in the long run.

Choose the right funds

Beware of the hype over recently launched funds, which tend to be heavily marketed but lack a track record. Tools such as trustnet.com and chelseafs.co.uk/research allow investors to research performance.

Actively managed funds have an investment manager who buys and sells holdings in an effort to outperform an index. In reality, though, many in effect simply track an index such as the FTSE 100.

Meckin’s analysis of the performance of 1,700 funds between June 2008 and June 2013 showed that one in 20 would have returned less than the amount invested and one in five failed to keep up with inflation. Nearly 40% of the funds he studied delivered annual returns of less than 5%. In the same period, the FTSE All Share index rose by 12.7%.

Djanogly said: “Nearly half of investment funds in the UK are glorified tracker funds that in reality hug the index they’re benchmarked against but at much greater cost than a much cheaper equivalent tracker.

“In almost all cases these closet trackers end up underperforming the benchmark index because of their high management costs and dealing charges.”

According to the research firm Morningstar, the average ongoing fee for an active fund is 1.58% a year, while the average passive — or tracker — fund costs 0.55%. That is a difference of more than £150 a year on a £15,000 Nisa.

For investors who would prefer a diversified, ready-made portfolio, Hannah Edwards of BRI Wealth Management recommends the multi-asset MyFolio range from Standard Life. Its MyFolio Managed III fund has an ongoing fee of 0.82%, and has returned 27% over the past three years.

As an alternative to managed and tracker funds, you could buy shares yourself. The cost of trading individual shares is typically £7 to £15 per transaction, which you pay when you buy and sell.

However, stock-picking requires a lot of research and commitment to ensure the chances of success are high.

Meckin’s tips for anyone choosing the hands-on approach include investing in companies and sectors that you understand, and neither putting all your money into one company nor over-diversifying. He said: “A portfolio of between 20 and 30 companies provides an ideal balance between keeping risk low and over-diluting your potential returns.”

He advises against branching out overseas if you are a beginner: “I invest only in companies quoted on the London Stock Exchange. As soon as you start moving money overseas, you are not only taking on the risk that the business does not do well, you are also taking on the currency risk of the exchange rate moving against you.”

Don ‘t get fleeced through high charges

There is still a lack of transparency about the costs of many financial products, which can catch out even savvy investors.

Djanogly said: “The problem with funds is often down to lack of clarity about all the fees and charges, and not being able to get an honest, independent second opinion.

“Be clear about what your adviser is charging you, as well as all the other extras, such as custody and dealing charges.”

Hidden fees are a particular problem. These occur when a fund holds other funds within it, which will result in second-tier management charges. Take time to research all the investments you hold thoroughly, to be sure you will not be hit with multiple management charges.

Advisers and wealth managers are now required to give investors clear summaries of all charges. If you are not sure of the charges and cannot find them online or have not been given a summary of charges, ask for one.

Learn your risk limit

Any investor should first assess how much risk they are willing to take on. This will vary from person to person and should be considered carefully — the amount we think we do not mind losing is often different to our reactions in practice.

Djanogly said: “Risk equals reward. Are you prepared to accept the inevitable ups and downs along the way that go hand in hand with achieving your required return? Although nobody can predict the future, you can use historical returns as a guide.”

Jason Hollands of the adviser Bestinvest added: “The most common mistakes DIY investors make is to start picking specific investments without first considering the right asset allocation they should have across different categories of investment to suit their goals, objectives and appropriate level of risk.

“The amount of risk you should take is in large part dependent on the timescale you intend to be invested for. The longer you can commit, the more risk you can take in the pursuit of better returns — although more risk does not guarantee better returns.”

Set clear targets

Set goals for the growth of your investments.

For example, if you are saving for retirement, you should have a clear idea of how much income you will need to live comfortably when you retire. Calculate how much money you need to generate each year, allowing for tax and inflation.

Once you have a number in mind, engineer your Nisa to try to reach it. Make sure you test all your assumptions, such as the rate of inflation.

For example, a couple, both aged 50, could decide they need an equivalent income of £40,000 in today’s money to live comfortably once they reach retirement. Assuming a 3% annual inflation rate over the next 25 years, that amounts to £62,319 gross adjusted for inflation.

Assuming the couple withdraw 4% a year once they have retired, the investment pot they will require when they reach 65 will be £1.56m. Working backwards, if the rate of return is 6% a year after inflation, they will need to build an investment pot of £650.000, according to Djanogly’s estimates.

By being disciplined and investing the full allowance in a Nisa every year, investors can build up a sizeable pot.

If they put money away from the age of 30, they could amass an investment worth £500,000 by the age of 47 and £1m by the age of 55, according to the stockbroker Killik, assuming the annual Nisa allowance grows by 2% and the rate of return is 6%.

Learn to be tax savvy

Taxes can make a big dent in potential returns, on top of the annual fees.

As well as maximising your Nisa allowance, remember that everyone has a tax-free allowance for capital gains tax. It is £11,000 for the 2014-15 tax year.

If you have children, you could increase your family’s total tax-free savings by opening a Junior Isa for the under-18s. The maximum contribution allowed for Junior Isas in 2014-15 is £4,000.

Hollands at Bestinvest said: “The tax treatment on the enlarged Nisas will be identical to existing Isas: interest earned on any cash deposits or yields from bonds, or bond funds, will be tax-free, and dividends from stock market funds or individual shares will not be liable to any further tax over and above the 10%, deducted at source.

“Any capital gains from investments within the Nisa will be tax free.”

An investment health check

The Investment Fitness Club asks probing questions to check the health of your investments.

Founder Saul Djanogly, a financial consultant and rabbi, is a fan of Warren Buffett’s “value investing” — buying underpriced and undervalued assets.

The free online fitness test will tell you whether your investments are “Buffett-compliant”. The site can then suggest a fitness programme to improve your returns. The assessment for this costs £499. The club will manage these investments for you, charging 1.49% to 1.61% a year, which includes fund fees and platform charges.

It focuses on funds from Dimensional, which offers trackers that mix a passive and active approach and are not usually available to the public.

The club has a £500,000 minimum investment. Its members also have access to advice on other financial issues, such as wills. Learn more at invfit.co.uk.