Investors shun Isa funds

SALES of Isa funds tumbled at the crucial launch of the so-called 'Isa season'. Figures from the Investment Management Association revealed a net inflow of just £38.9m into unit trusts and open-ended investment companies (Oeics) wrapped in Isas during January.

Demand had picked up steadily since a grim month in September, the first time more money was taken out of Isas than put in since they were launched in 1999.

But sales in January were 58% lower than December and were down 79% on a year earlier.

The fresh blow comes despite an announcement by Chancellor Gordon Brown in his Pre-Budget Report in December that Isa limits would not fall from £7,000 to £5,000 in April 2006 as had been planned.

Also, January to April is regarded as a crucial period for investment companies and financial advisers as investors have traditionally rushed to use up their annual £7,000 'maxi' Isa or £3,000 'mini' Isa allowance before the end of the tax year.

The pain of the stock market crash that wiped billions of pounds from novice investors' portfolios between 2000 and early 2003, appears to remain fresh in the minds of both experience and inexperienced investors.

The IMA said fund sales to individual investors outside Isas were £169.7m, down 39% on the previous month and 69% on a year before. While the Isa figures are considered a barometer for confidence among more novice investors, non-Isas sales give a better indicator of appetite for shares among more serious investors.

It also appears investors have been bailing out at the wrong time. '2005 has started slowly with little new money flowing into investment funds and investment fund Isas,' said Richard Saunders, IMA chief executive.

'This is in spite of continuing stock market improvement, which has seen the FTSE 100 index increase by some 50% in the last two years.'

Investors made the same mistake in the dotcom boom of 1999 and 2000. This month's sales figure of nearly £40m is dwarfed by the £2.3bn that flowed into investment Isas during March 2000. Dotcom shares peaked that month and continued to fall until spring 2003.

A study by ABN Amro last month highlighted the long-term track record of the stock market. It said that since 1900, the average annual real return on equities was 5.4% compared with 1.3% for bonds and 1% for cash.

People in recent years have been choosing to save rather than invest. The Building Societies Association (BSA) said net inflows into savings accounts were £9.4bn in 2004 compared with £5.2bn the year before.

The IMA's figures this month showed the most popular fund sector was 'UK all companies', accounting for 23% of gross retail investment into unit trusts and Oeics. It is home to the biggest UK growth funds. 'UK equity income' secured 17% of sales followed by the more cautious UK corporate bond sector, with 9%.

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