Old is the new black

Old is the new black. Presumably Mr Ashford believes that First Direct did so well because the survey looked at the “wrong things”.w.kay independent.co.ukWilliam Kay is Personal Finance Editor of ‘The Independent’. Arguing that Which? is ignoring the real facts, Mr Ashford says: “We save our premium rates for where they benefit customers most.”Strange, then, that the best buys in the survey are the bank and cheque accounts provided by First Direct which, when I last looked, was owned by HSBC. He accused the Consumers’ Association magazine of a “Which? hunt against the big banks [that] is so indiscriminate and surveys the wrong things”. As more new shareholders join the registers of public companies, the need for spin-free descriptions and explanations is going to be greater, so companies would do well to see for themselves what BP and Geest are doing right.* Is Which? magazine an angel or a devil in its attitude to banks? This week it published it’s annual survey of current accounts, provoking an angry reaction from Tony Ashford, HSBC’s general manager for Personal Banking. This week BP and Geest won awards for best overall performance by FTSE 100 and non-FTSE 100 companies respectively, amidst more and ever better entries. Much has been done to raise awareness of the need to communicate with shareholders through the annual awards organised by Proshare, the City-backed group that promotes wider share ownership and financial education.

Happily, the amount available on the internet increases by the month, and such sites as Hemscott offer an invaluable amount of data.But the starting point for any investor must be a company’s annual report, particularly if it is fresh. This will simply perpetuate the cosy old boys’ club which led to the split-capital debacle. It is depressing to see the FSA succumbing to such pressure, and marks an unfortunate start to the reign of Callum McCarthy and John Tiner as the new chief regulators.* As private investors rekindle their enthusiasm for shares, there will be renewed demand for information about companies. Cross-holdings are cross-holdings, and the 10 per cent rule would have been a useful discipline on funds of funds, which I expect to mushroom if the stock market continues to recover.We can also look forward to investment companies slipping resolutions into their annual meetings approving “stated policies” letting the management invest more than 15 per cent of these assets in other investment companies. I do not see why the FSA should go out of its way to encourage these vehicles, which offer a spurious level of convenience for an extra layer of charges. It will not apply to companies which have “a stated policy that allows them to invest more than 15 per cent of their assets in other UK listed investment companies”.This has been explicitly written in to allow the operation of controversial funds of funds, which are supposed to save investors’ time by investing in other funds. It is disappointing that the consultation process resulted in a watering-down of the edict relating to cross-holdings, which were a key cause of the collapse of so many split-capital trusts.The basic new rule is that listed investment companies may not invest more than 10 per cent of their gross assets in fellow UK-listed investment companies But an important loophole has been introduced.

A warning can range from the sotto voce to the grandioso, and managements and their lawyers have an obvious incentive to speak as softly as possible within the letter of the law. The FSA should lay down a model set of warnings, specifying their colour, font and size. And there must be warnings to investors proposing to invest in listed investment companies that are either highly indebted or companies that propose to invest in highly indebted investment companies.These warnings will have to be monitored to ensure that they are stark enough. Listed investment companies will be required to include an explanation in the prospectus of the risk factors specific to the issuer, its industry, its investment policy and securities it proposes to issue. After nearly a year, the Financial Services Authority has finally come up with rules aimed at preventing a recurrence of the split-capital investment trust scandal which led to the Treasury Select Committee accusing the FSA’s then chairman, Sir Howard Davies, of being “asleep on the job”.
The new rules rely heavily on risk warnings to investors. You pay too high a price for protection in limiting the upside With some, you can get a better return on a deposit account With most, you have protection quarterly.

If you choose a lower level of protection, usually 95 per cent, it is possible to lose 20 per cent over 12 months, and the cost of 100 per cent protection is so high you might as well be on deposit.”But when checking actual performance many investors would say 15 per cent over five years is not a bad return from the Close UK Escalator 100 when the FTSE 100 Index has plunged more than 30 per cent and the HSBC index tracking fund is down 33 per cent.But these statistics form an argument for sticking with trackers if you think the market is rising, but decamping quickly into a protected fund such as Close’s when you think it is about to fall, assuming you are clever, in which case you might as well invest directly in the stock market and not bother about protection.. Many advisers are sceptical of their value.Philippa Gee, investments director at the IFA Torquil Clark, says: “If you are worried about the stock market, there is a clear argument for not going into equities. If a five-year return on these funds is 10 per cent, then I would rather have 4 per cent a year from cash, thank you very much.”Patrick Connolly, of the Bath-based adviser Chartwell, says: “We don’t like them. This cost has risen significantly since the early 1990s because of lower interest rates and the increased cost of options, a result of increased market volatility. But Close UK Escalator 100 locks in 100 per cent of market growth every quarter.If the Close fund appears too good to be true, the downside of such funds is that you miss out on a varying and unpredictable proportion of growth when markets rise because of the cost of protection And the higher the level of protection the greater the cost. The Govett fund has risen nearly 4.5 per cent, reflecting its equity content.