Are SIPPs now better than ISAs?

The proposed changes to UK pension rules announced in the March 2014 Budget will make Self-Invested Personal Pensions (SIPPs) far more flexible. From April 2015, investors should be able to withdraw as much of their SIPP fund as they want immediately on retirement.

Since the choice between a SIPP and an Individual Savings Account (ISA) is a trade off between flexibility and tax relief, many investors will feel that this tips the balance in favour of SIPPs. But while the changes are welcome, I think it makes less difference than you’d expect.

Unlike some finance writers that I generally agree with (this piece on Monevator, for example), I think that the practical advantages of SIPPs over ISAs are easy to overstate. To see why, let’s look at how much the added tax relief from a SIPP is really worth for the average investor.


Best ISAs for international stocks October 2013

Update 04/01/2014: I’ve done a small update on this article to reflect AJ Bell Youinvest/Sippdeal’s increased FX costs and Alliance Trust Savings’ increased ISA fee.

 Update 30/11/2013: Sippdeal has announced an increased FX fee (as well as rebranding as AJ Bell Youinvest) – see this post for more. I’ll update the comparison table when I have more details, but it looks like it will no longer be the cheapest option, although the lack of an ISA admin fee should still make it one of the cheapest for smaller ISAs. For now, adding £57.6 to the figures below should give you the estimated annual cost under the new charges.

Since quite a few UK stockbrokers have changed their fees over the past year, I’ve updated my calculations for the cheapest ISAs for buying international stocks.

Full details of charges, changes and costs are listed in the tables below, but the main conclusions are:

  • Sippdeal now appears to be the cheapest for dealing in foreign stocks that can be traded as CREST Depository Interests (ie major US, Canadian and European companies). It also offers some other markets that can’t be settled in CREST, although these will be more expensive.
  • The main caveat to this whether Sippdeal’s current pricing structure – no account fees, no inactivity fees and no custody charges for CREST-settled stocks – can continue in the post-RDR world. I would not be surprised to see some kind of account fees come in over the next year or so, but I would expect the firm to remain one of the most cost-effective.
  • iDealing comes in as only slightly more expensive than Sippdeal, due solely to the annual account fee it charges. It does not offer the non-CDI markets that Sippdeal offers, making it a slightly less flexible option.
  • Following AJ Bell Youinvest’s increase in FX commissions to 1% (from 0.5% or less – depending on deal size – previously), it no longer offers such a cheap service and is now beaten by iDealing. Youinvest offers a a wider range of markets (ie the ability to access some non-CREST markets – iDealing may be willing to deal in some other markets on request, but is likely to require fairly large deal sizes), still remains one of the cheapest options and gets consistently good feedback for customer service, but can no longer be said to be the standout choice.
  • Saxo Bank (or Saxo Capital Markets as it’s gradually rebranding itself) is relatively cheap, but has restructured its ISA service since last year. The mass-market Modern Wealth Management offering has closed down, to be replaced by an ISA offering on the main Saxo Trader platform. This offers more markets but carries a high £50,000 minimum account size for an ISA (the regular Saxo trading account still requires a lower minimum of £5,000 in the UK)
  • Very broadly, holding US and European shares in an ISA can make sense for most investors using the cheapest brokers, but holding shares from other markets will arguably only be cost effective for larger investors.

The global trade explosion

The graphic below comes from a recent note by Barclays on global trade and requires little explanation. It shows total merchandise trade flows between the world’s main regions in 2012 (above) and 2002 (below).


Vietnam’s strong start to 2013

Regular readers will know that I’ve long been optimistic about Vietnam. For most of that time, the market has resolutely declined to play along, so 2013 has been a pleasant surprise so far – the VN Index is up almost 20% since the start of the year.

However, it remains to be seen if those gains will stick. There’s still plenty for policymakers to do in terms of sorting out the economy’s many problems (FT Beyond Brics has a quick primer), although they seem to be making some progress and deals like Mitsubishi UFJ’s recent agreement to buy a 20% stake in VietinBank can be see as a long-term vote of confidence.

And despite the slowdown in growth, there is the odd spot of good news – exports were up almost 20% year-on-year in 2012, reflecting the country’s improving position in manufacturing, as Capital Economics notes:


Unregulated timber investment schemes

The other week, I wrote an article for MoneyWeek on timber investing, looking at some of the interesting properties of timber as an asset class and what drives returns. It’s probably behind the paywall right now, but will be free in a few weeks – or you can get a free trial to read it now.

In the article, I focused on well-established investments such as the US timber real estate investment trusts (Reits) but I subsequently received questions about unregulated timber investments that promise retail investors rather eye-popping returns. I don’t want to comment on specific schemes, but here are some general points to bear in mind about arrangements of this type, which I’ll post here as a brief addendum to the article.


Management costs vs marketing costs

Last week’s Wall Street Journal had a short piece about the work of an exchange traded fund manager. While brief, it gives some obvious insight into why expense ratios for ETFs can be so much lower than those for traditional actively managed funds:

At 30 years of age, Hao-Hung (Peter) Liao leads a handful of portfolio managers at Van Eck Global who oversee some $24 billion in investor assets around the world. Mr. Liao’s rapid ascent—and the parallel success of his tiny team in handling its outsize mission—owe a great deal to the unique traits of the investments in which the team specializes: exchange-traded funds.

Such ETFs are easier to manage than index-tracking mutual funds. A single person or small team can oversee a long list of ETFs, as Mr. Liao and his team do. Indeed, 87% of Van Eck’s ETF assets are in the 38 funds run by Mr. Liao and his staff of three portfolio managers and analysts.


Low volatility and high quality

Low Risk Stocks Outperform within All Observable Markets of the World is an interesting paper from earlier this year that I’ve belatedly got round to reading. Co-written by Robert Haugen, one of the pioneering figures in quantitative investing, it focuses on the low volatility anomaly, which is the evidence that low volatility stocks on average produce higher returns than high volatility ones

The low volatility anomaly goes against conventional financial theory, which states that more volatile stocks should outperform since they are riskier. Haugen was one of the first researchers to show decades ago that empirical data in the USA did not support this idea and data in this newer paper essentially updates that. It looks at 21 developed markets and 12 emerging markets since 1990 and shows that low volatility stocks have consistently outperformed in all of these.

Of course, the interesting question is why this anomaly persists. Haugen and his co-author Nardin Baker propose what is essentially a behavioural and agency-based explanation, revolving around perceived incentives for the investment management industry to favour more volatile stocks.


A brief history of hyperinflation

World Hyperinflations, a recent working paper by Steve Hanke and Nicholas Krus, is exactly what the title would suggest: An attempt to collect data on every hyperinflation on record. They count 56, possibly 57, and Hanke has since suggested that Iran is on the way to becoming number 58.

You might assume that these events are already well documented, but there have been few serious studies, despite the popularity of the topic. To quote the paper:


Best ISAs for foreign stocks – October 2012 update

Update October 2013: There is now a new version of this comparison incorporating changes to brokers’ fees over the past year. See Best ISAs for International Stocks October 2013.

Update March 2013: Saxo Bank is closing the Modern Wealth Management service and introducing an ISA wrapper on its Saxo Trader platform. This seems likely to work out slightly more expensive than the Modern Wealth Management example below, but will apparently allow access to a much wider range of exchanges. The comparison table will be updated once I have full details of the revised service.

[Updated again on 06/11/2012 to include estimated costs for Interactive Investor and again on 19/12/2012 to reflect Saxo Bank’s new pricing for Modern Wealth Management]

I’ve updated the tables from the Best ISAs for international stocks post from April to reflect a few fee changes and include a new broker. Some changes and key points are:

  • iWeb has cut its dealing fee to £5 per trade. On the downside, its foreign exchange margin is scheduled to increase to 1.5% in April 2013, which will make it significantly more expensive. The figures in the table are based on the current margin, but estimates based on the increased margin are included in the footnotes.
  • Sippdeal has recently been added to the broker database and added to the tables for the first time. I wasn’t aware of this firm’s international offering until recently – all told, the cost structure looks very competitive if you want to trade in CREST-settled foreign stocks.
  • The figures for iDealing have been changed to be based on a 0.5% foreign exchange margin. Like Sippdeal, iDealing passes on the market maker’s FX commission without adding its own – the firm has previously told me that 0.25% was a typical mark-up, but based on figures from Sippdeal and elsewhere, I think this is probably too low for the relatively small deals I’m factoring into the table, so have adjusted it for this example.
  • Admin fees/inactivity fees for Alliance Trust, Halifax and Selftrade have changed slightly since the last update, although this has had relatively little impact on their overall competitiveness.
  • The estimate for Saxo Modern Wealth Management is based on its scheduled 0.5% regular FX charge rather than the introductory offer of no FX mark-up.  Saxo has now made the 0% FX charge its permanent rate, so the figures have been updated – this makes it look extremely competitive, albeit for a limited range of markets.

Historical valuation data for global stockmarket indices

Long-term historical data on price/earning ratios, price/book ratios and dividend yields for stockmarket indices is extremely valuable in looking at long-term returns – but it can be very difficult to obtain. While price data is available for many major markets stretching back decades or more, valuation data typically hasn’t been recorded so carefully.

The figures that are available have usually been reconstructed from old earnings reports and are proprietary data sets that are expensive to access. For those who are willing to pay, Global Financial Data is probably the most comprehensive source for very long-term financial data of all kinds.

For those who can’t justify the cost of paid-for data, there are a few freely downloadable data series for some of the major indices around the world, although they are often hard to find and there is no consistency about which markets are available. The following links will take you to the ones I’ve found that are still updated  – if you’re aware of any others, please let me know in the comments below or by email.