Collective Investments - UK

The collective investments market continues to experience strong growth on the back of financial markets that are performing well. The public has a long memory when it comes to events in the financial world, though, and recovery from the dotcom bubble that burst in the early part of the decade has been gradual. Not surprisingly, for years, net sales of collective investments have tracked closely the performance of the FTSE 100, and this fallout from the credit crunch is likely to see sales hit.

The fact remains that collective investments hold little attraction for a majority of people. Whilst stocks and shares ISAs were once more popular than cash ISAs, that is hardly the case now. Ignorance and apathy remain and Mintel’s consumer research shows that there has been no change in the past year in the number of people holding collective investments outside of ISAs.

Reports of the death of the independent financial advisor (IFA) have never been more premature as the channel continues to grab more and more of product distribution. Platforms and fund supermarkets have become the industry’s main battle ground. The Financial Services Authority (FSA) has conducted its review of distribution and has targeted the fee and commission structure for change.

Specific types of Collective Investments

• Unit trusts are investment funds shared by lots of different investors. They are 'open-ended funds', meaning that each fund gets bigger as more people invest, and gets smaller as people withdraw their money. Funds are divided into segments called 'units'. Investors take a stake in the fund by buying these units. The price of a unit is based on the value of the investments that the trust has invested in.
• An open-ended investment company (OEIC) is a company whose business is managing an investment fund. Investors take a stake in the fund by buying the shares of the OEIC. As with a unit trust, an OEIC is an open-ended fund.
• An investment trust is a company whose line of business is investing in other companies. The investment trust company has shares and is quoted on the stock market. Investors take a stake in its fund by buying the shares of the company. It is a 'close-ended fund' because there are a set number of shares, and this number does not change regardless of the number of investors. The price of the shares reflects the value of the investments in the fund, but is affected by other factors too. If more people want to sell their shares than there are people wanting to buy them, the share price tends to fall. Conversely, if there are more buyers than sellers, the share price tends to rise.
• As such, and unlike OEICs and unit trusts, investment trusts can trade at a premium (or discount) to the value of the assets held by the trust. The other key difference is that the company can borrow money and use it to buy more investments - this boosts the company's returns when the investments perform well, but magnifies losses if investments do badly.

Issues in the Market

Key issues

Market background and definitions

Investment risk

Figure 1: Risk profile of selected savings and investments

Collective investment types

Fund supermarkets

Capital Gains Tax

Tax on income

Abbreviations

Advertising data

Market in Brief

Sales are slumping as investors pull out

Figure 2: Net retail sales of UK-domiciled unit trusts/OEICs, 1998-2008

Market share

Intermediaries dominate retail distribution

Figure 3: Proportion of unit trust/OEIC gross retail sales, by distribution channel, 2001-08

Investor sentiment falls

Figure 4: Intended purchases of shares and equity-based unit trusts, government and corporate bonds and bond-based unit trusts and sales of equities and unit trusts, Q3/Q4 2002-Q1/Q2 2008

Limited funds available for investing

Key consumer research findings

Collective investments a minority pursuit

Strong aversion to risk

Face-to-face advice preferred

Consumers seek capital preservation and guaranteed returns

Collective investment alternatives

Figure 5: Main collective investment alternatives

Internal Market Environment

Key points

Investor confidence

Figure 6: Central position of confidence in consumers' attitudes towards investment, 2008

Weak investor sentiment

Figure 7: Intended purchases of shares and equity-based unit trusts, government and corporate bonds and bond-based unit trusts and sales of equities and unit trusts, Q3/Q4 2002-Q1/Q2 2008

Very few willing to take risks when investing…

Figure 8: Attitudes towards risk, April 2008

…nor do many understand their investment

Investors can face myriad charges

Fund supermarkets can help investors minimise costs

Poor fund classification puts retail investor at a disadvantage

Bad press undermines consumer confidence

The ability of fund managers is in question

Regulatory developments

Significant changes in Capital Gains Tax

EU directives aim to create a more competitive marketplace

The Retail Distribution Review

Broader Market Environment

Key points

Population is ageing and growing in affluence

Figure 9: Projected socio-demographic composition of United Kingdom population, 1993-2013

Difficult conditions could limit consumer spending…

…but it is unlikely that consumers will have much spare cash to invest

Figure 10: Monthly changes in annual inflation rates* for RPI and CPI - UK, June 2001-June 2008

Inflationary pressures on returns

Scope for base rate cuts limited by inflation

Figure 11: Bank of England base rate, January 2000-July 2008

Collective investments and the base rate

Stockmarket performance and collective investments

Figure 12: FTSE 100 and FTSE All Share - daily index movements, January 2000-June 2008

Volatility will always be inherent to the market

Collectives are for the long haul

Competitive Context

Key points

Collective Investment Alternatives

Figure 13: Main collective investment alternatives

Safe-haven savings products

Cash ISAs sales outpace stocks and shares ISAs

Figure 14: Amounts subscribed to ISAs, by cash and stocks and shares components, 2002/03-2007/08

NS&I savings products benefit from uncertainty

Figure 15: Amounts invested in NS&I annually and total funds held, 2001/02-2006/07

Pensions compete for individual funds

Figure 16: Total new premiums paid into individual and insurance-administered occupational pensions,

Investment Bonds a niche competitor

Figure 17: Total number of new single-premium investment bond contacts and value of new premiums, 2001-07

Investors appear to be moving away from direct equity holdings

Figure 18: Total value of equity owned (ordinary shares) by individuals in the UK, 1997-2006

Buy-to-let losing its appeal as house prices fall

Figure 19: Value and volume of buy-to-let mortgages in the UK, 2000-08

Strengths and Weaknesses in the Market

Figure 20: Collective Investments - SWOT analysis, 2008

Market Size and Forecast

Key points

Growth in retail sales slowing down after reaching a new high in 2007

Figure 21: Gross retail sales of UK-domiciled unit trusts/OEICs, 1998-2008

Net retail sales are slumping as investors pull out

Figure 22: Net retail sales of UK-domiciled unit trusts/OEICs, 1998-2008

Frequent switching of funds may be counterproductive

More access to European-style funds should tame frequent switching

The rising popularity of ETFs

Asset allocation has become more defensive

Figure 23: UK-domiciled funds under management, by asset class, 2001-07

Time and again retail sales jump during ISA season

Figure 24: Gross and net ISA sales of unit trusts and OEICs, April 2006-May 2008

Collectives are the primary asset class held in stocks and shares ISAs

Figure 25: Market value of ISA funds, stocks and shares component, as of 5 April 2007, by type of qualifying investment, 2002-07

Forecast

Short-term dip, but long-term growth

Figure 26: Forecast of gross retail sales of UK domiciled unit trusts/OEICs, 2003-13

Factors incorporated

Market Share

Key points

Retail and Private Client funds under management

Figure 27: Retail and private client funds under management (minimum lump sum is less than or equal to £50,000), by fund manager, May 2008

Retail funds under management

Figure 28: Retail funds under management (minimum lump sum is less than or equal to £10,000), by fund manager, May 2008

Fidelity top player when it comes to ISA funds under management

Figure 29: UK ISA funds under management, May 2008

Companies and Products

Key points

The residual effects of the credit crunch

Absolute return funds a fast-growing sector

Restricted withdrawals on property funds

More inflation-proof ETFs being offered by iShares

Key fund supermarkets

Broker activity

TD Waterhouse has been able to reduce charges for its clients

Other brokerages are covering the cost of switching

Brand Communication and Promotion

Key points

Overall Collective Investment adspend declining steadily since 2006

Figure 30: Collective investment advertising expenditure, by sub-category, 2004-08

Top ten advertiser adspend declines by a fifth in 2008

Figure 31: Advertising expenditure by the top ten collective investment advertisers, 2007 and 2008

Press the most favoured advertising medium for collectives

Figure 32: Collective investment advertising expenditure, by media type, 2007/08

Channels to Market

Key points

Intermediaries dominate retail distribution

Figure 33: Proportion of unit trust/OEIC gross retail sales, by distribution channel, 2001-08

Fund supermarkets to continue to grow

Fund supermarkets account for close to 40% of ISA sales

Figure 34: Proportion of unit trust/OEIC ISA sales, by distribution channel, 2001-08

The Consumer: Investment Ownership

Key points

Very few consumers invest in collectives…

Figure 35: Investment ownership, April 2008

…but do ‘passive’ shareholders realise the risk they’re taking on?

Investors in collectives likely to hold a wide range of financial products

Figure 36: Cross-analysis of ownership, by selected type of savings/investment product, April 2008

With age comes more activity in saving and investing

Figure 37: Ownership of select savings and investment products, by gender, age, marital status and lifestage, April 2008

Demographics could boost the market

Investing needs to be made more appealing to younger people

Affluent most likely to have funds available for investing

Figure 38: Ownership of select savings and investment products, by socio-economic group, working status, gross annual household income and household tenure, April 2008

Building up to equity investment

Lower chargers and improved access to advice needed

Media usage and investing

Figure 39: Ownership of select savings and investment products, by newspaper readership, technology usage and internet usage, April 2008

The full potential of the internet in financial services still to be realised

The Consumer: Attitudes towards Risk

Key points

Interested in investing - but not in taking any risks

Figure 40: Attitudes towards risk, April 2008

How to highlight the risk/reward trade-off?

Those investing in shares and collectives most prepared to take on risk

Figure 41: Product ownership, by attitudes towards risk, April 2008

There is evidence some investors don’t realise they are taking on risk

Age negatively correlated with risk taking

Figure 42: Attitudes towards risk, by gender, age, marital status and lifestage, April 2008

The more affluent and wealthy the more prepared to take on risk

Figure 43: Attitudes towards risk, by socio-economic group, working status, gross annual household income and household tenure, April 2008

Broadsheet readers and heavy internet users show less aversion to risk

Figure 44: Attitudes towards risk, by newspaper readership, tecnology usage and internet usage, April 2008

The Consumer: Sources of Advice

Key points

Banks or building societies and IFAs remain top sources of advice

Figure 45: Source of financial advice, 2003-08

More than a quarter don’t invest or are not interested in doing so

IFAs a source of advice for 50% of those investing in collectives

Figure 46: Product ownership, by source of financial advice, April 2008

Those who do their own research are more prepared to take on risk

Figure 47: Source of financial advice, by attitudes towards risk, April 2008

Seeking info online becoming more prevalent among older age groups

Figure 48: Preferred sources of investment advice, by gender, age, marital status and lifestage, April 2008

Affluent and wealthy utilising multiple sources

Figure 49: Preferred sources of investment advice, by socio-economic group working status, gross annual household income and household tenure, April 2008

Word of mouth a powerful tool in generating new business

Broadsheet readers consult a number of sources

Figure 50: Preferred sources of investment advice, by newspaper readership, technology usage and internet usage, April 2008

Appendix - The Consumer: Investment Ownership - Full Demographics

Figure 60: Ownership of select savings and investment products, by gender, age, socio-economic group, marital status, lifestage, working status, gross annual household income, household tenure, TV region, ACORN groups, technology usage, internet usage, newspaper readership and supermarket usage, April 2008

Appendix - The Consumer: Attitudes towards Risk - Full Demographics

Figure 61: Attitudes towards risk, by gender, age, socio-economic group, marital status, lifestage, working status, gross annual household income, household tenure, TV region, ACORN groups, technology usage, internet usage, newspaper readership and supermarket usage, April 2008

Appendix - The Consumer: Sources of Advice - Full Demographics

Figure 62: Preferred sources of investment advice, by gender, age, socio-economic group, marital status, lifestage, working status, gross annual household income, household tenure, TV region, ACORN groups, technology usage, internet usage, newspaper readership and supermarket usage, April 2008