The Sunday Times April 3, 2022 13
MONEY
N
ew year resolutions offer us
the chance to reinvent and
reinvigorate ourselves in the
bleak midwinter. Now the
new tax year that begins on
Wednesday provides a fiscal
prompt to do something
similar this spring with our
money.
For example, since the
chancellor set out plans for the govern-
ment to grab the biggest share of what we
earn in living memory, I intend to imme-
diately make use of the 2022/2023 annual
allowance to put savings and investments
beyond the grasp of HM Revenue & Cus-
toms (HMRC). By contrast, most folk wait
until the end of the tax year before invest-
ing in their Isa.
So, if you are one of them, it may be
worth pointing out that you have until
midnight on Tuesday to utilise the
£20,000 2021/2022 Isa allowance
because it really is a case of “use it or lose
it”. More positively, the sooner our sav-
ings and investments are squirrelled
away in an Isa, the sooner they can grow
for our benefit rather than HMRC’s.
Never mind the theory, there was a
£3,000 practical difference for folk who
invested £1,000 in their Isa every year
since the tax shelter was set up. Accord-
ing to the investment platform AJ Bell,
that’s how much better off early-bird
investors are than the last-minute mob if
both chose the same unit trust.
Laith Khalaf, the platform’s head of
investment analysis, told me: “Since Isas
were launched in 1999, last-minute inves-
tors of £1,000 each year in the Invest-
ment Association global sector average
fund would have turned £23,000 into
£62,240. Meanwhile, early birds wouldthat most investors would rather receive
£1,000 in their Isa than be left with £800
or £600 from the same dividend
(depending on each individual’s top rate
of income tax) paid outside it.
The same thing goes for growth, where
Isas render any profits free of capital
gains tax (CGT). Anyone successfully
investing outside of an Isa is allowed to
pocket CGT-free profits up to £12,300 in
the tax year that ends on Tuesday —
which, if you think about it, almost dou-
bles the annual earnings of £12,570 every-
one is entitled to receive before we have
to pay income tax.
This annual CGT allowance is another
example of use it or lose it. So anyone
with assets that are ripe with gains out-
side Isas should consider harvesting
some before midnight on Tuesday.
Remember, paper profits are all very well
but you haven’t really made a penny until
you sell.
As it happens, BHP also provides a per-
sonal example of how the Isa tax shelter
spares investors from having to worry
about CGT. I first bought shares in this
business more than a decade ago, and
they have grown substantially since.
After originally investing with a paper-
based broker, I transferred these shares
to an online platform’s Isa when they
traded at £19.06 in September, 2013.
They cost £30.01 on Friday, which
equals 12 years’ corporate earnings per
share, and continue to yield nearly 9 perNever mind lazy clichés about evil
capitalists waxing fat on profits from
armaments, gambling and tobacco.
You’ll find all of them in a typical tracker
fund, but investors willing to take an
interest in how our money might make a
difference can still do well by doing good.
Healthcare needs huge sums of capital
to fund research. Last Tuesday another
dividend payment provided a reminder
that this sector is in rising demand. Novo
Nordisk (NOVO) is a Danish pharma firm
that specialises in the treatment of
obesity and diabetes. It makes half the
world’s insulin and last June obtained US
authorisation for weight-loss pills. I first
invested in February last year, paying
$73 for American depositary receipts
(ADRs) that cost $111 on Friday. Switching
back into Danish shares means that
withholding tax takes a bite out of
NOVO’s 1.4 per cent dividend, but the
44 per cent gain in its sterling value in
just over a year has made this my ninth
biggest shareholding.
Pfizer (PFE), the vaccine-maker, and
Worldwide Healthcare (WWH), an
investment trust, are the seventh and
eighth most valuable shareholdings in
my “forever fund”. They tend to get
more coverage than NOVO because
coronavirus dominates headlines.
However, humanity is better at surviving
scarcity than coping with plenty, so I
expect we will hear more about NOVO.
Never mind the theory, this fatty only
has to look in the mirror to see what it
means in practice. Even so, as an
investor, I hope to be part of the solution
as well as the problem.Health stocks
are good for
fatties like me
$110
Price of Novo Nordisk shares that
Cowie bought for $73 in February 2021ST DIGITAL
For a full list of Ian Cowie’s
”forever fund”
thesundaytimes.co.uk/cowieholdingsWant to be £3,000 richer? Be an early
bird and invest all of your Isa on April 6
Ian Cowie Personal Account
cent with a net profit margin above 28 per
cent, according to the independent stat-
isticians Refinitiv.
I like the newish chief executive’s focus
on “future-facing” commodities, such as
copper and nickel necessary for electrifi-
cation, plus a big bet on potash fertiliser,
which looks shrewd since the war in
Ukraine suspended a globally important
source of supply. So I intend to buy some
more BHP on a down day.
Here and now, this miner is my sixth
most valuable shareholding, but there is
no need to worry about HMRC digging
into it because of the government-spon-
sored, onshore tax haven I hold it in. Isas
are also very flexible because, unlike pen-
sions, there is no maximum limit on their
value above which punitive taxes apply.
That’s a bit of a sore point with my self-
invested personal pension (Sipp), whose
value has exceeded the lifetime allow-
ance since before I began writing about
investments here. But I know that
nobody is interested in other people’s tax
problems, so I really mustn’t grumble.
The practical point for all investors is
to take timely action, sooner rather than
later, to grow and protect our life savings
because it beats hoping politicians or
paternalistic employers will do the work
for us. The end of one tax year and the
beginning of another is as good a time as
any to get stuck in.now be sitting on £65,290. Of course,
there are some years when the market
falls, but they have risen in 15 of the last 23
tax years.”
Odds of nearly two to one in favour of
shares over cash are good enough for me.
However, it is very important to be aware
that the past is not necessarily a guide to
the future. Share prices can fall without
warning and we might get back less than
we invest in the stock market.
Last week provided me with a four-fig-
ure reminder of the joy of tax-free invest-ment returns when BHP Group (stock
market ticker: BHP) distributed a record
$7.6 billion half-year dividend. The
world’s biggest miner is also the biggest
holding in my modest Isa and, since
BHP’s recent move to Australia, really is
paying tax-free income to investors —
unlike British shares, which suffer some
deductions that Isa managers cannot
reclaim.
There is no need to get bogged down in
the fiscal esoterica of franked and
unfranked dividends. Let’s just acceptO
ne of the biggest trends
in investing has been
the move away from
actively managed funds
to a passive approach.
Passive or tracker funds,
which seek to track a
benchmark or an index,
rather than outperform it,
were invented in the 1970s
and were viewed with
considerable scepticism at
first, but now about
$26 trillion is invested
passively around the world.
Their less risky aims and
lower fees mean that passive
funds have on average
outperformed active funds,
where a fund manager picks
the investments and aims to
beat the market — a much
harder thing to achieve
consistently than merely
matching it.
There are two types of
passive fund. A tracker moves
up and down in line with the
stock market index it follows,
such as the UK’s FTSE 100 or
the US’s S&P 500.
The other option is an
exchange traded fund (ETF).
These have a few whizzier
features derived from the fact
that they are traded on the
stock market and have been
growing in popularity.
ETFs held a record $10.27
trillion in assets at the end of
last year, with an all-time-
high of €1.29 trillion net
investment flooding into the
funds in 2021, according to
the research firm ETFGI.What’s to like?
Since passive funds do not
require the skill (or salary) ofTHE BESTSELLING ETFS ON
HARGREAVES LANSDOWN’S
PLATFORM LAST YEAR6 HSBC MSCI World6 Invesco
Elwood Global Blockchain6 Invesco EQQQ Nasdaq
1006 iShares Global Clean
Energy6 iShares Core MSCI World6 Vanguard FTSE 2506 Vanguard FTSE All-World6 Vanguard FTSE All-World6 Vanguard S&P 500a fund manager to run they
can be much cheaper.
The average fee for a
passive fund is about 0.12 per
cent, compared to 0.62 per
cent for an active fund.
Unlike a tracker, which can
be bought or sold just once a
day, you can buy or sell
shares in an ETF in the same
way as other stock market
shares. This lets investors buy
them when they are cheap.Bye-bye fund
managers,
our money’s
in trackers
Last year more was invested in
one type of passive fund than ever
before. Holly Thomas reveals whyETFs can also have low
fees. For example the Lyxor
Core UK Equity All Cap
ETF, which tracks the
Morningstar UK Index, comes
with a 0.04 per cent fee.
ETFs also offer the chance
to dabble in thematic
investing. You can invest in a
specific area such as artificial
intelligence, electric cars or
clean energy.
Ark Space Exploration
and Innovation invests in
firms involved in the space
race such as the mobile
mapping company Trimble.
It’s still important to check
through the holdings. There
are some surprising additions
in this fund, such as the
agricultural machinery firm
John Deere.
Rize Sustainable Future
of Food ETF invests in
companies across the food
production chain that are
dedicated to building a more
sustainable and fair system,
including the plant-based
food company Beyond Meat.
The most popular ETF
among users of the platform
Freetrade in 2021 was the
iShares S&P Global Clean
Energy, which invests in
firms involved in low-carbonenergy production such as
Enphase Energy, Vestas Wind
Systems and Orsted.
Another plus for investors
using ETFs is that they can
view every stock held in the
fund at any time. Actively
managed funds typically only
reveal their top ten
investments, publishing the
full list once a year.What’s not to like?
As they are not run by a
manager, passive funds have
no mechanism to react to
market changes.
The fact that ETFs are
traded on the stock market
adds another layer of
complication. “You’re relying
on someone wanting to take
the other side of your trade,”
said Emma Wall from the
wealth manager Hargreaves
Lansdown.
“ETFs are also guaranteed
to lag the index they track
due to fees. An active fund
has the chance to outperform
the index if run properly.”
It is also important to note
that while index-tracking
ETFs tend to be cheap, the
thematic ones are less so. Ark
Space Exploration and
Innovation has a 0.75 per cent
fee, for example.
ETFs can use a tool called
derivatives — contracts that
derives their value from the
performance of an
underlying asset — to track
their chosen index.
“Derivatives may be
provided by investment
banks called counterparties.
Because of these additional
transactions ETFs carry
additional risk — such as if the
counterparty runs into
financial difficulty,” said Wall.Keen to invest?
For beginners looking for UK
exposure, Wall suggested
iShares PLC Core FTSE 100,
which has turned a £10,000
investment into £12,700 over
five years. For those seeking
geographical diversification
she tipped Vanguard FTSE
All-World, which has turned
a £10,000 investment into
£14,700 over five years.
Ben Yearsley from Shore
Financial Planning likes
iShares UK Dividend, which
has turned a £10,000
investment into £11,650 over
five years. Its holdings
include the energy giant BP
and the miner Rio Tinto.