Nick Henshaw, Head of Intermediary Distribution at Wesleyan

I’ve been concerned to hear on the grapevine that investors are pulling significant amounts of money out of their stocks and shares ISAs.

They aren’t doing this because they need ready cash to combat the high cost of living. In fact, their main motivation is fear.

That might be the fear of a 1.5% fixed-rate mortgage coming to an end and being put on a standard variable at 7%, for example.

So for some, liquidating investments to pay off a mortgage, or a big chunk of it, is a way to fend off an abrupt increase to their monthly payments.

More likely, it’s the fear of ongoing stock market volatility, where they feel the risk premium outweighs the rewards available.

In more normal times, clients would have been confident in keeping money in investments as returns would easily outpace inflation or the interest being charged on their mortgage.

But now, they are looking at the returns their stocks and shares ISA have generated over the last year and wondering if the risk is worth it.

Seeking safety and certainty
Investors have been left bruised by cautious and defensive funds that have performed poorly for the last five years – but particularly last year.

So, in search of some safety and certainty, they are swapping stocks and shares ISAs for cash ISAs, or holding cash in a stocks and shares ISA instead of investing in risk assets.

Indeed, ISA season made history this year, when we saw the biggest inflow of money into cash ISAs that there has been since the tax efficient accounts first launched in 1999. £5.9 billion was deposited into cash ISAs in March alone.*

And, on the face of it, a cash ISA does deliver some peace of mind. After all, they could get up to 4.5%** guaranteed returns – and it’s risk-free.

However, while a cash ISA may feel risk-free, this is in fact an illusion. If you look at the difference between the rate of return – say 4.5% – and the rate of inflation – currently around 8.7%*** – money kept in a cash ISA actually loses 4.2% of its spending power every year.

In fact, we have to go back to the mid-nineties to find the last time there was a real return on cash.

The other big risk is, if you temporarily take money out of investments to avoid short-term volatility, when do you then get back into the market?

Getting the timing right is a big risk in itself. It’s that old adage – time in the market beats timing the market.

Fighting the fear factor
So, an important part of the advice process is to help clients overcome their immediate fears and take a more balanced view.

Both adviser and client must understand why they are investing, how long for and what their journey is.

With a roadmap in place, it’s important that clients accept that volatility is a normal part of their investment journey and that they shouldn’t get spooked and diverge from the route.

Look at any chart plotting the performance of any stock market and you will see there are no straight lines. Rather, we see something more like an Alpine landscape.

But there are investment products that can deliver long-term asset performance and control short-term volatility control too.

With profits funds use a smoothing process to hold back some returns when market performance is strong, to support returns when the market experiences losses.

It’s a strategy designed to reduce day-to-day fluctuations and provide steady investment growth.

Responding to risk
With profits has a track record of achieving just that. The fully managed Wesleyan With Profits Growth Fund, for example, has achieved a cumulative return of 80% (as at 3 April 2023)**** over the last decade.

And it has an FE fund info risk score of just 11, which is 89% lower than the FTSE 100*****.

So, a with profits fund can anchor an investment portfolio designed to acquire real assets that beat inflation and provide a long-term investment horizon while reducing the fear factor.

Advisers can use the Novia platform to create a nimble bespoke portfolio that has with profits at its core, dialling any risk up or down according to the environment and your client’s appetite.

And advisers should seek out funds that provide daily pricing, daily trading and daily smoothing, so they can get the instant information they need.

Human nature doesn’t change and fear of the uncertain is perfectly rational, but fear can also motivate people to do the wrong thing. While we can never eliminate risk entirely, we can certainly help take the anxiety out of investing.

For more information on Wesleyan’s smoothed With Profits Fund visit Follow Wesleyan for Intermediaries on LinkedIn.

**** Wesleyan With Profits Growth Pension Fund Series A Factsheet
***** Wesleyan With Profits Growth Fund Series A FE Fund info risk score ’27 Apr 2023′