Investment: The Battle Is on for Your Cash

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This is shaping up to be one of the toughest Isa seasons for some time. After the market ravages of the past two years, sales of Isas are way down on the glory years this year so far. Most providers are fretting anxiously over their marketing budgets, wondering whether there is going to be the traditional last-minute burst of sales to revive their fortunes after what has been a largely dismal year.

Nobody, as far as I can see, has yet latched on to a clear winning sales pitch at either the macro or the micro level, although New Star, the fund management house started by John Duffield, the former boss of Jupiter, appears to be having a fair deal of success with its high-profile "watch me repeat the Jupiter trick" approach since its launch last summer. Protected funds of the kind I mentioned last week, whatever their merits, would seem to have the makings of a good story in falling markets, but many investment firms have struggled to find the best way of explaining them in a way that allows even discerning investors to assess their merits.

This was a point that was explicitly made by Marc Gordon, the managing director of Close Fund Management, at an interesting high- level conference on the future of fund management organised by the Institute of Economic Affairs a few weeks ago. Close's range of escalator funds were among the first breed of protected funds to be launched, five years ago, and have done well in the institutional market, but have made relatively little headway in the broader retail market, where they are imperfectly understood.

So where will the market go for bread this year? It looks too early to get any serious momentum behind the damaged telecoms and technology sectors (though some isolated bargains are beginning to appear among those companies that survived the havoc of the bursting bubble). Bond and cash funds may be reliable but lack marketing sizzle. Health and biotech funds are being heavily promoted, but many I speak to worry that this sector too is heading for some kind of post-bubble correction.

By the nature of things, many fund managers have ridden the high tides of the bull market with only a sideways glance at the underlying economics of their businesses. These are clearly deterior- ating. Rising costs, falling markets and tumbling product sales have exposed how highly geared many investment firms are. The healthy profit margins that attracted so much new capital into fund management are proving highly vulnerable now that the golden years are fast becoming a distant memory.

Management consultants PWC have pointed out for several years now in their annual industry survey the threat that falling markets pose to many industry participants. It is no surprise, for example, to see a sudden intensification of corporate activity in the investment trust sector, where for a variety of reasons (history, tax, personalities) many indifferently performing trusts have clung to life beyond their natural span.

What was tolerable inefficiency and complacency during the bull market years now looks like a burden. …