The British ISA: What is it and Should I Invest?

Today’s Budget statement contained few surprises, and that itself is nothing new. But there was something that took me slightly aback: not just that the government is proceeding with its British ISA plans, but that the word “Great” doesn’t precede the product’s title itself.

A petty thing to point out, perhaps. Indeed, it suggests a government lighter on patriotism than onlookers have come to expect – and perhaps one more cogniscent of political sensitivities.

Whatever the reason, the outcome is entirely fitting. Because the policy isn’t an outstanding example of the levers of power at work. Even the providers in favour of it aren’t exactly staking their business plans on its inception. And that says all you need to know. Beyond that, there are reasons to hate it.

Before we get to those, it’s worth looking at why it exists, and how you could use it.

5 Potential Stocks For Your British ISA

• Alphawave (AWE);
• Chemring (CHG);
• Vodafone (VOD);
• Trustpilot (TRST);
• Yellow Cake (YCA).

The British ISA: is it Actually Necessary, Though?

As an exercise in focusing your mind solely on UK equities at a time when they are largely unloved, the British ISA can at least be deemed legitimate. As such, I am not surprised to see a press release land in my email inbox announcing various “interesting” investment options savers might now use their fresh (and separate) £5,000 allowance on.

Among them are companies like Alphawave IP Group (AWE), a UK-listed “mini-Nvidia” with a £1.3 billion market capitalisation. A way of getting in on the artificial intelligence hype without relying on the so-called Magnificent Seven, its shares are up 95% over one year.

Likewise, Chemring (CHG), the UK-listed defence and aerospace operations supplier, whose market capitalisation is slightly lower at £1 billion, but whose tailwinds in our world of resurgent uncertainty and higher defence spending look, cynically, good.

Are you thinking what I’m thinking? Let’s buy!

“In theory, [the British ISA] could provide a tailwind for UK equities if a significant number of investors invest extra money in UK stocks, pushing up prices,” says Russ Mould, investment director at AJ Bell.

In theory.

But there is, naturally, a difference between artificially inflating demand (and therefore prices), and companies like this being good value.

Investors will naturally be wary as they ensure they buy low and sell high. And over what timeframe? Jeremy Hunt is keen to put UK-centric investing first, but putting UK-centric investors first involves an acknowledgement that investing is a long-term game. That’s down to you. As such, using the British ISA as a day trading account is not for the faint-hearted, and isn’t what it’s been designed for anyway.

Nor will it escape your attention that, beyond having a bigger overall allowance to spend on your ISA investments from the government itself, you don’t actually need a British ISA to be UK-centric in your approach.

All of the UK’s publicly-listed companies are available for purchase within an existing stocks and shares wrapper anyway. I discussed this issue from a different perspective when, upon the invasion of Ukraine, I argued investors don’t need ESG funds to embrace arms stocks to get exposure. If you want to buy BAE Systems’ shares (BAE), go and do that.

“In reality, people can already invest as much as they like in UK shares via a stocks and shares ISA, so any benefit for UK companies is likely to be relatively marginal,” Mould says.

“Even if every single stocks and shares ISA holder using their maximum allowance went out and bought £5,000 of UK shares, that amounts to just 0.2% of the UK market’s aggregate value. In reality, most will just re-allocate money in their main ISA anyway in order to keep their overall UK exposure roughly the same.”

Do I Need a British ISA to be a Good Investor?

No, you don’t. But that’s subjective. Here’s what we know from science.

Morningstar does a lot of work to highlight the various pitfalls investors can fall into when considering their options, and among them is so-called home country bias.

As the name suggests, home country bias is what we display when we centre ourselves in the jurisdiction we’re in to the exclusion of investment opportunities elsewhere.

For UK investors less bullish on the UK than one Nick Train, at least, the Magnificent Seven provides a convenient enough excuse to think further afield anyway, but the point stands: a well-diversified portfolio will consist of different asset classes, but it will also contain instruments focused in lots of different countries and markets. Nick Train would tell you that for free, and his services don’t come cheap.

Sound simple? Here’s where the British ISA gets even more complicated.

So, is The British ISA Even British?

The above question is at the very heart of what you need to know about UK investing.

Though they may be listed in the UK, our wonderful stock exchanges’ biggest and best companies are internationally-exposed anyway.

The FTSE 100 is made up of massive multinationals in the energy, financials, and industrial sectors doing business all over the world. It’s thought as much as 82% of the revenue generated by FTSE 100 companies comes from outside our lovely island.

As such, using your existing stocks and shares ISA to invest in UK companies will, to some degree, grant you a degree of international diversification. But with that comes risk too: risk in the form of currency fluctuations, regulatory headwinds, or – geopolitics again – business disruption of any and all kinds.

The oil company Shell (SHEL) is a great example of this. Yes, it’s listed in London, but it does business all over the world, and is therefore exposed to all kinds of opportunities and risks. Morningstar analyst Allen Good assigns its stock a three-star Morningstar Rating, and its shares have performed well over the last two years, but its future will be complex.

As a primarily oil-driven company, Shell is vulnerable to all sorts of accusations about its business practices. Where regulators act on that – and in whichever jurisdiction they see fit to – its share price will probably reflect whatever is going on.

Taking the example of Chemring again, the same applies. The company does business all over the world, but defence contracts are often dependent on the appetite of cash-strapped governments, making its order book – and investor confidence in the company – cyclical.

None of this makes a British ISA entirely redundant. But it doesn’t exactly make it a brilliant distraction either.

One More Thing About The British ISA

Alas, there is another reason to be careful.

The UK’s ISA system is already becoming bloated with idea after idea designed to solve socio-economic problems that are arguably out of the reach of a single product.

We’ve had the Help to Buy ISA, the Lifetime ISA (which I find particularly troublesome), and now a “British” product. That’s alongside our existing cash and stocks and shares wrappers.

Each of these now has its own rules and regulations, so critics can only too keenly point out further iterations of exactly the same thing amount to nothing more than tinkering. For investors, this matters because the ISA system is meant to be simple. In theory, you shouldn’t require financial advice to open or use one.

All this is not even to mention a government clearly looking for ways to spruce up confidence not just in UK equities, but also its own track record. This, it seems, is what this story is all about: the levers of power showing how easy it is to slip into short-termism.

So, like the proverbial passenger plane handing out snacks as it awaits an available runway above Heathrow, passengers on this particular plane may appreciate clarity more than they do a complex and patriotic gimmick.

Who knows, they may even want a different airline.

Ollie Smith is UK Editor at Morningstar. He does not own any of the individual securities mentioned in this article


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