In the Budget, the Chancellor announced that the government is to extend ISA eligibility to include a whole new range of 'alternative' financial assets.
These new investments are:
Listed bonds issued by a co-operative and community benefit society.
Small- and medium-sized enterprise (SME) securities (not just equities) admitted to trading on a recognised stock exchange from summer 2015.
Debt and equity securities offered via crowd-funding platforms.
So what are they? And should you invest in them through your ISA?
Listed bonds from mutual societies
Co-operative and community benefit societies are mutual organisations, owned by their members, that provide a social benefit to local or national communities. The Co-op is probably the best-known mutual co-operative society operating in the UK today.
As mutuals, they have no shares and therefore cannot raise money by issuing equities. However, they can issue bonds similar to the corporate bonds offered by other businesses. Some of these bonds are listed and traded on the London Stock Exchange, and it is these fixed-income securities that will become ISA-eligible.
These listed society bonds are fairly low-risk and usually issued by organisations with fairly solid balance sheets, so including them in ISAs is a smart move by the Chancellor.
At this stage, it is not entirely clear what HM Treasury means by this statement: "SME securities...trading on a recognised stock exchange".
Investors Chronicle believes this refers to shares traded on the Icap Securities and Derivatives (ISDX) Growth Market. Companies listed on ISDX tend to be first-time equity fund-raisers or listed businesses arranging secondary fund-raisings.
As at the end of February, 76 company securities were listed on ISDX, with market values ranging from a tiny £80,000 to £983 million (Arsenal Football Club). The total market capitalisation of ISDX is just £2.1 billion, with Arsenal (46.7%), support services firm Mears Group (21.1%) and Kent brewer Shepherd Neame (8.0%) accounting for more than three-quarters of this total.
These are highly illiquid and risky investments. Indeed, months go by without even one trade being made in some ISDX securities. Given that ISDX stocks are more likely to lose investors money, rather than generating positive returns, it seems likely that this proposal will affect only a handful of UK investors.
The second school of thought is that this announcement concerns listed bonds issued by SMEs.
Danny Cox, Head of Communications at Hargreaves Lansdown, said: "This is almost certainly bonds, which makes a lot of sense, although investors need to be aware of the risks. Generally, these bonds will have much higher yields and fall into the 'junk' category, where defaults will be relatively commonplace. Diversification is the key here and a bond fund is likely to provide the best way to reduce and manage risk."
Regardless of which of these two routes this ISA extension takes (either or both), these investment classes are highly risky, illiquid and, therefore, best owned only by experienced, risk-hungry investors.
Crowdfunded shares and bonds
The Chancellor is to consult on whether to allow crowdfunded equities and debt to be included inside ISAs. Although fairly small today, both markets are experiencing explosive growth, driven by platforms such as Seedrs, Crowdcube and Syndicate Room. Even so, companies raised only £84 million through equity crowd-funding in 2014.
While crowdfunded bonds are suited to investors keen to buy high-yielding fixed-income investments, crowdfunded equities very much lie at the 'red flag' end of the investment spectrum. Cox warns that while there is a place for crowdfunded debt in ISAs, equity crowdfunding is "the Wild West of investing and involves the smallest start-up businesses, where there is high risk of failure".
What about peer-to-peer?
In last year's Budget the Chancellor announced plans to include peer-to-peer lending in ISAs. Since then the Government has held a consultation on the issue, with the final recommendations to be published this summer.
A risk warning
While investors will doubtless welcome the expansion of the ISA stable, financial experts have expressed some concerns over the levels of risk these new-fangled alternative financial assets involve.
David Norton, head of investments at financial adviser AES International, said: "I would urge caution to investors considering making more esoteric choices, as an ISA should generally be seen as a tax-efficient savings tool, rather than a place to take risky bets."
In other words, keep risky investments outside of ISAs, where they might generate losses to offset capital gains made elsewhere.
What do you think? Will you be investing in any of the above through your ISA?
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