As markets boom, fund managers celebrate with a bumper ISA season

People travelling home late this evening may notice unusual goings-on outside some of the country's most anonymous office blocks. It has been several years since leading fund managers have felt it worthwhile persuading their administration staff to burn the midnight oil in a last-ditch effort to take investors' money on the final day of the tax year. But this year, the investment industry is expecting a late rush for individual savings accounts (ISAs) and their staff are ready to cope with the late-night queues.

Fund managers including Fidelity and New Star will open offices and call centres around the country to the public, to help investors beat the midnight deadline for using their 2005-06 ISA allowance. The plans enable investors to put up to £7,000 into stock market funds each tax year, as well as a range of other assets, and protect future income and gains on the assets from tax.

Fidelity, the UK's biggest retail fund manager, and its rivals are prepared to pay their staff overtime tonight because this year's sales figures already suggest retail investors have finally regained their confidence about the stock market's long-term potential for growth.

During the 1990s bull run on global stock markets, the annual rush for ISAs and their predecessors, personal equity plans (PEPs), was an annual event in the financial services industry's calendar. But once world markets began to collapse in 2000, fund sales nosedived, irrespective of the tax advantages of ISAs.

Moreover, while markets have been in recovery mode for several years, the unit trust and open-ended investment company (Oeic) sector has been slow to reap the benefits. In the 2004-05 tax year, fund sales slumped to below £4bn, about a quarter of the total achieved at the height of the market.

Since last April, however, new money has finally begun flooding into collective funds. The Investment Management Association (IMA) said £9.7bn was raised in the 10 months of the current tax year to the end of February. In good years, March and the first few days of April have accounted for a third of total sales for the year, so many managers believe they will get close to figures not seen for six years.

Jupiter Asset Management, for example, said its sales were currently 110 per cent up on last year. "There's no doubt it has been a superb ISA season," said Jupiter's Alicia Wylie. "We've seen huge increases in ISA sales, as well as in stand-alone funds and in funds sold through other distribution channels, such as self-invested personal pensions."

Nick Wells, of Artemis Fund Managers, added: "We've certainly seen a very good start to the year - we're two or three times up on the figures we had at this time last year."

Fidelity, meanwhile, reported that its sales were up by more than 100 per cent, while New Star and Invesco Perpetual have also hinted at significant uplifts, although neither company would provide specific figures. Phil Wagstaff, the head of retail sales at New Star, said: "Stock markets have had three consecutive up years, clients are feeling more optimistic and it also helps that in the UK at least interest rates have peaked so cash returns are falling."

Richard Saunders, the chief executive of the IMA, said all the anecdotal evidence pointed to a continuation of a trend it identified this year. In February alone, the latest month for which final figures are available from the IMA, net fund sales totalled £1.41bn. That almost matched the £1.56bn of net sales recorded in February 2000, during the biggest-selling year on record for ISAs. "Everybody is very upbeat," Mr Saunders said. "Sales of funds do finally seem to be getting back to the levels seen in the late 1990s."

Such is the strength of investors' new-found enthusiasm for global stock markets that some investment advisers are becoming concerned. Philippa Gee, of the independent financial adviser Torquil Clark, said: "There is a huge amount of ISA money coming in but it is unfortunate that so much has been invested over the past three weeks, just as markets have hit new highs." Mark Dampier, of the independent financial adviser Hargreaves Lansdown, added: "The question that immediately follows is does this increased interest indicate that we are entering a bubble that will inevitably burst?"

Happily, this time investors seem to be backing a much wider range of funds. In 2000, many investors concentrated on the UK all companies sector - and specifically funds investing in technology, media and telecoms shares. By contrast, the top selling sector in February, according to the IMA, was the specialist category, which includes funds investing in everything from financial stocks to property.

The top-selling unit trusts and Oeics on Fidelity FundsNetwork, the manager's online brokerage service, are certainly eclectic. They include funds investing in Latin America, property, commodities, Russia, China and India - the latter country, where share prices have soared, has been particularly popular.

In addition, brokers such as Hargreaves Lansdown say some of the industry's most consistent performers are also selling well, including Invesco Perpetual Income, Artemis Income, New Star UK Growth and Framlington Select. "We do think some sectors, particularly property, are overvalued," Mr Dampier warned. "But investors are not rushing in as they did during the technology boom of 1999-2000 and they are not all following one hot theme."

One quirk of this year's ISA season is that while fund sales are massively up, at first sight, at least, there has not been a corresponding increase in purchases of ISAs. Investors don't have to buy stock market funds within an ISA, and many appear to have chosen not to. Six years ago, the £1.02bn worth of funds that were bought within ISAs in February represented 66 per cent of the overall total sales for the month. In February this year, confirmed ISA sales totalled just £130.7m - although that figure represented a 34 per cent increase on the same month in 2005, it still meant ISAs accounted for less than 10 per cent of overall fund sales.

The decline may not be as serious as the figures suggest. Fund managers depend much more heavily today on the online fund supermarkets than they did six years ago. But although sales from this channel account for up to 90 per cent of business through certain intermediaries, it is not possible to identify whether investors buying funds through this distribution channel intend to hold them inside or outside an ISA. As a result, ISA sales may be a significantly higher proportion of overall sales than it would first seem.

Even so, the investment industry believes the decision by Gordon Brown in April 2004 to abolish ISA investors' right to reclaim the tax automatically deducted from share dividends before they are paid has dealt the tax shelters a serious blow. The move meant, in effect, that only higher-rate taxpayers would get any income tax advantages from opening an ISA, although all taxpayers remain exempt from capital gains tax on ISA investments.

Mr Dampier added: "The abolition of dividend tax credits after a three-year bear run was an unfortunate combination that has undoubtedly put some investors off ISAs."