Innovative Finance ISAs (IFISAs) have outperformed the UK stock market over the four years from 2018 to 2021, exclusive Peer2Peer Finance News research has shown.
The tax wrapper around peer-to-peer investments has not only outperformed the FTSE All-Share Index but has also demonstrated far more stable returns in recent years, of approximately eight to nine per cent per annum.
Peer2Peer Finance News analysis found that IFISAs returned an average of 7.8 per cent across the calendar year 2021, compared to nine per cent in both 2020 and 2019, and 8.73 per cent in 2018, demonstrating the stability of the asset class over a medium-term investment horizon.
By contrast, the FTSE All-Share returned 18.3 per cent in 2021, -9.8 per cent in 2020, 19.2 per cent in 2019 and -9.5 per cent in 2018.
This means that £20,000 invested in a FTSE All-Share tracker fund in January 2018 would have been worth £23,022.16 by February 2022. If that same £20,000 had been invested in an IFISA it would have been worth £27,851.66 by February of this year.
“The performance of the IFISA is perhaps the best kept secret in financial services,” said Bruce Davis, director of industry trade body the UK Crowdfunding Association.
“For investors who have an appetite for risk, and are making investments for longer term financial needs, the wide range of products now available in both the P2P and crowdfunding sectors means that it is possible to make investments which are uncorrelated with mainstream public markets.
“We need to make sure there is a more balanced and accurate set of messages out there in the market about the potential rewards and risk of our sector so that ordinary investors don’t lose out on an investment option that has shown it can perform well over the long term – even through a crisis such as the pandemic.”
The attractiveness of IFISA returns has been further highlighted by the low yields seen on cash ISAs. The best rate on a three-year fixed cash ISA is currently 1.46 per cent, according to Moneyfacts, as of 17 February. UK inflation hit 5.5 per cent in January, meaning that money held in cash ISAs is eroding in value in real terms.
Furthermore, the vast majority of IFISA providers have been able to maintain a track record of zero losses to investors, while continuing to offer inflation-beating returns despite an unprecedented period of economic instability.
However, it should be noted that historic data is not a guarantee of future performance, as investments are never risk-free.
There is a variety of options on the market for investors considering putting money into an IFISA this tax year. As of February 2022, there were 39 IFISA accounts open to retail investors. By the end of February 2022, these 39 IFISAs were targeting average returns of 7.75 per cent for the 2021/22 financial year.
When taking into consideration the minimum and maximum returns on offer on some platforms, Peer2Peer Finance News calculated that the minimum average return being targeted by IFISAs is 6.38 per cent – still comfortably beating the current rate of inflation of 5.5 per cent. Meanwhile the maximum average target is 8.7 per cent. Some platforms have been advertising target returns of up to 16 per cent, depending on the amount of money invested and the type of investment shown.
“We have seen huge stability in rates earned but that isn’t a particular surprise to us,” says Stuart Law, chief executive of the Assetz Group.
“We have in the past expressed the IFISA with its lending assets from our type of platform as having the potential to offer higher rates than bank savings and lower volatility of returns than the stock market, effectively a third type of asset class. That theory now seems well proven.”
Narinder Khattoare, chief executive of Kuflink, predicted that 2021/22 would be one of the biggest ISA seasons to date, thanks to growing familiarity with the product, and the long track record of inflation-beating returns.
“I can see this ISA season being one of the biggest so far,” says Khattoare.
“A lot more people know about the IFISA and with bank rates going up and inflation rising it is inevitable people need to look wider afield to get a better return on their hard earnt money.
“I think new investors will enter the P2P IFISA market due to the attractive returns some of their friends and family have seen over the past 18 months. I’m surprised at the overall average return but think that will be slightly lower over time.”
The most recent figures released by HMRC reported that £438m was invested into IFISAs during the 2019/20 tax year. This brought the cumulative amount put into IFISAs to £1.07bn by April 2020.
However, since then the IFISA market has experienced unprecedented upheaval. In the wake of the Covid-19 pandemic many platforms opted to pause their retail investment offerings. Several major IFISA providers such as Funding Circle and LendingCrowd have yet to reopen to retail lenders.
Several other IFISA providers have exited the market altogether. Zopa announced its P2P exit in December 2021, and Lending Works confirmed its exit soon after. Meanwhile 2021 saw the collapse of former IFISA providers such as The House Crowd.
As a result, there is less choice in the IFISA market for the 2021/22 financial year. Among the 39 IFISA providers which are open to investment this year, 14 have a minimum investment threshold of £1,000 or more, placing them out of reach of the average retail investor. This has sparked calls for more independent financial advisers (IFAs) to consider IFISAs for their high-net-worth and sophisticated investor clients.
“IFAs have a duty to consider the asset class but for some unknown reason they don’t do the research, neither do online stocks and shares ISA platforms which is a poor reflection on the IFA community and direct online investment platforms,” says Lee Birkett, chief executive and co-founder of JustUs.
“The IFISA P2P secured lending asset class, when distributed via credible platforms and advised accordingly, is hard to match.”