Five ideas for the ‘ISA Season’11 February 2013
Bestinvest’s Jason Hollands highlights five funds focused on undervalued equities
With the end of tax year fast approaching and signs of improving investor sentiment, the coming weeks are expected to see a spike in new investments into tax-efficient Individual Savings Accounts (ISAs) with each adult able to invest a maximum of £11,280 in to a Stocks & Shares ISA. The key question facing investors however is “where to invest?”
Bond funds have been the most popular choice for many ISA investors in recent years. However, they now hold only limited appeal as yields have dwindled and performance momentum for bonds will diminish materially this year in our view. In contrast, equities are more attractively valued and in many cases offer superior income yields, albeit with potential for greater capital volatility.
- Threadneedle European Select. The relentless stream of bad news from Europe since Greece’s woes started hitting the headlines has left the region unloved by many investors, with companies almost indiscriminately de-rated even where their businesses are in reality globally diversified and not reliant on the Eurozone economy. This has led to the biggest disparity in company valuations between European stocks and their US rivals in many years, providing investors with an attractive opportunity to buy quality businesses. We like the Threadneedle European Select fund, managed by Dave Dudding, which focuses on core Europe and targets global brands such as brewer Anheuser-Inbev Busch, Kit Kat to coffee group Nestle and Unilever whose products include PG Tips, Persil and Marmite.
- First State Global Emerging Market Leaders. The emerging markets offer investors the opportunity to tap into much higher growth rates than the developed world, underpinned by younger populations and rising affluence. Yet over the last two years as western investors became risk averse due to concerns about the future of the Euro and the US fiscal cliff, they reduced exposure to higher risk markets which has resulted in emerging markets reaching some of their lowest valuations in a decade. This represents a buying opportunity for those with a long-term time horizon. First State are a leader in the field with a sizeable team.
- GLG Japan Core Alpha Equity D H GBP (FX hedged share class). Japan has been comprehensively out of favour with investors since its extraordinary bull market of the 1980s came to an abrupt end. While there have been occasional false dawns, Japan has suffered from political gridlock, lack of reform and a strong currency which has undermined its international competitiveness. Japanese companies, which include many global leaders in technology and manufacturing, are optically cheap on most measures, with companies trading below their book value. So why invest now? A recent change in political direction has led to massive stimulus policies and aggressive weakening of the Yen. While this approach is not without risk, if successful it could result in fundamental reappraisal of Japan and propel its markets higher. We like the currency hedged share class of GLG’s Japan Core Alpha fund. The fund, managed by Stephen Harker, has a strong style bias towards large businesses which he believes are undervalued. We would expect this strategy to play out well if there is a sustained re-rating of Japanese equities.
- Fidelity MoneyBuilder Dividend. For most ISA investors, UK shares will be their main allocation to equities. Although the outlook for the UK economy is far from inspiring, the good news is that such is London’s status as an international market, around 58% of revenues generated by FTSE 100 companies are derived outside of the UK and Europe. UK equities provide access to many world class businesses. Companies have been distributing healthy dividends which are generally well covered by underlying earnings and pay-out ratios are still some way below their peak levels. This suggests there may still be headroom for further increases. Historically around half of the overall return from the UK equity market has come from dividends, so equity income funds hold appeal for both income seekers and those growth investors who are happy to reinvest their dividends and benefit from a compounding effect. There are a number of equity income managers we rate highly but for those investors wanting a blue chip approach our favoured fund is Fidelity MoneyBuilder Dividend which under the tenure of Michael Clark has been one of the least volatile funds in the sector.
- Liontrust Special Situations. At a time when the outlook for economic growth is anaemic, we believe some of the best money making opportunities will come from investing in individual company “special situations”. This fund, which invests across the market cap spectrum from large companies to minnows, targets businesses which have distinctive qualities, such as intellectual capital, strong brands or distribution which are difficult for competitors to replicate, enabling them to defend profit margins and grow market share. One such example in the fund is Domino’s pizza which has captured 90% of the 8% annualised growth in the pizza delivery market over the last seven years due to its strong distribution network and online ordering system.
Of course ultimately any decision over which fund to invest your ISA in should be based on an appraisal of your own goals and attitude to risk, the time horizon you expect to be invested for, analysis of where your existing investments are spread and then making new investments which fit alongside these and which seek to target the areas of greatest value. Investors can analyse their portfolio free-of-charge at www.bestinvest.co.uk/first
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Underlying investments in emerging markets are generally less well regulated than the UK. There is an increased chance of political and economic instability with less reliable custody, dealing and settlement arrangements. The market(s) can be less liquid. If a fund investing in markets is affected by currency exchange rates, the investment could both increase and decrease. These investments therefore carry more risk.
Founded in 1986, Bestinvest was a pioneer of helping clients reduce the costs of investing through discounting commissions. Today Bestinvest has grown into a leading private client adviser which helps over 50,000 investors. Bestinvest offers a range of services including guidance, investment advice, financial planning and discretionary portfolio management all of which are underpinned by a commitment to rigorous investment research. Through its low cost Select service, Bestinvest offers execution-only investors a Self-Invested Personal Pension Plan (SIPP), Individual Savings Account (ISA), Junior ISA (JISA) and Investment Account with access to more than 2,000 funds as well as investment trusts, shares and Exchange Traded Funds. Bestinvest has won numerous awards including ‘Self-Select ISA Provider of the Year 2011’ and ‘UK Wealth Manager of the Year 2011’ as voted by readers of the Investors Chronicle and Financial Times and Investment Adviser of the Year 2012 at the Professional Adviser Awards. Headquartered in Mayfair, London, Bestinvest has 14 regional offices with 200 staff servicing clients with over £4 billion of assets.
Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.