Six ideas for the ISA season16 February 2015
With the 5 April end to the 2014/15 tax year fast approaching, investors have just weeks left to utilise their £15,000 ISA allowances. The choice of which investments to hold in your ISA should always be tailored to your personal circumstances after considering your goals, appetite for risk and investment time horizon. That means it is vital to take into consideration any investments you already own before putting new cash into the markets.
However, with that caveat in mind, Jason Hollands, Managing Director of leading investment advisory firm Tilney Bestinvest, sets out six themes to guide investors mulling their choices.
1. Follow the regions where central banks are engaged in money printing programmes – but consider neutralising the currency exposure
Hollands says: “In recent years a number of central banks have engaged in extraordinary stimulus measures, known as Quantitative Easing. Where these programmes have been put in place, QE has proved a decisive factor in driving stock markets higher by pushing down yields on bonds and therefore encouraging investors into riskier asset classes in search of returns. QE has also enabled companies to refinance debt cheaply and in doing so boost profits. However, while providing a supportive tailwind to stock markets, QE programmes also provide downward pressure on the currencies of the regions, so investors seeking to benefit from these stimulus programmes might want exposure to local stock markets - but not the currencies.
“While the US has now completed its QE programme and is largely expected to start increasing interest rates again this year, there are two major regions where significant stimulus programmes will be in place this year; Japan and the Eurozone. Japan has been expanding its monetary base for some time now, aggressively expanding its stimulus programme in April 2013 and accelerating it further in October 2014. With Japan clearly committed to this course and reformist Prime Minister Shinzo Abe having secured a further electoral mandate at the end of 2014, Japan continues to be one of the developed world equity markets with significant potential for further gains. A weaker Yen is boosting the competitive position of Japan’s exporters and the global slump in energy prices should also benefit the country which has been a major net importer of energy since the closure of its nuclear reactor programme in 2011. A fund that provides access to large Japanese companies such as Nintendo, Honda, Canon and Sony, but which hedges the exposure to the Yen back into Sterling, is the GLG Japan CoreAlpha Equity I H GBP fund.
“The Eurozone is another region where investors could benefit from stimulus measures. There have been a lot of negative headlines about the Eurozone of late, as it faces anaemic rates of growth, the spectre of deflation and a showdown with Greece’s new government. Yet we are upbeat on European equities, as at last the European Central Bank has announced that it too will introduce a massive stimulus programme which will start in March. This willsee the ECB commence asset-purchases of at least €1.1 trillion as it aims to achieve aninflation rate close to 2%. Western Europe is also a major net importer of energy, so we believe reduced oil and gas prices should also benefit European economies. A fund which provides exposure to European shares, but hedges exposure to the Euro back into Sterling is the Artemis European Opportunities I Hedged fund. The fund has significant (19%) exposure to healthcare companies, with major holdings including global giants Novartis, Roche and Novo-Nordisk, while its financials exposure includes the likes of Swiss fund manager, GAM, and Zurich Financial Services.”
2. Don’t box yourself in within the UK market – following a ‘multi-cap’approach
Hollands says: “Unsurprisingly, the UK tends to be the first port of call for most UK-based ISA investors, and over the last year it has been funds in the UK Equity Income sector that have proved the most popular of all. Yet investors need to take care that they do not layer upexposure to the same underlying companies through repeat investing into funds that eachare fishing predominantly in the FTSE 100 Index. Dividend growth has been slowing of lateand there are headwinds facing some of the sectors heavily represented in the FTSE 100 such as oil and gas which represent 14% of the index. Let’s not forget that there are almost 650 companies on the main London Stock Exchange and more than 1,000 on its junior sibling, the Alternative Investment Market. We therefore like funds that hunt right across the whole universe of opportunities, selecting attractive companies irrespective of whether they happen to be large, medium sized or small.
“For income seekers, a fund that has such an approach is the Standard Life UK Equity Income Unconstrained fund, managed by rising star Thomas Moore. The fund is currently 40% invested in FTSE 100 companies, 45% in mid-caps and 6% in smaller companies, with a further 9% not in these indices. Its top holdings range from telecoms giant BT to specialist bank Close Brothers and travel firm TUI. Absent are the large oil and gas companies - the fund has just 0.9% invested in these areas.
“Another fund that pursues a multi-cap approach, but with a growth rather than income objective, is the Liontrust Special Situations fund. This is 36% invested in the FTSE 100, 31% in the FTSE 250 and 26% in small-cap and AIM. The managers target growth companies that possess strengths that are difficult for competitors to replicate, and which should be more robust investments across the economic cycle. Top holdings include Compass, Advance Computer Software and Emis.”
3. Pursue a ‘value’ approach when investing in the USA
Hollands commented: “The US stock market has sky-rocketed since 2011 sending the S&P 500 Index repeatedly to new highs. With the US anticipated to continue to post robust GDP growth and the Dollar expected to strengthen as monetary policy normalises, it is easy to see why investors might be tempted to hold US equities in their portfolio - after all, let’s not forget that US-listed companies represent around half of all global equity markets by market-cap, so every diversified portfolio should probably have some exposure to the US.
“Yet the nagging concern is that US equities look expensive compared to history, so investors should tread with a little care and not throw caution to the wind. One approach is to invest through funds that have a style-bias that places a strong emphasis on investing in companies that can be purchased at attractive valuations while avoiding those trading on very highmultiples or placing too much hope on the future earnings that don’t exist today. One such fund that pursues this approach is the Dodge & Cox Worldwide US Stock fund, which is managed in San Francisco. For those preferring a passive approach to US equity markets, the Powershares FTSE RAFI US 1000 UCITS ETF tracks an index that weights companies based on fundamental factors such as revenue, cash flow, dividends and assets rather than market-capitalisation, and this leads it to having a more natural ‘value’ bias.”
4. Consider absolute return funds as an alternative to bonds
Hollands said: “The asset class which has been most distorted by the policy actions of central banks in recent years is fixed income as the combination of record low interest rates and bond-purchase programmes have driven prices up and yields down. With value hard to find in the fixed income universe, investors who have traditionally held bonds to reduce overall volatility, but don’t currently need to draw an income, might consider targeted absolute return funds, as although higher risk they may act as an alternative.
“The correlation between different asset classes, markets and currencies has reduced over the last year, and this environment provides greater opportunities for funds that have wide remits to implement trading strategies across the globe. One such fund we like is the Invesco Perpetual Global Targeted Returns fund, launched in late 2013 following the hiring of some of the team involved in developing the now very large Standard Life Global Absolute Return Strategies fund. Although there are no guarantees, the Invesco Perpetual Global Targeted Returns fund aims to deliver a positive return in all market conditions over a rolling three-year period, with a gross return above UK interest rates but with low volatility.”
5. Scoop up emerging market value with investment trusts trading at discounts
Hollands commented: “Emerging markets have been out of favour for some time now, as China has slowed, Russia has increasingly become an international pariah over its aggressive policy towards the Ukraine and Brazil’s economy has stumbled. Among the larger emerging market economies, India is seen as the brightest spot having last year elected its first ever business-friendly, reformist Government with a resounding majority.
“While some of the challenges facing certain emerging market economies aren’t going away, such as a rising cost of capital as the US Dollar strengthens, emerging market equities do appear tantalizingly cheap. For those prepared to accept their high risk nature and invest for the long-haul, current valuations look an attractive entry-point.
“One way to scoop up even more value is through an emerging market investment trust, as these are generally trading at discounts to their Net Asset Value. The closed end structure of an investment trust has distinct advantages when investing in volatile markets compared to an open ended fund, as the latter can find that when investors panic they become forced sellers of their most liquid investments, whereas an investment trust manager can hold steady, or even use gearing (borrowing) to buy into weakness. This can, however, make investment trusts more risky than open ended funds. We like the JPMorgan Emerging Market Investment Trust, which is trading at an 11.1% discount to NAV. The trust currently has a bullish position towards India, with 23.4% of the portfolio invested in India compared to a benchmark weight of 7.7%.”
6. If you can’t decide – open your account with cash rather than lose your precious allowance!
Hollands concluded: “If you can’t decide where to invest, need more time or are concerned about the short-term outlook for markets then don’t panic or feel pressured to invest in a hurry. You can always open your allowance now with cash and decide where to invest in later. The important thing is to secure your allowance as it is valuable. It is estimated that around 2 million more people have been drawn into the 40% tax band during this parliament and depending on the outcome of May’s General Election, those earning over £150,000 could see the return of the 50% tax rate. It really does make sense to get your savings ring fenced from the tax man through important allowances such as ISAs and pensions.”
- ENDS -
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 press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. ETFs can be high risk and complex and may not be suitable for retail investors, so you should make sure you understand all the risks involved before investing. Investment trusts are similar to funds in that they provide a means of pooling your money but they are publicly listed companies whose shares are traded on the London Stock Exchange. The price of their shares will fluctuate according to investor demand and changes in the value of their underlying assets.
Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing. Smaller companies shares can be more volatile and less liquid than larger company shares, so smaller companies funds can carry more risk. Due to their nature, specialist funds can be subject to specific sector risks. Investors should ensure they read all relevant information in order to understand the nature of such investments and the specific risks involved.
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 or decrease. These investments therefore carry more risk. Funds which invest in specific sectors may carry more risk than those spread across a number of different sectors. In particular, gold, technology and other focused funds can suffer as the underlying stocks can be more volatile and less liquid.
Bonds issued by major governments and companies will be more stable than those issued by emerging markets or smaller corporate issuers; in the event of an issuer experiencing financial difficulty, there may be a risk to some or all of the capital invested. Please note that historical or current yields should not be considered reliable indicators of future performance.
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 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 UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, 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 Bestinvest employs almost 400 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.The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority.Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.
For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 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. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.