‘Six of the best’ - top fund ideas for the "ISA season"10 February 2014
Bestinvest’s Jason Hollands highlights six funds which may appeal to different types of ISA investors
With the 5 April end of tax year deadline fast approaching, the coming months are expected to see the seasonal stampede into tax-efficient Individual Savings Accounts (ISAs). This tax year, each adult is able to invest a maximum of £11,520 in to a Stocks & Shares ISA, however the key conundrum facing them all is “where to invest?”
This year, picking funds for an ISA is particularly challenging as value is harder to find after the exceptional returns delivered by many developed markets during 2013. The risks are also acute as the process of winding down radical measures aimed at stimulating the US economy has begun, which is leading to volatility in emerging markets, fixed income and Japanese equities as well.
With this in mind, we highlight a number of options which may appeal to different types of investor:
1. Medium risk - Back a new star in a core sector: Cazenove UK Equity Income. Equity income funds have long been a popular with private investors, rightly so. Whether you draw the dividends or reinvest them, over the long run dividends have accounted for much of the total return on UK equities. The UK Equity Income sector is something of a Champions League for fund managers and has long been dominated by some Big Beasts. However, with the news earlier this year that the UK’s most widely held income manager, Neil Woodford, is set to leave Invesco Perpetual, the tectonic plates are starting to shift. We’re always on the look-out for the next generation of star managers and one we rate highly is Matt Hudson, manager of the Cazenove UK Equity Income fund, which is now part of the Schroders stable. Matt pursues a non-dogmatic approach, adapting the portfolio to suit each stage of the business cycle, so currently the fund is positioned towards recovery plays.
2. Medium risk - the recovery play: AXA Framlington UK Mid Cap. AXA may be a giant group, but this fund is a minnow at £70 million. Nevertheless, we see the fund's size as a definite advantage as it can trade more easily. Medium sized UK companies have been the stand-out performers on the UK market over the last 10 years but of particular relevance is the fact that their earnings are much more domestically biased compared to the larger companies in the FTSE 100 which are more multinational in nature. As such, we feel this fund is better positioned to benefit from the UK domestic recovery than most. Top holdings include property website Rightmove, builders merchants Travis Perkins and discount sports goods firm Sports Direct.
3. A re-rating opportunity: Baring European Select. While Europe’s economic woes rumble on and the European Central Bank has been behind the curve in terms of implementing the stimulus measures seen elsewhere, we think that ultimately further action to stimulate the Eurozone is inevitable as credit growth is slow and inflation is below target. When that happens it should benefit European share prices, which look reasonable value compared to their US peers. This fund focuses on small and mid-cap companies and should be more geared into a market rerating.
4. For the long-term thrill seeker: Aberdeen Global Asian Smaller Companies. We like this fund for adventurous investors, willing to take a long term view and with the guts to invest into a part of the market that has been going through a painful run of late as the effects of the US wind-down of its stimulus measures have spilt over to hit the emerging markets. While the near term ride could remain bumpy for some time, for longer term investors this should represent an opportunity to build a position at depressed valuations. This fund, managed out of Singapore by Hugh Young’s well-resourced team is highly diversified with around 150 holdings. Although these are higher risk companies in volatile markets, the approach is a conservative one, with a strong emphasis on buying companies that are at reasonable to cheap valuations.
5. Cautious option: Jupiter Absolute Return. After stellar returns on developed equity markets during 2013, investors might want to tread more cautiously this year as stock valuations are well out of the bargain basement and as the US progressively exits its massive “Quantitative Easing” programme, the road ahead could be bumpy. We feel this environment could be a more conducive one to “absolute return” funds that have been largely ignored in recent years. The fund we highlight is the Jupiter Absolute Return fund which has recently come under new management, following the hire of James Clunie from Scottish Widows Investment Partnership. At SWIP he successfully managed their UK Flexible Strategy fund but he was also a senior lecturer in finance at the University of Edinburgh and is a notable authority on absolute return investing. The Jupiter Absolute Return fund, which previously disappointed on expectations, now fully reflects James Clunie’s approach, targeting a 6% per annum return after fees across the market cycle through both “long” positions in stocks he likes and taking bets on stocks he thinks will fall.
6. A return to fixed income: Legal & General Dynamic Bond Fund. A year ago there was little to be said for investing in the bond markets, as prices had been artificially propped up by central banks buying them to keep borrowing costs down, and consequently yields were squeezed. However, the markets are moving on and the US Federal Reserve is now gradually reducing its bond-buying activities. The market is on a path to normality and yields have risen. That adjustment process has yet to fully play out, so we think the best way to access the bond markets is still through funds where the managers have considerable flexibility to adapt their positioning, so-called “strategic bond” funds. The Legal & General Dynamic Bond fund can invest across the entire fixed income spectrum, from government bonds to high yield bonds, as well as asset backed securities and cash. The fund will also very actively move between bonds that have a relatively short period until they mature and longer dated bonds. Right now it is conservatively positioned in expectation that there will be more volatility over the shorter term.
Of course every investor is different, and in considering choices for new investments, the right place to start is by reviewing those you already hold to make sure that any new purchases are complementary to your overall investment strategy. Investors can analyse their own portfolio free-of-charge using Bestinvest’s Free Investment Report Service & Tool at: www.bestinvest.co.uk/first
If you are unsure of where to invest, act now to secure your precious Stocks & Shares ISA allowance by holding cash in it and invest later once you have had time to decide on the right course of action. Investing always carries the risk of unfortunate timing, so even once you have decided on which funds to invest in, a sensible strategy is to phase your investment in over a period of weeks and months to help even out any short term volatility. This is easy to do with an online account.
Please feel free to get in touch should you need any further help with articles on ISAs.
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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.
Targeted Absolute Return funds do not guarantee a positive return and you could get back less than you invested much like any other investment. Additionally, the underlying assets of these funds generally use complex hedging techniques through the use of derivative products.
Bonds issued by major governments and companies will be more stable that 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. Any historical or current yields quoted should not be considered reliable indicators of future performance.
Founded in 1986, Bestinvest has grown to become a leading private client investment adviser, looking after £5 billion of assets. We offer a range of investment services from the Online Investment Service for self-directed investors to Investment Advisory and Investment Management services for clients who do not have the time or inclination to manage their own investments.
All of our services are underpinned by rigorous research aimed at identifying those fund managers we believe will deliver long-term superior performance. We also have a team of expert financial planners with nationwide coverage to help clients with their pensions, retirement or Inheritance Tax planning. At Bestinvest, we pride ourselves on offering the highest levels of professionalism and expertise with transparent, competitive prices. We are pleased that our greatest source of new business is from personal referrals from existing clients.
Bestinvest has won numerous awards including Stockbroker of the Year, Low-Cost Sipp Provider of the Year and Self-Select ISA Provider of the Year at The Investors Chronicle and Financial Times Investment Awards 2013. Bestinvest also won UK Wealth Manager of the Year 2013 and Best WealthManager for Investments at The Investors Chronicle and the Financial Times Wealth Management Awards 2013.
Headquartered in Mayfair, London, Bestinvest employs more than 200 staff and has an extensive network of regional offices.
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.