Be quick! Or miss out on equity ISAs
The deadline looms, and with tax hikes on the horizon too, Julian Knight consults the experts on the best fund sectors for tax-free savings
Sunday 14 March 2010
Use it or lose it, is the message for millions of savers and investors as the deadline looms for investment in an individual savings account. They have until 5 April to invest up to £7,200 (£10,200 for the over-50s) in a combination of cash or equities, or entirely in equities. Miss this deadline `and the chance to earn investment growth free of tax this tax year will be gone for good.
What's more, this year's deadline for investment in an ISA has greater significance than normal. With taxes almost certain to rise sharply, whichever party wins the upcoming general election, it's more crucial than ever to shelter as much money as possible from the taxman. But whereas the tax break is one that shouldn't be ignored, getting the choice of fund right is paramount. Nearly every year since ISAs came into being in 1999 there has been a fad investment, which has attracted lots of investor cash only to go pop further down the line. It's no good investing for tax-free growth if the investment loses money.
"What tends to happen is that investors look at what sector has performed well over the past year and go for that. The truth is, though, that they may have missed the boat," says Ben Yearsley from IFA firm Hargreaves Lansdown.
But this year is unusual because the investment performance in most stock market sectors has been so strong, as investors lock into the continued march of the emerging economies of China, India and Brazil as well as a hoped-for recovery in the West. As a result, there is no "must have" ISA this year and investors are probably the better for it. "We are seeing investors put their money into a real mixed bag. Some prefer the riskier play of emerging markets funds, while others look at safer options such as absolute returns and UK equity income. There is no overarching theme here, probably because the recent track record of many unit and investment trust funds is good," Mr Yearsley adds.
But what about those who may have had their fingers burnt through investing in a "must have" ISA, or who are simply nervy about the fact that stock markets have been rising seemingly away from economic growth?
"I think there is still good value out there in the main global stock markets which can be exploited by a good fund manager, and the emerging markets story does have a lot going for it," says Darius McDermott, the chief executive of Chelsea Financial Services. "But for those who are frightened that another dip could be on the way there are strategies that can be adopted. By investing a small amount monthly you spread your risk and take timing out of your investment. As well as this, you can pay money into an ISA opened with a fund supermarket – thereby using your allowance – but then wait to assign this money to the funds of your choosing at a later date."
But even if you adopt the monthly drip-feed strategy, or hold money with a fund supermarket to be invested when you reckon the time is right, there is still the key question – which fund sectors should your cash be going into this year? Here's a run down of what the experts say.
For most investors this means the Bric economies – Brazil, Russia, India and China. The world balance of economic power has definitely shifted eastward, and emerging market funds are one of the main ways of taking advantage of this fundamental switch.
"Emerging market equities look reasonable value at the moment and we would expect that over the next decade or so investors would be rewarded," says Derek Capelin from IFA Capelin Financial Management.
Much of the risk associated with emerging markets is due to instability, and, generally speaking, the less developed the economy of the country is, the riskier it will be to invest in because there isn't the legislation or regulation in place to protect investors. The success of many emerging markets is also directly linked to their natural resources, for example, the Russian economy relies heavily on the energy and oil markets.
If there is one "hot" fund in emerging markets it's the recently launched Fidelity China Special Situations. Managed by Anthony Bolton, a hugely successful manager in the UK sector, the fund has seen huge inflows of investor cash. "It looks attractive on paper because of the combination of Bolton and China," says Adrian Lowcock from IFA Bestinvest. "But his experience is all UK-based, so no one knows how it will translate in China, and, with annual fees of 1.5 per cent and performance charges on top, it's expensive."
Instead, Mr Lowcock recommends going for a broader emerging markets fund rather than country specific. Aberdeen Emerging Markets and First State Global Emerging Markets Leaders are his tips for the investors.
With developed economies in the doldrums, the view on corporate bonds is mixed. "The opportunity to make gains was last year, but with interest rates and inflation set to rise, returns may not be as good a year or 18 months out, and there are always corporate failures," Mr McDermott says. But he likes strategic corporate bonds, such as those managed by Henderson and L&G, and M&G Optimal Income bonds. "They have more flexibility than standard corporate bond funds as they can invest in gilts and blue chip companies as well as using derivatives to protect against interest-rate rises."
Few would have guessed that the most lucrative investment area to have been in over the past few years was commodities such as oil, gold and copper. Big-name funds such as BlackRock Gold and General, and JPMorgan Natural Resources have produced impressive performances.
"We are looking at a finite supply of these resources and, therefore, due to the laws of economics, those prices will be driven up over time," says Dan Clayden from IFA Clayden Associates.
Short-term investing can paint a different picture though, as commodity prices are driven by the development of economies such as China and India, and the outlook will also vary from one commodity to another.
Many investors therefore use exchange traded commodities (ETCs) which potentially offer some respite from volatility. ETCs can be traded within an ISA account and because they are not shares, they are exempt from any stamp duty. Like exchange traded funds (ETFs), they offer a cheap and effective way to gain exposure to commodities by matching the performance of a particular index.
"The world's insatiable demand for consumption would suggest that most investors would enjoy long-term gains and should have some direct exposure, providing they have the appetite for risk and volatility," says Mr Capelin.
A decade ago the technology bubble burst, spectacularly. This was enough to put many off for good. But could it be poised for a renaissance? "We are highly dependent on all aspects of technology and from time to time investors forget that technology companies are just like any other business – some succeed and some fail," says Nick Bamford from IFA Informed Choice.
Mr Bamford recommends the Axa Framlington Global Technology Fund for its long and consistent track record.
Otherwise, an index-tracking fund such as the Legal & General Global Technology, with no initial charge and an annual management charge of 1 per cent, will mirror the FTSE World Index for Information Technology. But Anna Sofat, from IFA Addidi, warns against the use of a tracker fund in the sector because of a lack of choice in the UK.
For investors who think they can spot the next corporate giant, the smaller companies sector offers potential.
"At the start of a recession smaller companies are the first victims, but when economic conditions improve, they can come into their own," says Mr Bamford. He commends Investec's UK Smaller Companies Fund for consistency of performance, but Ms Sofat also suggests investors consider America and, more specifically, the Schroder US Smaller Companies Fund. "The US economy is slightly better placed than the UK's, and smaller companies should see a decent uplift," she says.
Less the Cinderella market of the past 10 years more the ugly sister. "Japan is off 70 per cent from its highs," Brian Dennehy from IFA Dennehy Weller says. "However, there are a lot of cash-rich companies in Japan, particularly in the smaller companies sector. Long-term investors should look for deep value, and there is no deeper value to be had than in Japan." Mr McDermott sees the sector as a major play for contrarian investors: "The economy is still in a mess but it's worth dipping a toe in the market, I like Jupiter Japan income and GLG Japan core alpha funds."
The world's biggest economy is pulling out of deep recession, slowly but surely. "People write off the US and its stock market at their peril. The economy is very flexible and able to achieve higher growth rates than, for example, European economies," Mr Yearsley says. "I think the US, like other Western markets, has been given too bad a press." This is echoed by Mr Lowcock who sees the US lead in technology as a potential engine for growth. But there seems to be a paucity of talent in fund managers focused on the US. "Managers tend to perform well for a couple of years and then go off the boil. Outside of the M&G American Fund I would recommend people invest in the US through an ETF [exchange traded fund] rather than relying on an active fund manager," Mr Yearsley says.
If the US suffers from a lack of fund manager talent, Europe apparently has a surplus. "Chris Rice at Cazenove European Growth and Richard Pease New Star Euro Special Situations are both excellent, and there are others," Mr Yearsley says. "Also, European companies are paying higher and more consistent dividends. But it is hard to get excited about Europe, particularly as the euro is strong and the pound weak, which will damage returns if that position reverses itself."
Traditionally, the UK sector has attracted a huge amount of investor cash. There is no currency risk, and the stock market can take advantage of global growth as the majority of FTSE 100 firms make most of their money in economies outside the UK. So the UK stock market may not be as badly hit as it first seems by the country's continuing economic problems, although a government fiscal crisis will only harm values. One of the most popular plays is the UK equity income sector which looks to invest in shares that pay a regular dividend: "It's a long-term play earning 4 per cent income per year from dividends. It can mount up," Mr McDermott says. As for funds, Mr McDermott likes Artemis income and Invesco Perpetual High Income, managed by the high-profile Neil Woodford.
These funds have grabbed many headlines in the past year. According to the hype, they offer steady returns because managers are free to hedge their bets via derivatives and have greater flexibility. But the sector has underperformed the market over the past year and has its critics. "Most of them have been a bit disappointing and quite a few funds are still without a track record," Mr Dennehy says. Out of the funds with a track record, the Standard Life Global Strategies Fund is the "outstanding" choice, he says. But he adds that absolute return funds are generally quite expensive, with managers charging a performance fee as well as an annual management charge.
Additional reporting by Chiara Cavaglieri
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