Beating the deadline: What's hot (and what's not) in equity ISAs
With only weeks to go until the end of the tax year, it is time to think about your annual ISA allowance. Julian Knight asked a group of industry experts what they would be looking for in an equity fund
Sunday 18 March 2012
It's a red letter day in many private investors' diaries. Thursday 5 April marks the end of the tax year and the last chance to make use of this year's Individual Savings Account allowance.
An ISA protects savings and equity investments from tax on interest earned and capital growth. Up to £10,680 can be squirrelled away in an ISA each year but once the tax year is over, that's it. Deciding which cash ISA account to go for is relatively easy – just compare the rates and access, and off you go.
But with equity ISAs the choice of fund is wider and more esoteric. You have only a few pointers to which fund to go for, such as past returns – which are meant to be no guide at all, according to the well-known Financial Services Authority warning – and the story behind the fund: either the manager's track record and core beliefs or the sector itself.
From large UK companies to small African start-ups, every investment sector has a story to tell. But with only weeks left to decide where to invest your hard-earned cash, we put together a panel of experts with decades of investment experience behind them to outline which sectors and funds they'd go for.
Anna Sofat, Addidi Wealth
It's your individual attitude to risk which should determine where you invest your cash, according to Ms Sofat. "Cautious investors – say those nearing retirement or with relatively small amounts of spare cash – should look at absolute return funds, which are meant to smooth out investment returns. As for choice of fund, I'd look at the Standard Life absolute return fund."
Ms Sofat is less convinced by fixed-interest funds – which invest in either corporate or government bonds. "Fixed interest has had a lot of money going into the sector and there is likely to be a correction when investors feel a bit more safe and start to look for risk," she explains.
For those willing to take a little more risk, Ms Sofat favours funds which invest in the debt of emerging markets. "These funds carry a decent rate of return and default rates are low," she says.
Tom Stevenson, Fidelity
As one of the world's biggest fund management groups, Fidelity is well placed to say which types of fund are hot and which are not as the ISA deadline approaches. "There is a lot of interest in UK equity income funds – which invest in the shares of companies which pay a dividend," Mr Stevenson says. For once, he thinks what is hot is also what is right. "There is a clear case for equity income funds. The companies are paying dividends of 4 or even 5 per cent which means you are keeping pace with inflation – not easy with a cash ISA.
"What's more, people have heard of the companies these funds are investing in – the likes of Vodafone and GlaxoSmithKline. A good steady dividend is the sign of a good steady company."
Mr Stevenson also cites the US: "The economic figures Stateside get better by the day. The US is the Western economy which is recovering the fastest from the global recession."
Brian Dennehy, director, Dennehy, Weller & Co
Mr Dennehy says this year's ISA allowance should by used to buy funds which invest in dividend-paying companies. "The JOHCM UK Equity Income and Schroder Income stood out in 2011 for growing their payouts by 10 per cent, vital for keeping ahead of inflation," he says. "These remain two outstanding funds for those comfortable with capital volatility in the short term, in exchange for a steady and growing income stream in the longer term.
"Similarly with Newton Asian Income, where the potential for income growth should be greater still."
Mr Dennehy also favours corporate bond funds. "M&G Corporate Bond had a total return of 9 per cent in 2011 – made up approximately of half reinvested income and half by capital gains. The manager, Richard Woolnough, remains a safe pair of hands, being the only manager in his sector to make money in a tough 2008."
Darius McDermott, managing director, Chelsea Financial Services
Hunting down dividends is the order of the day, according to Mr McDermott. "Equity income is the way, because reinvested dividends are key to decent returns in a low growth environment, and lots of very good companies are sitting on cash at the moment, but this means any money they are spending is on increasing dividends to shareholders."
Mr McDermott says investors should look beyond the trusted old favourite UK equity income funds. "To diversify more, investors could consider Asian or global equity income funds." He lists the Newton Asian Income fund and M&G Global Dividend as ones to watch.
Adrian Lowcock, Bestinvest
Investors should have more than one eye on potential volatility caused by the eurozone crisis, Mr Lowcock says. "This leads me to special situations and smaller companies funds, where active managers not only add value but in many cases significantly outperform."
Mr Lowcock looks to managers who have performed well in the past 12 months, which saw major swings in global stock markets. "I like the Asia Aberdeen Global Asian Smaller Companies fund which has returned 11 per cent over the past 12 months, while in the UK, Liontrust Special Situations, a multi-cap fund, has returned 16 per cent over 12 months.
"The key behind both is the quality and expertise of the fund managers."
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