Investors wishing to use their tax-efficient individual savings account (Isa) allowances for the tax year 2008-09 have exactly three weeks to invest up to £3,600 in cash, or up to £7,200 in equities or funds. But with interest rates on cash Isas now averaging just 0.96 per cent, and global equity markets continuing to fall, advisers are recommending a focus on risk management, through the use of well-diversified funds.
Andy Parsons, advice team manager at The Share Centre, says: “The see-sawing markets have no doubt left some wary of investing in equities so, to help minimise risk, investors need to consider how their investment portfolio is structured. Those not ready to invest directly within the stock market could consider funds as a way of reducing their overall risk.”
So, to help evaluate fund risk, FT Money asked a number independent financial advisers (IFAs) to recommend Isa-qualifying funds for three types of investor:
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• Isa recommendations for income investors
• Isa recommendations for lower-risk growth investors
• Isa recommendations for higher-risk growth investors
• Isa recommendations for cash savers
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Isa recommendations for income investors
Artemis Income fund
Artemis Income, run by Adrian Frost, is Bestinvest’s preferred fund for Isa income investors – or any investor seeking a long-term return. “Income is becoming a big theme for investors and shouldn’t be considered by just those looking for income,” points out Adrian Lowcock, senior investment adviser at Bestinvest. “Anyone reinvesting dividends over the last ten years would still have positive returns in equities.
Tim Cockerill, head of research at advice firm Rowan & Co, also recommends the Artemis Income fund. He says: “The fund is yielding 6.7 per cent and has been performing well (this is relative of course). The manager Adrian Frost has extensive experience and is a cool head in these troubled times. The fund avoided the fall out from the banking sector and focuses on quality businesses that will survive this recession.”
Schroder Income Maximiser
In the current low-interest-rate environment, more “enhanced income” funds being launched – which, for some additional risk, can improve the income being generated. Of these, Lowcock recommends Schroder Income Maximiser, while has been around for a while. At present, the yield is “an exciting” 12.9 per cent – but this is based on historic dividends so “investors should prepare for it to come down”.
BNP Paribas UK High Income
This BNP Paribas fund works in a similar way to Schroder Income Maximiser, and is Killik & Co’s recommendation for income investors. It aims to generate a high and stable yield by earning dividend income from a diversified portfolio of FTSE 100 stocks, and by writing call options on the shares held. It has recently increased its weightings towards more defensive stocks, such as GlaxoSmithKline and BP, both of which are expected to maintain their dividends despite the gloomy economic outlook. “Given the current level of economic and earnings uncertainty in the UK, we continue to see a strong case for investors to diversity part of their equity exposure into this fund,” says Mick Gilligan of Killik.
Invesco Perpetual Corporate Bond fund, Threadneedle UK Equity Income fund, and Ignis Argonaut European Income fund
Generating income from alternative sources right now is important, advises James Davies of Chartwell. So, in addition to the M&G Optimal Income fund (see above), he suggests that investors try combining a corporate bond fund, such as the Invesco Perpetual Corporate Bond Fund, with some UK and overseas equity income funds, such as Threadneedle UK Equity Income and Ignis Argonaut European Income. “Not enough investors are diversified – and that goes for those looking for income, too,” says Davies. “Gain exposure to income sources from cash, bond and equity exposure. Just look at how low the income generated by cash is right now.”
Invesco Perpetual Corporate Bond fund
Invesco Perpetual’s bond fund is also recommended by Andy Parsons at The Share Centre. He says: “The most attractive thing about this fund is the yield on offer. Its distribution yield [an estimate of the income the fund expects to pay over the next year] currently stands at a staggering 7.1 per cent, although this is variable and is not guaranteed.” However, the fund aims to achieve a high level of overall return, with relative security of capital, by investing primarily in fixed-interest securities, such as gilts and corporate bonds.
Jupiter Corporate Bond fund, M&G Optimal Income fund, Invesco Perpetual Income fund, Invesco Perpetual High Income fund
“For income seekers, there are really two ways to go: corporate bonds or equity income,” says Mark Dampier, head of research at Hargreaves Landown. So he recommends four funds – two for each direction.
Jupiter’s Corporate Bond fund is one of the “lower risk breeds”, he suggests, with a yield of approximately 5 per cent. Manager John Hamilton has a risk averse style which has kept the fund lowly weighted in financials. M&G Optimal Income, managed by Richard Woolnough, yields nearer 7 per cent but but has a “strategic mandate” enabling it to move into all areas of fixed interest.
Invesco Perpetual’s Income and High Income funds, both managed by “market leader” Neil Woodford, are his picks for income investors seeking a yield from share dividends. High Income currently offers 5 per cent net, but Dampier thinks Woodford may be able to increase this. “Given where cash rates are, this looks very attractive.” Woodford is very defensively positioned in defensive sectors such as tobaccos, pharmaceuticals and oils – although Dampier warns that, in current equity markets, “you may have to shut your eyes on the capital side for the first few months at least”.
Two of these income funds are also recommended as Isa holdings for lower-risk growth investors (see below).
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Isa recommendations for lower-risk growth investors
Invesco Perpetual Income fund
An equity income fund is recommended for cautious growth investors by Mick Gilligan of Killik & Co: Invesco Perpetual Income, managed by “seasoned investor” Neil Woodford. His fund focuses on firms with “defensive” revenue streams, such as pharmaceuticals and consumer staples. Woodford constructs the fund’s portfolio by taking a top-down macroeconomic view to identify broad investment themes, and then using stock selection to benefit from these themes. He is a “contrarian by nature” so the portfolio will tend to differ markedly from both the FTSE All Share index and a typical UK Equity Income fund. Gilligan says: “The fund continues to consistently outperform its peers and its defensive qualities make it a strong candidate for portfolio inclusion, given the deteriorating economic backdrop. We continue to rate the fund a buy.”
Fidelity Moneybuilder Income fund
Cash should be the first port of call for a low risk investor, argues Adrian Lowcock, senior investment adviser at Bestinvest, but as returns are “pretty dismal” he recommends a corporate bond fund. “We feel quality corporate bonds remain most attractive for a on a risk/return basis and would recommend a well managed fund, such as Fidelity Moneybuilder Income. For moderate risk investors, he suggests an absolute return equity fund, and opts for Blackrock UK Absolute Alpha.
Cazenove UK Absolute Target Fund
Cazenove’s absolute return fund is preferred by Mark Dampier at Hargreaves Lansdown. This fund makes use of the Ucits III regulations, allowing tit to short shares as well as going long. “It’s basically a market neutral fund,” says Dampier. “It got off to a terrific start last July but over the last month has had a much harder time as it is positioned more defensively with shorts on the cyclical side. Any fund like this is prone to sector rotation, and I would suggest now is an excellent time to buy some of this fund. It aims to grind out a return of about 8 per cent per annum.”
Low-risk investors might be tempted to go down the absolute-return fund route, says James Davies, investment research manager, at Chartwell, but he advises caution as these funds tend to work best as part of a larger portfolio. So, for a lower risk ISA investment, he suggests for a strategic bond fund holding government and corporate bonds. Davies prefers the M&G Optimal Income Fund, as it invests in a “good spread” of lower risk assets, and is managed by Richard Woolnough – “an excellent fixed interest manager, with a strong process and team behind him”.
Newton Higher Income fund
For investors willing to take “medium risk”, Andy Parsons, advice team manager at The Share Centre picks Newton’s Higher Income Fund, as he considers it “an ideal holding for investors seeking income as well as the potential for capital growth, especially given the current climate and depressed share prices”. It is focuses on medium and large-cap UK companies, and currently offers a yield of 8.02 per cent. It has achieved “superb relative performance in a sharply falling market”, says Parsons, thanks its “large underweight” in financial stocks.
Perpetual Income & Growth investment trust
With this investment trust, “the ultimate goal is total return”, says Tim Cockerill, Head of Research at Rowan & Co Capital Management – which is why he picks it for lower-risk investors. He points out that the managers’ “broadly negative outlook” and resultant positioning has made them among the best performers. “They are long-term investors with a focus on income generation,” he says “If the stock market races ahead, then this trust will be left behind, especially as it is trading at a small premium, but it works well as a core long-term holding. It is perhaps one of the few you can buy and forget about – almost!”
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Isa recommendations for higher-risk growth investors
M&G Recovery fund
Investors willing to take some risk should consider an absolute return equity fund, says Adrian Lowcock, of Bestinvest. “Some of these have actually shown very stable performance over the last couple of years,” he points out. “There are more being launched but we would suggest sticking to a tried and tested model and opt for Blackrock UK Absolute Alpha run by Mark Lyttelton”. However, for a long-only equity fund, he recommends M&G Recovery.
Sarasin GlobalSar IIID fund
Medium risk investors should be looking to diversify their investment across asset classes and geographic region, explains James Davies of Chartwell. So he recommends the Sarasin GlobalSar IIID Fund, which invests in equities, bonds and cash, but can also use some alternative asset types to smooth the returns. Fund manager Daniel Briggs and his team aim to identify investment themes that will drive returns over the medium to long term – so Davies believes this fund is a good way of getting geographic diversification for within an Isa, without having to select a number of individual funds.
Allianz RCM BRIC Stars A Accumulation fund
Launched in 2006, this Allianz RCM emerging markets fund returned 58 per cent in 2007, thanks to its focus of the fast-growing economies of Brazil, Russia, India and China. But, in the market turmoil of 2008, it then lost 54 per cent. Even so, Andy Parsons of The Share Centre still believes this fund perform in the long-term as these emerging markets will continue to have “a strong input to future global development.”
Aberdeen Emerging Markets Fund
Aberdeen’s emerging markets fund is favoured by Mark Dampier of Hargreaves Lansdown. “Clearly, emerging markets have also been hit by the developed world downturn but they are in much better shape to cope,” he argues. “Most emerging market countries have current account surpluses with little or no debt, plus they don’t have an ongoing banking crisis.” He believes Aberdeen’s fund is one of best in the sector – and suggests now is a good time to pick up units at cheap prices.
First State Asia Pacific Leaders fund
Asia Pacific is the region recommended for higher-risk investors by Killik & Co, and the firm’s preferred investment is First Sate’s fund. It has topped its sector peer group over a five year period, and is well diversified in terms of both sector and geographical allocation. exchange rates may also work in its favour. “The relative strength of the balance sheets among Asian governments compared to the UK should mean that sterling is likely to remain weak against Asian currencies in 2009,” says Killik’s Mick Gilligan.
Fidelity Special Values investment trust
When this investment trust was managed by Anthony Bolton, it used to trade at a premium to its net asset value (NAV). Now under Sanjeev Shah, its shares are at a 10 per cent discount. But Christopher Sexton, investment director at Saunderson House thinks the shares have been oversold – and expects the discount to narrow as Shah makes his mark. “We’ve been following Shah closely since his days managing Fidelity’s UK Aggressive fund,” he says “He is backed by Fidelity’s strong research resource and he also looks into metrics such as directors’ deals or the amount of a company’s equity that is on loan to short sellers. He has the freedom to go short on markets and, by doing so, banked some profits at the start of 2008.”
F&C Commercial Property investment trust
F&C Commercial Property has seen its NAV fall 40 per cent from its peak in mid 2007, and Christopher Sexton of Saunderson House doesn’t think the downturn in the commercial property market is over yet. But, with the trust trading at a discount to NAV of around 25 per cent, he believes a lot of bad news is already factored into the share price. “The fund holds quality property assets with good tenants and we view it as lower risk than many other funds in this sector,” says Sexton. “Following some disposals, it has a healthy cash position and a low level of net gearing at just 5 per cent. Investors who buy into this trust’s shares now will also be paid an annual yield of 9 per cent, while they wait for the sector to return to favour.
JP Morgan European Fledgling trust
It may not be the best environment for investing in European smaller companies, and some argue that the euro is over valued – but Tim Cockerill of Rowan & Co thinks the JP Morgan European Fledgling trust could be an interesting holding for those willing to take the risk. “Small companies have great potential for growth even if it has been delayed for now, and across Europe the range and diversity in smaller companies is huge,” he says. “This trust’s share price may get cheaper, but at a 16 per cent discount it’s worth watching. A good one to drip feed money into.”
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Recommendations for Isa cash accounts
John Kelly, financial adviser at Chelsea Financial Services, recommends Barclay’s instant, £1 minimum deposit account paying 3.55 per cent for cash Isa money.
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