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THE Isa season is upon us, triggering the annual reminder for investors to use this year’s tax-free savings allowance – or lose it. The appetite for equity Isas is expected to be strong with just five weeks to the end of the tax year on April 5. This will be fuelled in part by disillusioned savers looking for better returns than the paltry rates offered on cash Isas.
But whether you are utilising this year’s allowance of £11,520 before the deadline or are planning ahead on where to invest the £11,880 limit for the new tax year starting on April 6, the challenge is picking the right investment funds.
In this three-page special report, The Mail on Sunday asks leading investment experts to recommend top funds for investors looking for income or capital growth from their Isa and examines the best rates from cash Isas.
Investing for INCOME
AN INCOME-DRIVEN investment is meant to generate regular payments through companies paying a healthy dividend, known as the yield. The dividend is the proportion of annual profits handed out to shareholders.
Tim Cockerill, at financial adviser Rowan Dartington in Bristol, says: ‘Equity income funds suit a lot of investors even if the income isn’t required. Instead it can be re-invested and the accumulating dividend will add significant value over time.’
He likes Threadneedle’s UK Equity Alpha Income fund. ‘It is conventional in many ways with its top ten positions comprising wellknown British firms such as pharmaceuticals group AstraZeneca and telecoms giant BT. But the selection and timing of purchases and sales are why this fund has succeeded,’ he says. It yields 4.5 per cent a year.
James Bateman, who runs multimanager funds at investment house Fidelity, likes Artemis Income. He says: ‘Manager Adrian Frost finds companies that pay dividends and sustain them. He does this by checking the “free cash flow” of businesses, which shows how much spare cash they have to expand – and pay dividends.’ The Artemis fund is yielding about 3.7 per cent.
Gary Potter, who runs multimanager funds for asset manager Foreign & Colonial, recommends Majedie UK Income, which yields 3 per cent. He says: ‘It has exposure to companies that are steady income generators and it can invest in a wide range of stocks.’
While investing only in UK funds reduces the currency risks of investing abroad, Bateman says global exposure is important for income seekers. He suggests the Sarasin Global Higher Dividend fund. He says: ‘Among other things, it is invested in firms that benefit from ageing populations such as American pharmaceuticals company Amgen, which is working on a cholesterol-lowering drug. It also hopes to benefit from the rise of the consumer through companies such as Mr Price, South Africa’s fifth-biggest clothing retailer.’ The fund yields around 4.5 per cent.
Caspar Rock, chief investment officer at multi-manager fund group
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Architas, recommends First State Global Listed Infrastructure. It invests in toll roads, ports and airports and offers good income potential. It has returned 7 per cent over a year and 28 per cent over three years.
Appetite has declined for fixed income funds. These invest in gilts and corporate bonds, essentially loans that pay interest to investors.
The sector has performed poorly recently, but Marcus Brookes, head of multi-manager funds at investment house Schroders, says Isa portfolios should have some exposure to bonds. His top choice is M&G Optimal Income fund. He says: ‘Manager Richard Woolnough has made a positive return in difficult market conditions where others have failed.’ The fund yields around 3.2 per cent.
Juliet Schooling Latter, at Londonbased broker Chelsea Financial Services, says: ‘An idea for someone wanting to diversify away from both equities and bonds is Henderson UK Property Trust. This fund has one of the best yields amongst its peers.’ It yields 4.2 per cent.
Investing for GROWTH
A GROWTH oriented fund aims to increase the value of your original investment by putting it into companies that can increase their earnings significantly.
While there is a great deal of negative feeling towards emerging market equities, Rock says now could be a good time to invest.
He says: ‘For a contrarian bet, look at Fidelity South East Asia fund. Of course the risk is higher, but so are the potential returns.’ The fund has lost investors 10 per cent over the past year and three per cent over three years. But over five years it has returned 100 per cent.
Brookes highlights JP Morgan Natural Resources for investors in search of a broad exposure to resources companies such as mining group Rio Tinto and oil giant Shell. It has made losses of 19 per cent over one year but generated returns of 47 per cent over three years.
For those who want exposure to the US, Patrick Connolly, a financial adviser at Chase de Vere in Bath, suggests Axa Framlington American Growth.
He says: ‘This is an out-and-out US growth fund with large weightings in technology, healthcare and consumer stocks, such as Apple. If you
take the stance that the US economy is firmly on the road to recovery, this fund should be positioned to perform well.’
It has registered returns of 17 per cent over one year and 37 per cent over three years.
Rock tips Franklin European Growth for those who believe in the European recovery story.
‘It’s going to be a bumpy ride, but things are improving,’ he says.
For global growth, Bateman suggests BNY Mellon Long Term Global Equity fund, which aims to achieve long-term capital growth from companies all over the world.
The fund is up 2 per cent over one year and 25 per cent over three years.
Closer to home, Cockerill favours River & Mercantile UK Equity Smaller Companies fund. He says: ‘Smaller companies have the ability to generate more growth than large companies because they are coming from a smaller base.’
The fund has returned 50 per cent over one year and 100 per cent over three years.
Potter, who is also a supporter of UK funds, recommends Schroder UK Alpha Plus, which invests in big British names such as GlaxoSmithKline and Barclays.
It has returned 18 per cent over the past year and 40 per cent over three years.