With analysts so divided about the outlook for the stock market, this is one
of the most uncertain Isa seasons for years.
Everyone can invest up to £7,000 in an Isa and the returns will be sheltered
from the tax-man — but you must use your allowance before the end of the tax
year, April 5. This leads to a spring rush as everyone acts at the eleventh
hour.
There are two options — you can invest your entire allowance in an equity Isa,
or put up to £3,000 in a cash Isa (see page 12) and the
remaining £4,000 in stocks and shares.
This year, however, the market setback has unnerved people who were planning
to put the maximum into equities. One in four Isa investors are not sure
what to do with their allowance, according to Fidelity.
Here we offer tips on investing your Isa allowance in uncertain times.
Make sure you have a balanced portfolio
It is at times like this that having a balanced portfolio of shares, bonds,
cash and commercial property comes into its own. While equities have dropped
20 per cent in the past two weeks, bonds are up 1 per cent — protecting
those who have both in their portfolio. If you don’t already have a balanced
portfolio, use your Isa allowance to fill in the gaps. If you do, you could
use your £7,000 to boost part of your portfolio — depending on whether you
are a bull or a bear.
If you are cautious, JS&P Towry Law, an adviser, suggests you have half of
your money in fixed-interest investments such as corporate bonds and gilts.
Corporate bonds are loans to companies, which pay a fixed income to investors
— equivalent to the interest on a loan. Gilts work the same way but you are
lending to the government.
Patrick Connolly at JS&P suggests holding 51 per cent of your money in
fixed-interest funds, 5 per cent in UK equities, 4 per cent in US shares,
the same amount in Japan, 2 per cent in Europe’s stock markets and 1 per
cent each in emerging markets and Asia. Another 20 per cent would go into
property and 12 per cent into alternative investments such as hedge funds,
gold and commodities.
If you are more adventurous, he recommends just over half in shares,
comprising 13 per cent in the UK stock market, 11 per cent in the US, 8 per
cent in Japan and the same amount in Asia, 6 per cent in emerging markets
and 5 per cent in Europe. This leaves you with 20 per cent in fixed
interest, 17 per cent in property and 12 per cent in alternatives.
Investors who don’t already have a decent portfolio could look at a new type
of scheme called a multi-asset fund, which gives you an instant blend of
assets. Sarah Windsor-Lewis at Punter Southall Financial Management
recommends the CF Midas Balanced Growth fund. About two-thirds of the scheme
is in shares, with the rest split between property, bonds and hedge funds.
Paul Ilott at Bates Investment Services tips the even more risk-averse JP
Morgan Cautious Total Return plan. More than half of the fund is in cash, 14
per cent in shares with the remainder in bonds.
If you’ve already got a balanced portfolio but you’re still cautious,
consider bonds
If you agree with the bears, you could use your Isa allowance to invest in
bonds, which traditionally perform well in an economic downturn. Returns
were poor last year, but that should change if the global economy takes a
turn for the worse.
Brian Dennehy of Dennehy Weller, an adviser, suggests the Artemis Strategic
Bond fund.
If you’re happy to stick with equities, go for a safety-first approach
Investors who are happy to top up their portfolio with an equity fund should
still take care.
In a volatile and uncertain market, blue-chip shares that pay good dividends,
such as Voda-fone and Royal Bank of Scotland, are most likely to weather the
storm. You can invest in such companies through an equity-in-come fund.
Advisers suggest Invesco Perpetual Income or Jupiter Income.
If you are really bullish and think the market will take off again as quickly
as it fell, you could take a chance on smaller firms. Dennehy recommends M&G
Smaller Companies. It produced a healthy return of 11 per cent after charges
last year, and Dennehy believes it should do well if the market recovers.
He also tips Rensburg UK Select Growth, which has a significant portion of its
portfolio in medium-sized and smaller companies though its biggest holdings
are in large FTSE 100 firms.
Dennehy said: “Growth funds did particularly badly last May as fears of a
sharp slowdown in the global economy hit shares. But they bounced back
during the recovery in the second half of the year. If shares head higher
again, funds with a greater growth orientation should outperform.”
Or you could simply buy an exchange-traded fund. ETFs track the market like an
index fund, but are shares you can buy and sell. The Ishares FTSE 100 ETF
costs just 0.4 per cent a year.
If you want to go abroad rather than stick with the UK, advisers recommend
defensive developed markets such as Europe rather than emerging countries
such as India or areas like Latin America that have been hit hard in the
recent sell-off and are considered unlikely to beat developed markets for
another year.
Dennehy tips M&G American and Schroder Tokyo.
Spread your payments
You can reduce the risk of investing in equities by drip-feeding money into
the market. If you had invested your Isa allowance at the start of the tax
year, this would have simply involved making monthly payments. If you do
that now, however, you will start eating into next year’s allowance after
April 5.
That’s why some firms, including F&C and Invesco Perpetual, offer a
phased-investment option. They invest your money in chunks over a set period
— usually three, six and 12 months — without it affecting your allowance.
If, for example, you invest £7,000 and phase it over six months, one-sixth
would be invested immediately with the rest invested in five equal amounts
over the following five months. As long as you buy in before close of
business on April 5, it will count towards the current year’s tax-free Isa
allowance.
Don’t fall for the protected hype
Many fund managers and banks are pushing protected funds, which give you
exposure to the stock market but safeguard your cash when shares tumble by
using derivatives. Abbey, for example, has a five-and-a-half-year plan
linked to the FTSE 100 index that offers full capital protection if held to
maturity.
But many advisers dislike them. Philippa Gee at Torquil Clark said: “Protected
plans should be avoided. If you are so cautious you do not want to be in
equities, then you shouldn’t be investing in one of these schemes. And if
you are nervous but prepared to have some exposure to shares, a spread of
assets will serve you better.”
In a good market, returns from protected plans are poor because you often have
to give up some growth as well as dividends; in a bad market, you usually
only get your capital back with no interest.
Don’t follow fashion
The best-performing funds and markets one year are invariably among the worst
in the following 12 months. This was highlighted less than two weeks ago
when, after soaring 130 per cent in 2006, the Chinese stock market suddenly
dropped by 9%, leading to a global sell-off of high-risk assets.
Justin Modray of Bestinvest said: “Buying purely on past performance, or
chasing investment fads, can be dangerous for your wealth because you risk
buying at the top of the market.”
Over the 12 months to the end of February last year, the best-performing fund
out of 1,144 was Invesco Perpetual Latin America, which returned 80 per
cent. During the past year, however, it has slipped dramatically, achieving
just 3 per cent, which has pushed it down the ranks to 841st place.
The CF Ruffer Baker Steel Gold fund dropped an astonishing 1,124 places down the
ranks. It has lost 5% in the past year, but 12 months earlier it boasted a
return of 70 per cent.
This year’s most fashionable sector is likely to be commercial property. In
2006 New Star Commercial Property raked in more than £1 billion, for
example.
Just last month Threadneedle got in on the act, launching its UK Property
Trust, and several other firms, including Norwich Union, have plans to
launch funds.
However, Mark Dampier of Hargreaves Lansdown, an adviser, said: “I would not
recommend investing in commercial property right now because it looks very
overvalued.”
The sector rose by 18 per cent in 2006 and is up 67 per cent over three years
but returns are predicted to dip to 8 per cent next year, according to
Modray.
‘SHARES DO BEST OVER THE LONG TERM’
Pramy Rai, 40, from Leicester, is sticking with equities despite the turmoil
of the past few weeks.
The youth tutor, pictured with his wife, Pam, daughter Saria, 11 and son
Amreet, 13, plans to invest £4,000 in an equity Isa before the end of this
month, but he has yet to decide which funds to buy. He already has a large
portfolio which he has no intention of selling. His first Isa purchase was
the Schroder Mid 250 fund in 1999, which has almost tripled his money.
He said: ‘Shares tend to perform best over the long term. I know there are
concerns about China and the US, but overall conditions still look good.’
although it is true that the majority of managed funds do not beat the ftse all share indiex after charges, there are still about 20% who do outperform. carefuful analysis rather than falling for trends, discounts or market hype will allow one to find those funds that do outperform the market
james murphy, london, uk
don't waste your time on all these 'active funds' they all perform below the index's or in the unlikely event of outperformance,they only outperform by 2-3% - enough to cover their charges!, i know because i have owned these for the last ten years and am in the process of transferring the lot to index trackers and ETF's.
buy a cheap index tracker or ETF , their all sorts of index's avaliable from all over the world and also ETF's which just own companies with the highest dividends in the U.K or Europe. Instead of wasting time on the impossible job of guessing which fund is going to do well in the next few years, have a cross section of trackers ETF's and hold them forever!
salim, london, uk
A more bullish outlook comes from over the pond from a market analyst called Don Hays. He recommends the following asset allocation: “Long term growth”: 90% stocks, 10% cash. “Conservative growth” 58.5% stocks, 35% bonds, 6.5% cash. It's interesting how the US mindset is usually more optimistic, especially in times of uncertainty. Having said that, this is by far the mainstream view, just the view of one fund manager who has an excellent long term record. So perhaps no need to be quite so jittery!
Dane Halling, Stockbridge, Hants