Investors should be feeling pretty perky as the Isa season gets underway. The threat of a triple-dip recession is receding according to early economic indicators, while the stock market has just racked up its best January performance since 1989.
Greater optimism is already detectable in the trend away from safety-first bond funds – which were all the rage a year ago – and the move back into riskier equity funds.
Investors are being tempted back in by strong recent returns, although experts warn volatility could return if crisis suddenly hits again.
Bond devotees also appear to be heeding warnings that the bubble could be about to burst after a strong 2012.
Other signs of cheer are renewed interest in European funds following the lull in the eurozone crisis, a willingness among income seekers to look abroad for opportunities, and a penchant for having a punt on Japan and India.
We asked fund experts to tell us which funds are hot this year. We’ve also rounded up the latest fund league tables from some of the top Isa platforms, so you can check out the favourite picks of earlybird Isa investors below.
LOW-COST ACCESS TO INVESTING
Actively-managed funds need to pay a fund manager to select stocks, pushing up the costs. Index trackers, on the other hand, aim to follow a stock market’s fortunes based on a computer programme.
It’s far cheaper. The best trackers levy fees of less than 0.5 per cent a year compared to, for example, funds that may come with a total expense ratio (TER) of 2.5 per cent plus.
The effect of charges amplifies over the years and can leave a big dent in your final savings pot, although the managers argue that you are paying for their skill in outperforming the market. Unfortunately most of them don’t and it’s difficult to predict which ones will excel.
Investors could also consider exchange-traded funds (ETFs), which are more easily tradeable and are sometimes cheaper than trackers. Read more here about buying ETFs.
Income seekers look to Asia
‘There was a bit more optimism going into 2013 than there was going into 2012,’ says Andy Parsons, advice team manager at online broker The Share Centre.
Investors are still intent on achieving income at a time when savings accounts and cash Isas offer such low interest rates, but they are more disposed to looking overseas to find it, he says.
THE SHARE CENTRE
Top five funds for January
1. Schroder Asian Income Maximiser fund
2. Newton Asian Income fund
3. Invesco Perpetual Monthly Income Plus fund
4. Premier Monthly Income fund
5. Schroder Income Maximiser fund
Newton Asian Income, [Minimum investment: £1000. TER: 1.65 per cent] with a yield of 4.38 per cent, is a ‘regular’ in The Share’s Centre’s top 10. But clients are also turning to the Schroder Asian Income Maximiser, [Minimum investment: £1000. TER: 1.7 per cent] which comes with more risk but has a higher yield of 6.7 per cent.
‘If you are prepared to take additional risk, it can bring handsome rewards in terms of income,’ says Parsons of the latter fund.
When it comes to income, Neil Woodford’s Invesco Perpetual Income [Minimum investment: £500. TER: 1.18 per cent] and High Income [Minimum investment: £500. TER: 1.69 per cent] funds are still stalwarts in the league tables, and M&G Optimal Income [Minimum investment: £500. TER: 1.41 per cent] is another old favourite, says Parsons.
A year ago, index-linked bond and corporate bond funds were among the most popular Isa choices, but the trend is now towards strategic bond funds instead, he adds.
These invest in riskier ‘high yield’ corporate bonds, as well as safer ‘investment grade’ corporate bonds and supposedly rock solid ‘gilts’ or government bonds.
WHAT IS TER?
Total Expense Ratio or TER is the benchmark of fund running costs which is the current best estimate for taking all the administration and dealing charges into account. The bigger it is, the costlier the fund is to run.
Investors in strategic bond funds are attracted to the flexibility enjoyed by the fund managers – they can range across the complete debt spectrum, explains Parsons.
Meanwhile, he says there was a surprise new entrant in his platform’s December top 10 – a maiden appearance by the First State Asian Property Securities fund [Minimum investment: £1000. TER: 2.50 per cent].
Parsons says this shows that when it comes to property, investors are finding ‘pockets of opportunity’ worldwide.
Investors show penchant for India and Japan
The Jupiter India fund [Minimum investment: £500. TER: 1.87 per cent] recently made The Share Centre’s top 10 after the firm added it to its Platinum 120 list of recommended funds.
The structural reforms and changes underway in India make it a compelling investment opportunity, according to Parsons.
The Legg Mason Japan Equity fund [Minimum investment: £3000. TER: 1.92 per cent] has also done well in the wake of an election in December. A new government was installed with plans to boost inflation to 2 per cent, work more closely with Bank of Japan, and generally do whatever it takes to fix the economy.
HARGREAVES LANSDOWN (VANTAGE)
Top Isa fund sales in January
1. Aberdeen Emerging Markets
2. Artemis Income
3. Cazenove UK Smaller Companies
4. First State Asia Pacific Leaders
5. First State Global Emerging Mkt Leaders
6. INVESCO PERPETUAL High Income
7. JO Hambro UK Equity Income
8. Marlborough Multi Cap Income
9. Newton Asian Income
10. Newton Emerging Income
Parsons says that the Legg Mason fund focuses on firms exposed to domestic demand in Japan itself, rather than more export-driven businesses.
The Share Centre’s league table at this time last year included a gold fund, but this has now vanished as fear gives way to a global ‘risk-on’ mood.
With the eurozone crisis becalmed and the US ‘fiscal cliff’ budget row having subsided for now, there is a ‘groundswell of optimism’ among investors, says Parsons.
Bonds dumped in favour of shares
Bond funds were the best-sellers overall in 2012 – but they were outsold by equity funds in each of the last four months of the year, according to industry figures from the Investment Management Association.
Strategic bond funds topped the fixed income sector, while global funds reigned among investors plumping for equities, it said.
A definite shift from bonds to shares is underway right now, confirms Gary Mcluckie, sales and marketing director at Alliance Trust Savings.
‘We have seen the markets bounce quite strongly in January,’ he explains. ‘That creates confidence. People are looking for opportunities in the marketplace.’
He is seeing an ‘uplift’ for smaller and mid-cap companies, while index tracker funds continue to do strong business.
Vanguard’s tracker range tend to be big sellers for Alliance, which has a charging structure that tends to attract sophisticated investors with larger portfolios who want to keep costs to an absolute minimum.
Japan is also on the investment radar again, while European funds started coming back into fashion in the second half of last year, adds Mcluckie.
Europe makes a comeback
The IMA figures for 2012 highlighted a positive turnaround in sentiment towards Europe.
Although it was the second-worst selling region in equities after suffering the eleventh year running of outflows, there were signs of change at the end of the year with net inflows from September to December.
‘Our favoured equity markets are Europe and global emerging markets, which look cheap, especially compared to US stocks which is one area that looks dear,’ says Jason Hollands, managing director of financial adviser Bestinvest. ‘We also believe unloved Japan is a potential wildcard for the year.’
Hollands, who claims Bestinvest’s clients tend to follow its thinking, says European equities have been very undervalued due to bad newsflow over the eurozone crisis.
‘Good companies have been indiscriminately marked down,’ he says, citing Nestle and Unilever as high quality firms that do business around the globe including in Asia.
Bestinvest favours the Threadneedle European Select fund [Minimum investment: £2000. TER: 1.69 per cent], which includes both these companies among its top holdings.
Hollands adds: ‘Despite the markets having made good progress, we think equities still offer good value for those with a reasonable time horizon.
‘As anyone who went to the January sales will know, the biggest bargains get snapped up early but that doesn’t mean you can’t still find something attractively valued after the initial scrum is over.’
Top-selling funds in December
1. Fidelity ISA Cash Park
2. Invesco Perpetual High Income
3. Invesco Perpetual Distribution
4. Jupiter Merlin Income Portfolio
5. Invesco Perpetual Monthly Income Plus
6. M&G Optimal Income Fund
7. First State Global Emerging Market Leaders
8. Fidelity MoneyBuilder Income Fund
9. Invesco Perpetual Corporate Bond
10. M&G Global Dividend
Top funds in fourth quarter of 2012
1. Jupiter Merlin Income Portfolio
2. Invesco Perpetual Distribution
3. Newton Global Higher Income
4. M&G Global Dividend
5. M&G Optimal Income
6. SL Inv Global Absolute Ret Strategy
7. HSBC Open Global Distribution
8. Newton Asian Income
9. M&G Strategic Corporate Bond
10. Cazenove MM Diversity
SKIPTON FINANCIAL SERVICES
Top funds bought by This Is Money readers in December
1. Invesco Perpetual High Income Acc
2. Aberdeen Emerging Markets Acc
3. M&G Recovery Fund A Acc
4. Invesco Perpetual High Income Inc
5. BlackRock UK Special Situations Acc
6. Invesco Perpetual Global Bond Acc
7. First State Global Emerging Mkts Leaders
8. First State Asia Pacific Leaders Acc
9. Jupiter Merlin Growth Portfolio Acc
10. Liontrust Special Situations Fund
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