According to TD Waterhouse’s December investor confidence survey, 45% of respondents said they were more cautious. However, 38% said they had invested in a regular savings plan in the past 12 months.
Investors had also moved away from specialist funds and emerging market funds. These were being replaced by bond funds.
‘There is a negative background and negative sentiment,’ says Steve Waddington, multi-asset fund manager at Insight Investments, ‘but investors are still looking for conservative growth.’
Destinations for Isa money
So, with the April deadline fast approaching, where should investors look to invest the Isa allowance this year?
Risk-averse investors generally look at the defensive, mainstream companies, perhaps focussing on the FTSE 100. The type of utility, pharmaceutical and tobacco companies that have traditionally provided single-digit growth are the usual refuges in times like these.
Diversification through using funds is another way of damping down risk. ‘Stay well diversified across defensive sectors and use collectives where necessary,’ says Caroline Black, investment manager at brokers Redmayne Bentley.
For those who think the market is in for more falls now, or even any time before the end of this year’s Isa season on 5 April, could seem a bad time to go into shares. Black reckons there could be falls back to 3,800 or 4,000 in the FTSE before things improve.
‘Drip-feeding monies into the market gradually is one option rather than attempting to second-guess the bottom,’ she says. ‘General market exposure could be achieved by drip-feeding into a FTSE 100 exchange-traded fund [ETF] over a number of months.’
While this strategy offers no dividend yield, it could achieve growth in line with the UK market and is helpful if the markets recover quickly.
With £7,200 to invest this Isa season, money could be shared around two or three funds, with fund supermarkets such as Cofunds or Funds Network making this option easy and relatively cheap.
‘To ensure adequate diversification and that the client is not relying solely on one or two sectors of the market, a portfolio could be constructed using a series of equity growth collective investment vehicles,’ says Black.
As well as looking at the mainstream FTSE 100 blue-chip collectives, growth investors may also like to consider mid- and small-cap funds, she suggests. These types of funds are slightly higher on the risk scale but could benefit from markets turning around, as could the breed of funds labelled ‘special situations’ or ‘UK select’.
If an investor’s risk profile is a bit higher than mainstream UK investments, it pays to spend some time devising a strategy. ‘Consider your risk profile and think about how much time you propose to devote to watching your portfolio,’ says James Daly, investor centre representative at TD Waterhouse.
Doing it yourself
Funds, even for higher-risk investors, require less attention because a manager is watching the portfolio. But for investors who are prepared to be more adventurous and have time to monitor companies, now could be a good time to go into companies using a self-select Isa.
‘For trading or high-risk clients, there have been many opportunities to profit from the volatility, even in the major FTSE 100 stocks,’ explains Black.
Rio Tinto (RIO), for example, has been an interesting stock to trade over the past couple of months. Investors could have been taking out 10% to 15% profit as the markets moved up, and reinvesting once they dropped again.
‘If this strategy can be employed in an Isa then any gains made over and above the individual’s annual CGT allowance will be free from tax,’ Black points out.
A self-select Isa is simply a wrapper with a tax break, into which the investor can put a variety of stocks, including UK and overseas equities (see box for details). The execution-only stockbrokers offer self-select Isas, often with competitive dealing charges, so it is possible, to some extent, to trade within an Isa.
TD Waterhouse is among the firms offering tools to make picking companies easier. ‘We have four different stock screeners on our website where you can sort through 1,000 stocks,’ says Daly. ‘There is a growth filter where you can search for price to earnings [PE], earnings per share, PE to growth, so you can use it to search for companies that grow their earnings over time.’
Possible approaches for more daring investors seeking growth include looking for momentum stocks or going into the out-of-favour value stocks. ‘You’d be taking a contrarian approach looking at these stocks,’ says Daly. ‘Banking, for example, is down 20%, so we are seeing people looking at those
companies now.’
Niche opportunities
At a fund level there are also more adventurous niche areas, in which some players forecast long-term growth. Insight’s Waddington thinks there are long-term strategic areas for growth in a few up-and-coming areas of investing.
One of the themes for his fund-of-fund portfolios is water. Global use of water has tripled since 1950 and two-thirds of the population will inhabit areas of scarce supply over the next decade. These facts, says Waddington, are part of the argument for the long-term success of companies working in the area. He invests in a global water ETF.
Another area Waddington looks at is environmental technologies. ‘The support for developing new technologies is strong from industry and governments,’ he says.
The Impax Environmental Markets fund forms part of Waddington’s portfolios, while James Davies, investment research manager at Chartwell Investment, favours the Allianz Global Eco Trends fund in this area.
Going forward, Waddington has an eye on agriculture. ‘Agricultural commodities have come off a bit,’ he says, ‘but we are at the stage where supply is at a multi-year low and you still have three billion in developing countries, so we are going to increase that area.’
Davies likes the Sarasin AgriSar agricultural commodities fund: ‘It is a niche area, finding solutions to food issues,’ he explains.
Although industry figures show investors coming out of emerging markets to some extent, the area is of interest to those looking for higher returns. Dean Newman, head of emerging markets at Invesco Perpetual, says areas such as Latin America are relatively untouched by the banking crises of the West.
Consumption in developing economies such as India and China also still has to continue. India could be a good buying opportunity now, according to Black, as corporate scandals, a volatile stock market and the Mumbai attacks saw investors move out of the area.
‘India is less exposed to US and European slowdowns than China because it is less dependant on exports,’ she adds. ‘Only 20% of India’s GDP is export-driven as opposed to 40% in China. Furthermore, although India’s economy is slowing, it is still growing year on year, which is more than can be said for Europe and the US.’
Using income for growth
If straight-out growth companies or overseas equities seem a little too much to ask for in times like these, yield from income-producing companies or funds can always be reinvested for growth. ‘Many defensive companies provide reasonable yields, which are added bonuses for capital growth investors,’ explains Black.
Some of the more income-related funds can have an allocation to equities so the bond portion provides, say, a 4% income to reinvest, along with a small potential growth, and an equities portion gives more of a growth boost.
Now could even be a good time to buy some reliable old bonds. Corporate bond funds are proving popular for investors and offer a good income, which can be rolled up.
The Newton Corporate Bond fund has a current net yield of 6.8%. ‘Compared with cash, that level is very attractive,’ says its manager Paul Brain. ‘This time last year the comparison was not so attractive and I do think we will see more demand for corporate bonds.’
At S&P Fund Services, director of fund research Kate Hollis says investment-grade bonds are cheap at the moment. Opinions are more mixed on high-yield bonds, with a feeling the pace of defaults could pick up.
However, high-yield bonds, which make up a portion of the strategic bond funds available, are yielding up to 20%. ‘Back in 2003 the high-yield market had bombed out post WorldCom and Enron,’ says Hollis. ‘Some high-yield funds made 20%-plus in the following couple of years. There is a possibility we could see that again, and those credits left standing after defaults have happened will offer very good returns.’
Investors must be in it to win it
The growth in both the funds market and firms offering self-select Isas means this year offers arguably the most variety for an Isa season that UK investors have seen.
While markets may be rough, many investment advisers report investors are staying put and even buying more. The stock market tends to recover six to nine months before the general economy, points out Black, and forecasts are for recovery to show by the end of 2009 or beginning of next year.
‘Those investors with an appetite for risk may well begin to consider where they might like to place their investments for recovery,’ she says. ‘Some sectors will benefit greatly when markets turn around.’
What can you put in a self-select Isa?
Invest up to £7,200 a year using:
• UK and international equities
• Gilts
• Bonds
• Investment trusts
• Unit trusts and OEICs
• Exchange-traded funds
