TOP 10 ISA IDEAS: WITH RISING INFLATION EATING INTO REAL RETURNS, HOW CAN INVESTORS MAKE THE MOST OF THEIR REMAINING ISA ALLOWANCE?

By Michelle McGrade, chief investment officer at TD Direct Investing

With two weeks left before tax year end, many investors are wondering what to do with the remainder of their ISA allowances. In addition to poor returns from cash, after the Bank of England kept interest rates at 0.25% last week, inflation – which has risen to 2.3% in February, above the Bank of England’s 2% target – is continuing to eat into real returns and eroding purchasing power.

The UK stock market (FTSE All-Share) was up 16.8% in 2016, which may make investors wonder if now is the right time to invest. It’s important to remember that the global outlook is reasonably rosy and if Brexit is executed cleverly, then the UK in particular has a bright future to look forward to. So, the outlook for the investor is that there may be some short-term wobbles but over the long term, sensible investing should help you prosper.

With current market conditions in mind, where should investors look for inspiration? Below, I’ve included a varied selection of opportunities and related funds that investors might want to consider:

  1.  The Disruptive Challenger: Henderson Global Technology

There are plenty of ways you can invest in the rapidly expanding area of disruptive growth. Whether you decide to go down the active or passive route, the long-term story for investing in technology remains intact. Despite some potential near-term headwinds, such as protectionist policies in the US, Henderson believes the technology sector could outperform global equities over the medium term. As tech gets cheaper and faster, it will continue to grow market share in the global economy.

  1.  The Best of British: MFM Slater Growth

This year we crowned Mark Slater as the best performing fund manager in our Best of British list. With an exceptional track record over more than a decade, Mark has topped the list two years in a row. He tends to focus on small and mid-sized companies, gets to know the ones in his portfolio very well before he buys them, and typically holds them for a long time. The portfolio was hampered last year by the EU referendum result, but Mark stands by it and he is excited for the prospects of the companies within it.

If you had invested £20 each month in the fund, your total returns over 10 years would have ballooned to £5,497 from your original contribution of £2,500 – net of fees – which amounts to an increase of 120%.

  1.  The Pro-Growth Maverick: Baillie Gifford International

Policy shifts in the both the US and the UK towards a more growth-friendly environment – albeit tempered by higher input prices in the shape of oil, higher inflation, and modestly higher interest rates – could see pro-growth funds do well. Managed by Charles Plowden, Malcolm MacColl and Spencer Adair, the Baillie Gifford International fund aims to produce attractive returns, primarily through capital growth, over the long-term. The fund invests in an actively managed portfolio of stocks from around the world (excluding the UK).

  1.  Emerging Opportunities: M&G Global Emerging Markets

Over 80% of the world’s population live in emerging market countries. In considering this statistic, JP Morgan notes that these countries arguably “…house the consumers of the future” and represent an asset class that is growing considerably faster than developed markets. At M&G, fund manager Matthew Vaight likes investing in cheaper companies and is encouraged by their improving capital management trend. Emerging markets are a good portfolio diversifier.

  1.  Standing by Oil: Guinness Global Energy

Last year, OPEC and non-OPEC oil producing countries announced that they would stem the supply of oil so that oil prices would rise to acceptable levels. We believe that there is the will to do this and at $70-75 a barrel, companies will again have the ability to become profitable. The portfolio is concentrated, with only 30 names in it and is managed by a highly experienced and dedicated team of three: Will Riley, Jonathan Waghorn and Tim Guinness.

  1.  Investing in a Sustainable Future: Royal London Sustainable Leaders

Mike Fox, the fund’s manager, believes the commitment to limit the rise in global temperatures at the Conference of the Parties (COP) Paris climate change convention in December 2015, could be a catalyst to making sustainable investing even more mainstream. This is despite Donald Trump’s recent rhetoric on the subject. China and the rest of the world are committed to improving the planet, but there is more to it than just the environment – it’s the way we live and work too. Mike and his team identify companies that are run by savvy business people, with the aim of making improvements one way or another for our world.

  1.  The Contrarian Opportunity: Man GLG Undervalued Assets

Henry Dixon buys companies that are cheap, have been forgotten by the markets and have a promising upside. He has a disciplined approach and conducts thorough analysis of company balance sheets to understand the company’s assets and liabilities. With more government spending promised, Henry’s portfolio of mainly UK domestic mid-sized companies, which have been held back in the last few years, have the ability to stage a comeback.

  1.  The Passive Performer: Vanguard LifeStrategy

For those perhaps a little short on time or who prefer a passive fund solution, take a look at our Quick Start Funds which will help you get set up and investing quickly. Comprising a range of Vanguard LifeStrategy portfolios which offer global exposure to a mix of assets, these funds are split into three levels of risk and return, with the Vanguard LifeStrategy 80% equity fund in particular being one of our most popular funds.

  1.  The Alternative Diversifier: First State Global Listed Infrastructure

Companies which own and operate infrastructure assets typically have contracted or regulated earnings streams. This is the case with many of the holdings in this fund, which enables manager Peter Meany to pay a reliable, attractive dividend yield. Its holding in Australian toll road operator Transurban, for example, allows it to link directly to the inflation rate, which we view as a positive.

  1.  The Bond Counter-Balance: Fidelity Strategic Bond

A focus on high-quality companies has benefited performance as government bond yields declined. Ian Spreadbury has been diversifying into high yield bonds (now around 25%), which we think is a sensible move in the quest for income, although the fund’s core exposure remains in corporate bonds.

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