Your Isa checklist: How you can make the most of your Isa in heightened volatility

Harriet Green
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What should you bear in mind if you have a Stocks and Shares Isa?

With just two weeks to go before the end of the tax year, and given the big tax advantages the Isa wrapper can offer investors, there is no shortage of advice on why you should make full use of your £15,000 allowance before 5 April.

But filling up your Isa is only half the battle. If you had to sum up markets this year in a word, says Maike Currie of Fidelity Personal Investing, it has to be “volatile”. Investor angst is mounting – a large number are choosing to park their cash with the safest governments, regardless of whether they get a lamentable return, she says. JP Morgan Asset Management expects volatility to rise in coming weeks, with lower market returns.
So what should you bear in mind this year, particularly if you have, or plan to have, a Stocks and Shares Isa? City A.M. Money has spoken to the experts to find out what your Isa checklist should include over the coming weeks and beyond.


Spring has (finally) sprung, and it’s as good a time as any to blow the cobwebs off your Isa portfolio, says Jason Hollands of Tilney Bestinvest. “The right way to approach investing is to periodically reappraise your goals,” he says. Check that you’re on track to meet both your income and growth targets, and revisit your time horizon and the level of risk you are prepared to take. Determining an asset allocation strategy should follow, then how you should split your money between different regions of the credit spectrum for fixed income. This shouldn’t be rushed (you can leave cash parked in your Stocks and Shares Isa), but you can then focus on selecting the right funds, investment trusts or ETFs for each allocation, he adds. As different investments perform differently, asset allocation drifts over time, and “this can mean that a cautious portfolio will mutate into a much higher risk one if it isn’t rebalanced regularly”. It might seem counterintuitive, but the act of rebalancing means selling your winners and ploughing the proceeds into areas that may offer better value – ideally following the maxim of selling at the top of the market and buying at the bottom.
Now is also an ideal time to hunt for the best deal for an Isa platform. You don’t have to use your existing provider, and moving is relatively easy – just ask your new Isa manager to arrange the transfer. But make sure that you follow the process to the letter – otherwise, you may lose the tax free status, says Currie. Research from online discretionary fund manager Nutmeg found that, out of those savers who never review the performance of their Isas, 40 per cent said it was because they thought it’d be too much hassle to move their money.
If you can make the time to shop around, you could also consider a Bed & Isa service. Since it’s not possible to directly transfer shares held outside an Isa into the wrapper, the service makes it easy to sell them, then reinvest the proceeds in an Isa. The advantage is that you can use existing investments to top-up your Isa, shielding as much as possible from the taxman.
One of the biggest mistakes investors make, says Hollands, is choosing their investments on an ad hoc basis, putting their money into funds that are either riding high in the performance tables, being tipped or heavily marketed. This problem is especially acute at the end of March, adds Shaun Port, chief investment officer at Nutmeg. “Buying a best-seller each year can lead to a very unbalanced collection of funds, rather than a strong portfolio, and is not tailored to the level of risk the investor wishes to take,” he warns.
DIY investors are at particular risk of this, with bombardments from brokers with fund ideas, but little in the way of help or analysis around asset allocation, says Hollands. Remember, he says, that “asset allocation is a bigger driver of returns than stock or fund selection”.
For a reasonably conservative approach, Hargreaves Lansdown recommends the newton real return, a multiasset fund aiming for more modest growth but with less volatility than the stock market.


Once you’re content with your asset allocation, it could be worth thinking outside the box in terms of funds for your Isa. Hollands says it’s unsurprising that, for most UK-based Isa investors, the UK tends to be the first port of call, with funds in the UK Equity Income sector proving the most popular of all. But it is important that you don’t “layer up exposure to the same underlying companies through repeat investing into funds that are each fishing predominantly in the FTSE 100”. After all, there are almost 650 companies on the London Stock Exchange, and more than 1,000 on its junior sibling, the Alternative Investment Market (Aim).
Moreover, slowing dividend growth and considerable downward pressure in heavily represented sectors (oil and gas represent 14 per cent of the index) mean that you may want to consider a multi-cap approach, Hollands says, looking at funds that hunt further afield and don’t necessarily discriminate on company size.
Despite headwinds remaining, the positives are adding up for Europe, says Stephanie Flanders, chief market strategist for the UK and Europe at JP Morgan Asset Management. Slow but steady reform, less austerity, a potential turn in the credit cycle, a weaker euro and supportive European Central Bank QE will all help bolster risk assets, she says.
Currie agrees: “European companies boast strong earnings and attractive prices. Balance sheets are sound and so are payouts. Dividend yields are generous and easily covered by earnings, which means investors are being paid well while they wait for earnings recovery,” she says.
But Hollands reminds investors that QE programmes also put downward pressure on currencies; although those looking to benefit from these stimulus programmes might want to gain exposure to local stock markets, they may want to hedge the currencies.
The coming months won’t be easy for fixed income investors, warns Flanders. It’s the asset class that’s been most distorted by central bank policy over the last few years: while tighter US monetary policy will push down US bond prices, looser money in the Eurozone and Japan will likely cap yields on longer maturity bonds, she says. This means that investors “need to have a flexible, diversified approach to fixed income”.
While value has been tough to find in the fixed income universe, investors have traditionally held bonds to reduce overall volatility. Hollands suggests considering absolute return funds as an alternative. “The correlation between different asset classes, markets and currencies has reduced over the last year, and this environment provides greater opportunities for funds that have wide remits to implement trading strategies across the globe,” he says.
For income seekers, Jason Hollands suggests the standard life UK equity income unconstrained fund, managed by rising star Thomas Moore. It’s currently 40 per cent invested in FTSE 100 companies, 45 per cent in midcaps and 6 per cent in smaller companies, with a further 9 per cent held elsewhere.
Maike Currie recommends Jupiter’s European special situations fund. It’s managed by Cedric de Fonclare, who looks for good valuations, where the market is too cautious about prospects.


Research from Hargreaves Lansdown shows that the average UK fund manager has returned 90 per cent since December 1999 – exactly in line with the market, on average (the FTSE All Share also returned 90 per cent). “On the face of it, this may be perceived as a failure of active management. But actually, it is a reasonably positive result. It means that the average active manager has given investors the same return as the index – after management fees and all transaction costs have been deducted,” says Hargreaves senior analyst Laith Khalaf.
At the same time, while some active managers “have handsomely beaten [the market since 1999], others have failed to match it,” says Khalaf. Last year demonstrates how performance can fluctuate: of the 257 managers in the Investment Association UK All Companies sector, just 43 per cent outperformed the FTSE 100 index, down from 89 per cent in 2013.
The key for DIY investors investing actively, he says, “is to spend a little time picking winners”.
Remember, says Hollands, that past performance data of funds they manage may not represent their track record – it’s a competitive industry, and job turnover is high. It’s vital, he says, that you uncover the relevant career record of the manager at the helm today. This means looking beyond a three, or even five year period.
Those who don't use an adviser may want to consider using a tool like Tilney Bestinvest’s Free Investment Review Service & Tool (First) to provide some portfolio insight and analysis.
Always remember that trying to beat the market is harder than you think, says Fidelity’s Tom Stevenson. According to research by Fidelity, an investor who put £1,000 in the FTSE All Share 20 years ago, but missed the best 10 days in the market since then, would have achieved an annualised return of 4.83 per cent – and ended up with a total investment of £2,568.92. Had they stayed in the market the entire time, they would have seen an annualised return of 8.09 per cent and investments worth £4,747.36. “It’s difficult to predict the best time to be in and out of the market, especially as the best and worst days very often tend to bunch together during periods of heightened volatility,” says Stevenson. Flanders adds that, “when the market slumps, it’s easy to make decisions based on emotion rather than fact.” The problem is that there’s a very real danger that you increase your underperformance – “time in the market matters more than timing the market,” says Stevenson.
Moreover, says Port, when populating your Isa, it’s vital to remember that investment trends vary greatly from one year to the next. “History tells us that diversifying can give you a smoother ride along the way” – not just picking what did well. Hot trends are just that – and keeping hold of them can be dangerous. Internet stocks, gold shares and now biotech have “had their day in the spotlight”. While small company shares form a great part of many investors’ portfolios, says Port, “they also move in trends, with strong phases during the best of the economic cycle, and suffer very significant losses when markets turn south”. Ensure you’re building a portfolio to last, he says.
It’s crucial that investors take diversification seriously, adds Flanders, pointing out that asset performance in 2014 highlighted this with brutal clarity. Commentators were shocked by bonds, which generated over 8 per cent last year, having returned just 0.1 per cent in 2013. “The lesson is that you need to allocate your portfolio on the basis of what might happen – not just what everyone expects to happen,” she says.
The Artemis European opportunities i hedged fund provides exposure to European shares, but hedges exposure to the euro back into sterling, says Jason Hollands.
Tilney Bestinvest likes the Invesco perpetual global targeted returns fund, launched in 2013. It aims to deliver a positive return in all market conditions, over a rolling three-year period, with a gross return above UK interest rates.

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