Three Isa investment themes to play in 2014

@AnnabelPalmer1

ARE YOU making the most of your Isa? The end of the tax year is fast approaching, so not only is now the time to maximise your contributions (up to £11,520 in a stocks and shares Isa in 2013 -14), but it is also an opportunity to consider whether your portfolio needs rebalancing. City A.M. talks to the experts about the key investment themes, and their top fund picks, for 2014.

PROFILE: UK SMALLER COMPANIES

UK smaller companies have had a great run in recent years. The FTSE Small Cap Index rose by 29.6 per cent in 2013, compared with the 14.4 per cent return achieved by the FTSE 100 Index.

Tom Stevenson of Fidelity says: “The outperformance of smaller and mid-cap companies in the UK is not surprising. These firms were sold most aggressively when investors worried about recession in 2008 and 2009, and they are therefore the ones which have bounced back as confidence returns.

“Looking ahead, however, the biggest companies actually look better value, though small companies funds can provide good diversification for savers, as they can behave differently to their larger counterparts during certain parts of the economic cycle.”

Old Mutual Smaller Companies. “The managers look for individual firms out of line with the consensus, and thus where a re-rating is likely,” says Stevenson. It has seen 30.5 per cent growth over 12 months.

Marlborough UK Micro-Cap Growth. “We think there is more value to be found in very small companies – this fund’s hunting ground. It rose by 37.8 per cent in the past year,” says Darius McDermott of Chelsea Financial Services.

Standard Life UK Smaller Companies. “The fund has returned 359 per cent over 10 years. It tends to outperform in the later stage of a recovery – so it could be approaching another good run,” says Adrian Lowcock of Hargreaves Lansdown.

PROFILE: JAPANESE EQUITIES

Japanese stocks rallied in 2013 – with the Nikkei 225 Average closing the year up 57 per cent from its January open. The market has had a shaky start to 2014, but Hargreaves Lansdown analysis has found Japanese shares remain cheap.

“Now may be a sensible time to buy in,” says Peter Sleep of Seven IM. “A Japanese fund will offer international diversification and added value.”

Jason Hollands of Bestinvest is more cautious, however. “In 2012, we were very bullish on Japan. Now, we are more neutral. There are positive signs of improvement in Japan’s prospects, such as evidence that the deflationary cycle has halted. But a looming sales tax hike in April could snuff out the recovery.”

JO Hambro CM Japan A H GBP. “The fund hedges the currency risk back into sterling.

GLG Japan Core Alpha. “Manager Stephen Harker buys unloved companies at low valuation levels and waits for them to return to normal. His approach works particularly well in undervalued markets, such as Japan,” says Lowcock. It has grown 73.3 per cent over five years.

Baillie Gifford Japanese Fund. “The fund is up 65.5 per cent over five years. Its managers have a research-heavy process, which has done well in both bear and bull markets. Last year, it rose 42.7 per cent,” says Sleep.

PROFILE: FIXED INCOME

After a 30 year bull run, experts remain cautious on fixed income. As markets adjust to expectations of interest rate rises in the US and the UK, 2014 could be a mixed bag.

“Amid the background of low yields and rock-bottom interest rates, it’s important to spread your exposure across different types. So look to the ‘strategic bond’ fund sector, where managers can mix a range of bonds. You are unlikely to stay truly ‘safe’ by sticking to one type,” says Stevenson.

Hollands, meanwhile, expects yields to rise over the coming year on both government bonds and investment grade bonds. “In this environment, investors should consider fixed income funds with broad and flexible mandates to take active views on duration,” he says.

L&G Dynamic Bond Trust. “This is a truly flexible total return fund, run by highly-experienced portfolio manager Richard Hodges since 2007,” says Stevenson. It has seen 5.2 per cent growth in the last 12 months.

Henderson Strategic Bond. “A strategic bond fund, it has more tools to manage interest rate risk and move between different asset classes. The fund has a yield of 5.8 per cent, and rose 5.19 per cent in the last 12 months,” says McDermott.

Invesco Perpetual Corporate Bond. “Managers Paul Read and Paul Causer are good at anticipating the market. They make the right decisions,” says Lowcock. It has seen 2.6 per cent growth in the past year.