WITH the end of the tax year fast approaching (on 5 April), there is still time to invest up to £11,520 in a stocks and shares Isa. For higher or additional rate taxpayers, sheltering your money in the tax-free wrapper means avoiding income tax at 40 or 45 per cent on any interest.
But while many savers will be drawn to cash for safety, a stocks and shares Isa could offer bigger gains. And adventurous investors may wish to spice up their portfolios through higher-risk funds with the potential to generate greater returns. The focus here is likely to be on growth assets, and equities in particular.
Last year, the UK economy grew by 1.9 per cent and the FTSE 100 index rose by over 14 per cent. And while broker Killik has suggested the FTSE 100 could reach a record level of 7,400 by the end of the year, smaller companies could be your best chance to profit from the UK’s growing economy.
Those seeking a higher-risk option with the potential for significant returns could opt for the Marlborough UK Micro Cap Growth fund, up a whopping 287.28 per cent over five years. “It invests in smaller companies, and manager Giles Hargreave is an excellent stock picker,” says Adrian Lowcock of Hargreaves Lansdown.
GLOBAL REGIONS I: EMERGING MARKETS
In recent years Isa investors have poured money into emerging markets (EMs), only to see them fall out of favour in the second half of 2013 amid fears of a Fed taper. And “with the taper now underway, those concerns are likely to persist through 2014, providing a headwind for EM equities and currencies,” says Tom Stevenson of Fidelity. But more bullish investors may feel the current rout represents a buying opportunity, and could increase their weighting towards EMs accordingly.
Jason Hollands of Bestinvest tips the JP Morgan Emerging Market Investment Trust. It suffered during the EM turmoil, but “investment trusts have certain advantages in volatile markets, namely that the fund managers won’t have to engage in a fire sale of holdings to meet redemptions from panicking investors,” he says.
Taking a longer-term view, it is hard not to argue for a reasonable exposure to China. “It is the world’s fastest-growing major economy, and the current historically low valuations make this a good contrarian moment to invest there,” Stevenson says.
GLOBAL REGIONS II: JAPAN
Touted as one of the best investments of the next decade, those willing to take a big bet in Japan could see big returns. While there remain some residual concerns about the impact of the forthcoming sales tax hike in April, Stevenson is confident that the government will do what is necessary to return the country to growth.
Investors wanting to up the ante could select the Baillie Gifford Japanese fund. “It has done consistently well over the last five years – up 65.5 per cent versus the sector average of 35.1 per cent,” says Peter Sleep of Seven Investment Management.
ALL THAT GLITTERS
Gold shares had a torrid time in 2013, but the precious metal still has its place in a portfolio – though investors wanting exposure will need a stomach for volatility. Lowcock tips the BlackRock Gold & General fund. The fund is down 20.68 per cent over five years, but Lowcock believes that “manager Evy Hambro is extremely experienced in this sector, and will be well-placed to benefit from a possible recovery.”
While corporate bonds are not looking attractive at present (they are currently yielding around 4.5 per cent), Sleep and Lowcock both recommend some exposure to the fixed income asset. Bonds are far less volatile than equities, and offer “protection in the event of an economic downturn, as well as a steady yield,” says Sleep. He tips the Invesco Sterling Bond Fund, which has outperformed the underlying market over one, three and five years. “Manager Michael Matthews correctly invested in bonds from the UK’s big banks at the height of the Eurozone crisis, and his investors have seen excellent returns from the brave call. He continues to hold a large proportion of bank issued corporate bonds in the fund.”
With late-January’s volatility now behind us, the backdrop for equity investors is positive. This should be kept in mind as the Isa deadline approaches.