20 fund, trust and ETF choices for your ISA

There are only a few days of the tax year left in which to make use of your 2011/12 ISA allowance. If you've missed that 5 April deadline or have already made your £10,680 contribution, don't stop reading now.

If you have a lump sum to invest or you want to start a regular savings scheme, why not put your 2012/13 contributions to work as early as possible?

Stocks and shares ISA investors have a bewildering choice: 2,800 or so investment funds, 400-plus investment trusts and companies, and hundreds of exchange traded funds are listed in the UK alone. Together, they far outnumber ISA-eligible shares traded on the London Stock Exchange.

One danger is that investors are often paralysed by indecision, like rabbits in the headlights, but it's more likely that they will be steered by marketing towards the most visible funds or make their selection on the basis of past performance alone.

This shortlist of ISA choices aims to help you avoid those pitfalls.


Troy Spectrum

Troy Asset Management's investment philosophy marries caution and unconventionality with a long-term, value-driven approach that ignores benchmarks. It has worked well across Troy's limited fund range for lead manager Francis Brooke and his team.

The £63 million Spectrum fund is a concentrated fund of funds and investment trusts. Effectively, it's the team's 20 to 25 best ideas, primarily from overseas and in areas where Troy does not otherwise invest. It includes mainly global equities but also some gold, global index-linked and absolute return funds.

Over the past three years it has produced equity-type returns (52% to 1 March), but with markedly less volatility, such that performance in the worst month since launch in February 2008 saw a loss for Spectrum of 5.8%, compared with a MSCI World Index loss of 10.6%.

This emphasis on risk mitigation translates into a FE risk score of 44, compared with the Investment Management Association flexible investment sector average of 65.

Newton Real Return

Many absolute return funds have proved absolutely nondescript, and very few in the sector have managed to meet their targets and pull off a positive return year in, year out.

Newton Real Return, a multi-asset fund run by Iain Stewart and holding a mix of equities, fixed-interest, commodities, cash and structured products, has an impressive track record compared with its peers. It returned 47% over five years to 1 March, against the sector average of 14%, although it did slip marginally (by -0.4%) into negative territory in 2011.

Stewart aims to produce cash plus 4% over three to five years, so that 9% annualised return is very much in line with expectations. However, the fund has an FE risk score of 42, which is relatively high for the absolute return sector (average 13), so investors need to be prepared for some significant variation in the level of returns from year to year.

M&G Strategic Corporate Bond

The fixed-interest team at M&G, led by Richard Woolnough, is highly regarded, and this, its star bond fund of recent years, has won (among various others) the Money Observer award for best fixed-interest fund in 2010 and 2011.

And with good reason: it has comfortably outpaced the sterling bond sector average over each of the past five years, delivering a total of 55%. Its FE risk score, at 25, stands just above the sterling corporate bond sector average of 22. Although it sticks mainly to investment-grade bonds, it has the flexibility to make use of both gilts and racier high yield holdings as Woolnough deems fit.

He explains: "In this fund I have more freedom to back my convictions. I can take a focused approach with larger positions, in an effort to enhance returns."

Old Mutual Global Strategic Bond

This globally diversified bond fund has the freedom to invest in a mix of government, investment-grade and high-yield bonds across international markets, including emerging markets. It is also free to use both fixed- and variable-interest investments, and hold cash or take short positions if need be.

Manager Stewart Cowley has been successful in anticipating and adapting to the uncertainties of the recent economic climate, and also in adding value through his currency selections. For example, last year his use of strong commodity currencies, such as the Australian and Canadian dollars, enabled him to boost returns.

The fund's focus is on maximising overall returns, so it may not be an ideal choice for investors needing a regular income, as yield can vary quite significantly over time. Currently, it stands at just 1.3%. The fund is also rather riskier than the average global bond fund, with a FE risk score of 35, against the sector average of 23. But it's a strong long-term performer as far as total returns are concerned, achieving 70% over five years (compared with the sector average of 52%).

Cazenove UK Equity Income

This fund has just £66 million under management, but manager Matt Hudson has proved adept at delivering superior, risk-adjusted returns in all bar one of the past five calendar years. Hudson describes himself as a "pragmatic income investor". He assesses the business cycle to understand the key economic drivers and how they will affect shares and sectors, and then tries to position the portfolio to get the best out of both cyclical and defensive shares.

He takes a flexible approach and can invest in large, medium or small companies, typically holding between 50 and 70 in the portfolio. He looks for firms that pay high and sustainable dividends and have strong business franchises. Where possible, he seeks out stocks off ering potential extra returns from corporate action.

He cites Morgan Crucible, Bodycote and Cookson as examples of well-run, cash-generative companies that he has held when the economic cycle turns in their favour. Companies such as Diageo, Unilever and Reed Elsevier are better suited to a more defensive environment. Hudson points out that one of the advantages of the business cycle approach is that it avoids the permanent sector biases that characterise the portfolio make-up of many UK equity income funds.

Nevertheless, he also focuses on a group of LSE-listed companies that falls between two stools and tends to be ignored when market sentiment switches between growth and defensive stances. Companies such as Compass, Sage and WPP may have their quirks, he says, but usually deliver solid annual growth of 6-7% in the medium term.

Hudson's approach is paying off. The fund's FE risk score of 95 is 10 points more that the sector average and volatility, at 15.6, is also a little higher. But the fund has markedly superior returns over three and five years of 80 and 21% respectively to 1 March.

Schroder UK Mid Cap investment trust

This is something of a contrarian suggestion. Schroders is one of the biggest players in the mid-cap market, and the open-ended version of this trust – the Schroder UK Mid 250 fund – is very large, at £1.25 billion. But things have not been going too well for it: it appeared in broker Bestinvest's latest Spot the Dog listings of consistent underperformers.

The investment trust is much smaller, at £123 million, and has done markedly better than the fund. That may be a reflection of the portfolio's heavier focus on industrials at the expense of consumer services, and the fact that it's currently geared by almost 9%, which is not an option open to the unit trust.

Three-year performance has been first quartile and the share price is up 107% against the UK growth sector average of 74%. But you do need to be prepared for a bumpy ride, given the FE risk score of 109 (against the sector average of 67). The big attraction, however, is the 16% discount, which is currently towards the upper end of the one-year range, despite the fact that the trust's net asset value has risen 23% over the past six months. Why buy the unit trust when you can pick up the investment trust much more cheaply?

M&G Global Dividend

Income seekers are increasingly realising the value of a global perspective that taps into the rapidly rising number of dividend-paying firms worldwide. M&G's global equity income fund is a well-established leader; it ranks in the top 10 of the global sector over one and three years and has a three-year total return of 97%, compared with a sector average of 59%.

However, that success involves an above-average element of volatility. The FE risk score for the fund is 97, compared with the sector average of 89. The fund's aims are a dividend yield ahead of the market average and increasing payments over the long term. It is currently paying around 3.3%.

However, although manager Stuart Rhodes is firmly focused on dividends, he is wary of the highest-yielding shares, because a high yield often indicates a company in difficulty or with limited growth prospects, investing for income at the expense of capital. Instead, he looks for businesses with low payouts rising steadily year on year. "They will, after a while, achieve a higher dividend than a high-yielding company where the dividend is not growing," he says.

Morgan Stanley Global Brands

This fund invests in high-quality Western-based branded consumer companies with strong franchises that can penetrate emerging markets. The few stocks that make the grade are held for at least five years and some holdings have been held since 2004.

"The challenge is finding good-quality, attractively valued companies in a rather narrow universe," comments manager Bruno Paulson. "Few companies meet both the quality and strict valuation criteria."

The result is a concentrated portfolio of 20 to 40 shares with a free cash flow yield that comfortably exceeds that from a risk-free alternative such as a 10-year government bond.

It is managed on an absolute return basis. The nature of the stocks held means it is a relatively stable fund, and that is reflected in a FE risk score of 65, against 89 for the IMA global sector. This, coupled with top-quartile performance over one, three and five years, makes it an attractive proposition as a core global equity holding.

Trojan Income

Trojan Income has the same manager as the Troy Spectrum fund, Francis Brooke. He uses the same basic investment principles of investing cautiously, seeking value, buying to hold, moving in and out of markets to capture absolute returns, and ignoring benchmarks.

Although it shelters in the UK equity income sector, Trojan Income has a notably broad mandate that allows it to invest in UK and international equities and bonds, plus collective investments where appropriate. As the name indicates it has an income focus, seeking progressive dividend growth – a target it has achieved every year since launch in 2004. It currently yields a respectable 4.4%.

Moreover, like its fund-of-funds sibling, Spectrum, it has an excellent track record over the longer timeframe in which it operates and assesses its own performance. That is borne out in the five-year performance. Trojan Income has returned 35%, against the UK equity income sector average of 3%, with relatively low volatility. The FE risk score is 64, comparing favourably with the sector average of 85.

Db X-trackers/SCM Multi Asset ETF

This is the first fund launch from a relatively new wealth management house, and an interesting new departure: it's the UK's first actively managed exchange traded fund of ETFs. However, manager Alan Miller has a long investment record, most recently as chief investment officer at New Star Asset Management.

Miller says the fund aims to create, in ETF form, a geographically diverse, broad-based portfolio of db-X ETFs that includes equities, property, private equity, bonds and cash, but manage the all-important allocation between the various asset classes actively, and often in a contrarian way.

He adds: "For instance, we've been selling our exposure in Chinese equities because we have done very well there." The advantages of using ETFs include their transparency and low cost. Indeed, in the interests of clarity SCM quotes a "flat fee", equivalent to a total expense ratio, of 0.89%, that includes all underlying expenses except for dealing.

Miller's fund has no official track record yet. But the company has been running an equivalent absolute return ETF portfolio for private clients since June 2009, which has risen by 27% to date. The IMA absolute return sector has averaged 11% over the period.


Investec Emerging Mkts Local Currency Debt

Investec Asset Management, with its South African roots, has a long history of active management of emerging market currencies. This interesting fund turns that expertise to good use by investing in sovereign and corporate debt issued by emerging markets governments and companies, in local currency and in hard currencies such as the dollar.

Manager Peter Eerdmans aims to generate returns through both currency movements and bond performance. The fund has delivered first-quartile performance over one, three and five years and grown by 112% over five years – more than double the IMA global bonds average. It is, however, a relatively volatile proposition on an FE risk score of 57, way above the sector average of 23.

Emerging markets have kicked off strongly in 2012 and investors are regaining their interest in these assets, but Eerdmans believes valuations remain attractive. He adds that emerging market debt remains relatively under-owned, especially in institutional portfolios and
that continuing reallocation towards the asset class will "underpin performance in the medium term".

Scottish Mortgage Investment Trust

Run by James Anderson at Baillie Gifford, Scottish Mortgage is one of the grandes dames of the AIC global growth sector, with around £1.8 billion under management in a fairly concentrated, global 80-stock portfolio. But Anderson is very much a bottom-up stockpicker and geographical spread doesn't matter for him: he simply picks the stocks he likes. He takes quite a thematic approach.

One favourite theme is the rise of Chinese domestic consumption, and another is the impact of technology – particularly "technology winners" such as Amazon, eBay and Google, and technology in healthcare. Performance has been nothing special over the past year, but Anderson is investing on a five-year view and stresses that performance should be judged over that kind of timeframe.

Certainly, over both three and five years performance has been outstanding relative to the sector average. An 11% discount adds to the attraction.

SPDR Emerging Markets Dividend ETF

This ETF is another play on the attractions of emerging market income opportunities in a low-yield environment. The London-listed ETF has only been around since October 2011 but has proved popular among dividend seekers, according to Eleanor Hope-Bell, head of UK and Northern Europe sales at SSgA. And understandably so, given the 8.4% dividend yield it fl agged up as of the end of January.

It tracks the equity market performance of a broad cross-section of high-yielding shares from emerging markets, by investing physically in the S&P Emerging Markets Dividend Opportunities index. This comprises around 100 high-dividend-yielding, liquid shares with stable or increasing three-year dividend growth from 20 emerging market countries.

Interestingly, the make-up of the index reflects the fact that dividend-paying companies are most in evidence in the more mature emerging economies: more than 40% of the fund is concentrated in Taiwan and Brazil alone.

Utilico Emerging Markets Investment Trust

Although it sits in the global emerging markets equities sector, this trust is firmly focused on the relatively stable, long-term opportunities in the industrial infrastructure sector. Port and waste/water holdings each account for more than 20% of the portfolio, and road/rail, electricity and airports a further 30% between them.

The management team takes a bottom-up approach. Analyst Colin Reid at broker Fairfax observes: "Geographical exposure is not a result of asset allocation, but is driven by the desire to find good value." However, the relatively advanced emerging economy of Brazil is one area of interest, and around a third of the portfolio is invested there.

Although the trust doesn't commit to a specific yield target, it is run with dividend payouts in mind and is currently paying 3.2%. Many of the companies in the portfolio distribute dividends and are in a strong position to grow payouts over time. A number have specific progressive dividend policies in place.

The trust has returned a very respectable 75% over the past three years, although it has, unsurprisingly, underperformed its racier emerging markets peers.

Lowland Investment Trust

The income theme continues with this UK multi-cap trust, run by the respected James Henderson at Henderson Global Investors. It invests in the whole spectrum of UK companies, from family-run enterprises to blue chips, although FTSE 100 companies may not account for more than half the portfolio.

One particular attraction for income-seekers is Lowland's long-running focus on rising dividends. Until 2009, when the dividend payment was unchanged from the previous year, the trust had achieved 38 consecutive years of dividend growth, and since 2009 it has been back on track with further increases. Henderson is positive about the outlook for UK companies.

"There's a rebalancing going on in the UK, away from consumer stocks and towards manufacturers selling to growing economies. I'm finding many capital goods companies in a strong position now and offering very good value. People are being too negative about earnings for a lot of companies," he says.

The trust's current 15% gearing reflects his optimism. Performance has been impressive. The trust achieved a total return of 122% over three years, streets ahead of its peers and the UK growth & income sector average of 83%. Despite this, Lowland has one of the larger discounts in this popular sector, at 3.5%, so this could be a good opportunity for bullish income seekers.

M&G Recovery


For more than 40 years, this popular UK all-companies fund has been sniffing out underdogs: UK businesses that are unloved by the market – because of operational difficulties or financial troubles, for example – but have the potential to recover in time.

Manager Tom Dobell takes a patient tack. He holds his chosen stocks for three to five years, or longer if he reckons there's more recovery to come, and takes an active role as a "constructive shareholder". Because the focus is on corporate rather than economic recovery, the fund is able to find investment opportunities whatever the state of the wider economy. Over the long term it has been very successful at doing so and has achieved top-quartile performance over one, three and five years.

Indeed, on a very long-term perspective M&G Recovery is one of the most consistent performers in the UK market, outperforming the FTSE All-Share in 30 of its 42 years. From launch to the end of October 2011, it produced an average annual return of more than 15%, compared with 10.7% for the FTSE All-Share.

But over the short term it is more volatile than average, with an FE risk score of 114, compared with the sector average of 100.

Aberforth Smaller Companies Investment Trust

Over the very long term, this 89-holding trust has done pretty well, producing a compound annual growth rate of just under 10% over 15 years to the end of 2011. But it has failed to deliver for some time now: performance is well below the UK smaller companies sector average over one, three and five years.

Yet the management team is well respected and sticks to its guns in the face of adversity, holding companies with low valuations, high yields and strong balance sheets. Could 2012 see a turnaround? The managers say their underperformance over the past five years is a reflection of the trust's value investing style and point to research suggesting that returns on smaller-company growth shares have beaten their value-focused peers by 10% a year over that time.

"The present gulf between the valuations of value and growth stocks is exaggerated," they comment. "History suggests that the relationship between the two groups will not stay at such stretched levels. The process of normalisation will be advantageous to the value investment style." Investors may have to wait a while, but in the meantime they'll receive a decent dividend yield, currently 3.3%. The trust is on a 14% discount.

Hansa Trust 'A'

Run by John Alexander, a well-regarded manager with a strong track record, this unusual £145 million trust runs a portfolio of special situations. It holds a multi-cap mix of around 24 UK-listed shares weighted towards the smaller-cap end of the market. The bulk is in UK equities, but around 12% are property shares.

Particular novelty value lies in the 40%-plus of the portfolio invested in Ocean Wilsons, a London-listed holding company with a majority stake in one of the largest port and logistics firms in Brazil. Colin Reid at broker Fairfax reports that as of the end of 2011 the trust had a 28% exposure to Brazil through Ocean Wilsons.

Hansa's mandate for special situations and its conviction-driven approach means that performance bears little relation to that of market indices. Over the longer term it has a very strong record, but it has suffered more recently, underperforming the UK growth sector average over one, three and five years to the end of February, according to FE Analytics.

However, as a potential recovery play offering access to Latin America and prospects for emerging market infrastructure, it's an interesting option, especially on its current 20% discount – well above the 12% sector average (and its own one-year average).

BlackRock World Mining Investment Trust

This £1.3 billion trust is run by Evy Hambro and his team and invests in a portfolio of metal and mining securities worldwide. The sector as a whole had a tough time in 2011 as emerging market demand slowed, but the team's stock picking abilities meant the trust outperformed the benchmark index.

Moreover, 2012 has started strongly and Hambro believes the macro backdrop is improving. The trust's outlook has also been boosted by impressive revenue growth, which enabled it to pay a 14p dividend in 2011 – a 133% increase on the previous year. And that pattern is set to continue. Hambro says: "The portfolio is already seeing substantial increases in dividends across the board from the companies it holds. So overall yield is rising."

The trust is further helped by a change to accounting policy, which means that in future management costs will be paid out of a mix of capital and income (rather than entirely from income). That change, had it been implemented last year, would have added another 8p to 2011's dividend, Hambro explains.

Consequently, the trust will target a higher yield in future. If the changes had been in place last year it would have paid around 3.7%. A decent yield also has favourable implications for the discount.

Hambro comments: "Research indicates that once a trust yields over 3.5%, the discount tends to narrow. We've already seen the discount on BRWM fall from 16 to around 9%.'

Pantheon International Participations Investment Trust 'R'

This private equity fund of funds, formed in 1987, is the oldest such trust listed on the London Stock Exchange. It's a well diversified trust that invests globally and holds more than 600 funds. As a result, investors benefit from high liquidity and a broad mix of private equity holdings across a range of regions and sectors.

Long-term performance has been strong: over 15 years to 30 September 2011 the trust's compound net asset value total return was 9% – double the MSCI World index's annualised return. But private equity is an inherently volatile investment. Over three years to 1 March, PIP returned 300%, against 129% for the private equity sector, but over five years the trust is down 16%. Long-term investors will be attracted by the discount. The private equity fund-offunds sector is on a 33% discount.

PIP is on a substantially larger-than-average 39% discount, although this has narrowed recently.

This feature was written for our sister publication, Money Observer.


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