Does your ISA suit your appetite for risk?
Picking the top-performing funds can help deliver good returns on your individual savings account, but it's also important to build a balanced portfolio.
By holding a diversified range of investments that suit your investment objectives and appetite for risk, you shouldn't get any nasty performance surprises.
Before you buy or sell anything, make sure you know what level of risk you're willing to take and what you're trying to achieve through your ISA investments. Your time-frame is important here.
Because of this you need to be able to leave your investment for at least five years, and ideally longer, especially if you're investing in a high-risk area such as emerging markets.
As well as having sufficient time, you need to consider how comfortable you feel with risk. The more risk you take, the more potential for return but, if the thought of losing your money causes you sleepless nights, then you should look for lower-risk investments.
Broadly speaking, investors fall into three categories – cautious, balanced and adventurous – although it's not an exact science and different time-frames and market conditions will influence how rigidly you follow the asset allocation models.
Once you know where you should be investing, look at the investments you already have. Darius McDermott, managing director of Chelsea Financial Services, advises: "Look at where you've already got money, not only with any existing ISAs but other investments too.
"Many investors are overweight in the UK, so do take these other investments into account when correcting your asset allocation."
For first-timers, McDermott suggests looking at global funds, recommending M&G Global Basics: "These give you access to a bit of everything and you can benefit from exposure to different assets and regions."
As an example, he points to US giant Colgate. "It's a US company but its growth can come from other parts of the world," he explains.
Diversification is also important, as getting exposure to a variety of different assets, countries and sectors is key to minimising the risk in your portfolio. After all, if one of these is rising sharply, you can be sure that another is falling.
"Spread money across funds too," says Andy Parsons, advice team manager at The Share Centre. "Even if you have a well-diversified global fund that takes care of everything, vary the styles of fund management by having two or three global funds."
It's also important to review your portfolio on a regular basis. Although it might be perfectly honed today, different rates of growth across different assets can leave it flabby and out of shape.
"Don't watch your portfolio 24/7 but do review it at least annually, or ideally two or three times a year," says Parsons.
As well as looking at how your funds have performed against their peers, you should also check whether anything has changed about the funds as this might affect your decision to invest in them.
For example, if the fund management group has been bought by another company, or the manager has left, this could affect performance. Parsons recommends avoiding knee-jerk reactions in these situations.
"Give it six months and see what happens. It could be positive for performance," he explains.
Once your portfolio is up and running, getting it into shape should be fairly straightforward. Simply check its asset allocation against your model portfolio and buy and sell funds accordingly.
When you review your portfolio, don't be afraid to take profit too.
With stockmarket investments there's always a risk you become so attached to a fund that's performing well that when its performance falters you convince yourself it's only a blip and end up seeing your profit disappear as you simply can't sell it.
"Different regions and assets have their times, so set profit targets and lock in your gains when you make them," adds Parsons.
Alternatively, you can opt for a fund supermarket, which can make it much easier and cheaper to run your stocks and shares ISA portfolio.
The cost of investing is much lower as the initial charges on funds are reduced, sometimes by as much as 5.5%, and there are no extra charges for buying and selling.
Also, because the wrapper is with the fund supermarket, you can pick any funds that are on its platform. This means that you can gain exposure to a range of different fund management groups.
You can also have more flexibility if you want to make changes to the funds you selected.
If you had taken your ISA out with a fund management group, you would have to transfer all of that year's allowance if you wanted to move to a different manager; with a fund supermarket, you can switch the proportion you want when you want.
You don't even need to invest the money straightaway. If you haven't decided where you want to invest, you can leave your money in cash within the supermarket.
Although this practice isn't encouraged by HM Revenue & Customs, you will receive some modest interest on any cash in your ISA.
As well as choice, greater flexibility and low charges, many fund supermarkets also offer you access to tools to help you build and manage your portfolio.
This includes portfolio analysis tools that let you see the asset allocation of your funds and how this would be affected if you made any changes. On top of this, you'll also have access to research, market reports and fund tips.
There are a number of fund supermarkets available, including Fidelity's FundsNetwork, Hargreaves Lansdown's Vantage and Interactive Investor's Fund Supermarket.
If you don't have the time, confidence or inclination to run your portfolio yourself, you can pass these responsibilities on to an expert. An independent financial adviser can recommend funds and monitor them on a regular basis, to help you maximise your returns.
It might not even cost you anything extra either. Although a growing number of IFAs charge fees – and this will become the norm by 2012 – some use the commission they receive from the fund management companies to pay for their advice.
To find an IFA in your area, go to moneywise.co.uk/findanifa.
FUND RECOMMENDATIONS - CAUTIOUS INVESTORS
Investec Cautious Managed
Fund manager: Alastair Mundy
This is recommended by The Share Centre's advice team manager, Andy Parsons. "This fund has a mix of bonds and equities, and the manager, the well-respected Alastair Mundy, can adjust the weightings of each asset class as he sees fit," he explains.
M&G Optimal Income
Fund manager: Richard Woolnough
Both Parsons and Chelsea Financial Service's managing director Darius McDermott recommend this strategic bond fund. McDermott likes the fact that it can switch between areas of the bond market, while Parsons praises the strength of the analyst team picking the investments.
Legal & General Dynamic Bond Trust
Fund manager: Richard Hodges
Another favourite from Parsons and McDermott, this fund also has a flexible mandate, enabling it to take advantage of all types of market, and posted a return of 42% in 2009. "Returns in 2009 were a once-in-a-lifetime event," adds Parsons.
FUND RECOMMENDATIONS - BALANCED INVESTORS
BlackRock UK Absolute Alpha
Fund manager: Mark Lyttleton
This fund, which could suit both cautious and balanced investors, looks to deliver a return whichever way the market is heading by using derivatives to make long and short calls on stocks. "Its strategy makes it a bit of a 'Steady Eddie' fund," says Parsons. "If we have continuing growth it'll lag, but you have the reassurance that even if everything is falling, it should post positive returns."
Fund manager: Tom Dobell
Recommended by both McDermott and Parsons, this fund's objective of investing in companies that are out of favour or have the potential for recovery is particularly well suited to the current market. "At the moment, picking investments must be like a kid going into a sweetie shop. It also has a good history, it's been going for more than 40 years and returned 40% last year," says Parsons.
L&G UK Alpha Trust
Fund manager: Richard Penny
This fund also invests in companies that are showing signs of recovery, with more of a focus on the small to medium-sized end of the market. "This fund delivered a return of 88% last year, and while I doubt it'll repeat this, there are plenty of opportunities out there," says Parsons.
FUND RECOMMENDATIONS - ADVENTUOUS INVESTORS
Allianz RCM BRIC Stars
Fund manager: Michael Konstantinov
This emerging markets fund invests in Brazil, Russia, India and China, and is recommended by both Parsons and McDermott. "It's a volatile area to invest in, but if you can take a long-term view of at least 10 years, then these markets are where the performance is," says McDermott.
First State Asia Pacific Leaders
Fund manager: Angus Tulloch
This is a Far East fund that invests in large and medium-sized companies in the region. "The Asia Pacific region is First State's area of expertise," says McDermott. "It has offices out there, which makes it easier for it to identify opportunities."
Invesco Perpetual Latin America
Fund Manager: Dean Newman
Parsons recommends this fund if you think Latin America will be the big emerging markets story. The fund's portfolio is spread across the region, but towards the end of 2009 its largest holdings were in Brazil (59.2%) and Mexico (19.8%). "With oil fields recently found off its coast, Brazil has huge potential," says Parsons.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.