Where are Isa investors putting their money in 2016?
UK equities more popular than bonds
Earning an income, as ever, has been top of mind, but preferences are changing for how this is achieved. Bond funds are really out of favour. Even Strategic Bond funds – the most flexible type of bond fund – are down from the third best-selling sector from January to March last year to seventh as 2016 kicked off.
Bond yields generally are at all-time lows and although better yielding opportunities can be found in some parts of the corporate market, conservative income investors are not keen to accept the associated higher risks for the levels of return on offer.
Instead, income investors are preferring UK equity funds that pay dividends.These are the mainstay of many portfolios and remain the most popular choice.
Benefiting from manager Neil Woodford’s experience, Woodford Equity Income fund, which tops the list, was also the sector’s best performing for the six months to 31 December 2015, delivering 6.1% total returns.
We’ve been saying for some time now that many investors are too heavily concentrated in the top end of the market – and to their detriment, as total returns from the FTSE 100 in 2015 were -1.3%, compared to 11.2% in the FTSE 250.
Times they may be a-changing, though, with the UK Smaller Companies sector shooting into third place among Chelsea clients in January, despite making no appearance at all in the top 10 of Isa season 2015.
Five smaller companies, mid-cap and multi-cap funds were also named among the 10 most popular funds.
Make the most of market falls
So what has been driving recent changes in investor sentiment? As anyone even remotely following the financial news will be able to tell you, 2016 began turbulently. Global markets fell nearly 5% in the first few weeks of the year.
Historically, these kinds of pronounced falls have deterred all but seasoned investors. But in reality, now might be the perfect time to snap up a bargain.
We all flock to the shops after Christmas to take advantage of seasonal sales because we can get good- quality purchases at cheaper-than-usual prices.
The same rationale should hold true for investments. UK companies are 7.5% cheaper than they were this time last year. A long-term investor prepared to buy shares a year ago should really be prepared to do the same thing now.
Short-term markets may continue to fall but longer-term the potential gains are greater.
Even if you’re not in a position to buy today, it doesn’t hurt to have some ideas stashed away for next year’s Isa allowance.
Top selling sectors and funds among Chelsea Financial Services clients in Jan 2016:
Darius McDermott is the managing director of Chelsea Financial Services and FundCalibre.
- Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott's views are his own and do not constitute financial advice.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
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.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
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).