Top ISA choices for 2013
Novice investors, or even seasoned investors, looking for a comfortable home for this year's stocks and shares ISA contribution could do worse than consider the Money Observer model portfolios, provided by Moneywise's sister company Interactive Investor.
The whole range of portfolios is off to a flying start, but it is the income-oriented ones that have performed best. Indeed, investors would be hard-pressed to find a similar multi-manager fund that has done as well as the portfolios over the past year, let alone a single fund.
The average performance of funds in sectors we benchmark against was reasonably respectable in 2012: the average UK Equity & Bond Income fund generated 12.4%; that falls to a 7.2% average in the Mixed Investment 0-35% Shares sector, while Mixed Investment 20-60% Shares turned in an average 8.5%.
Our portfolios also account for attitudes to risk, and it's higher-risk investors who have been better rewarded. One of the reasons the portfolios have performed so well is they use both investment trusts and funds.
Growth in growth
Last year, share price performance of income-oriented trusts was enhanced as yield-hungry investors drove the rating of investment trusts ever higher, meaning many are trading on a significant premium to net asset values.
One such trust is Murray International, run by Bruce Stout at Aberdeen Asset Management. It appeared in all three of our higher-risk income portfolios and in the balanced, medium-risk portfolio, contributing to the strong performance.
INCOME OPTIONS BEAT GROWTH
|THE INCOME PORTFOLIOS||MEDIUM RISK||HIGHER RISK|
|THE INCOME PORTFOLIOS||MEDIUM RISK||HIGHER RISK|
|TIME HORIZON 5-9 YEARS||5.1%||10.8%|
|TIME HORIZON 10-14 YEARS||8%||10.3%|
|TIME HORIZON 15 YEARS+||9.8%||13.7%|
Period from 1 January 2012 to 31 December 2012, bid to bid, net income reinvested. Source: Interactive Investor
However, it is now a victim of its own success, trading on a high premium to its net asset value, and we've replaced the trust with a new holding. The premium has ranged between 12.5% and 4.75%, and is now around 6%. That's arguably fine for existing investors in the trust, who have hopefully bought at the right time to get an extra uplift from any rise in the premium.
However, new investors are paying more for the trust than it is worth, so should it fall from favour and slip to a lower premium, or a discount to its net asset value, there is the potential to lose more than the underlying value of the investments.
The holding has been replaced with Schroder Global Equity Income. Manager Sonja Laud adopts a similar approach to Stout, targeting global companies with stable business models trading on decent valuations and therefore able to deliver above-average dividend yields.
The only other fund we have replaced in the income portfolios is the M&G Corporate Bond, in favour of a higher exposure to equities via Threadneedle UK Equity Income. Again, we feel exposure to good quality equities, via a fund that yields more than 4%, offers more opportunity than the M&G fund, now yielding 3%.
I believe this will be a stronger year for the growth-oriented portfolios. There are early signs of "animal spirits" returning to stockmarkets, boosting recent performance. Some analysts and commentators are already suggesting the 30-year bull market in bonds has peaked and that the "great rotation" back into equities has begun.
I'll explore what that might mean for these growth portfolios next month.
- The portfolios are available on our sister website Interactive Investor for an all-in buying price of £10.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A bull market describes a market where the prevailing trend is upward moving or “bullish”. This is a prolonged period in which investment prices rise faster than their historical average. Bull markets are characterised by optimism, investor confidence and expectations that strong results will continue. Bull markets can happen as a result of an economic recovery, an economic boom, or investor irrationality. It is the opposite of a bear market.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
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).