Top ISA choices for 2013

Last updated: Jul 10th, 2013
Feature by Andrew Pitts

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.

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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
IMMEDIATE INCOME 14.6% 14.1%
BALANCED INCOME 13.6% 19.3%
GROWING INCOME 15.6% 22.1%
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.