Top fund picks for the adventurous ISA investor

21st February 2014

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With just over six weeks to go before the start of the new tax year on 6 April, the clock is ticking for those yet to use up their ISA allowance writes Philip Scott.

Given the fiscal benefits on offer, in that any gains or interest earned are tax free, for the vast majority, putting money in an ISA wrapper or Individual Savings Account is by far the optimal way to save. For a basic and higher rate taxpayers, this means respective savings of 20% and 40%.

In the present 2013/2014 tax-year, UK savers can squirrel away up to £11,520, of which half, at £5,760, can be held in cash.

And while many will be attracted to the perceived safety of cash, in the long run, and taking into account the pathetic savings rates on offer from banks and building societies, an investment ISA is more likely to deliver greater returns.

For those savers looking to add some spice to their ISA portfolio in a bid to generate above average returns, we list and examine some of the top picks in the market.

THE UK

Following a prolonged period in the doldrums the UK is once again finding its feet, where  in 2013, the economy managed to grow by 1.9%, its best result since 2007. On the back of this the stockmarket has got itself back on track, with the FTSE 100 index of the UK’s top firms rising by more than 14% over the 12 month period.

UK investors often tend to have the majority of their portfolio exposed to their domestic market but for those looking to up the ante in this regard and invest in a higher-risk vehicle with the potential for very strong returns, Adrian Lowcock, senior investment manager, at broker Hargreaves Lansdown tips the £295m Marlborough UK Micro Cap Growth, which has rocketed by no less than 286% over the past five years.

The fund tends to have a very broad spread of holdings, at more than 200, and favours sectors such as software, computer services and media.

Lowcock says: “We like that its manager Giles Hargreave has over 45 year’s investment experience and has delivered strong returns during his career. We like his preference to back businesses, which have the potential to grow but importantly have more sustainable business models.”

Lowcock also recommends the £1bn Standard Life UK Equity Unconstrained fund, up a hefty 379% over the past five years. This fund is a high conviction portfolio and counts the likes of insurer Legal & General, Easyjet and miner Rio Tinto among its top holdings. “Its manager Ed Legget believes the recovery will continue and has increased exposure to UK companies, which have exposure to Europe and Emerging Markets.  This fund is likely to do well in a bull market but could suffer in falling markets,” notes Lowcock.

JAPAN AND EMERGING MARKETS

After being the success story of the 60s, 70s and 80s Japan, suddenly found itself battling heavy deflation for some two decades but on the back of a number of extraordinary economic policies, dubbed ‘Abenomics’ after their architect, the Japanese Prime Minister Shinzo Abe, the nation’s economy appears to be on the mend. In addition, its stockmarket was the standout of 2013 after its Nikkei index left US and UK in the dust after soaring by 57%.

Many experts believe there is more to come and for someone looking to take a big bet, Darius McDermott, managing director at fund broker, Chelsea Financial Services highlights the £229m Legg Mason Japan Equity, up 164% over five years. McDermott says: “As it is biased towards small and mid caps, it should do well as the Japanese economy improves. It is one of the most volatile funds in the sector though – rewards on the upside can be spectacular but it can also fall pretty rapidly.”

Given the appalling reversal of fortune emerging market investors have suffered in recent years, some fund pickers are pointing out that the pendulum has to swing back at some point. Investing in developing economies is tricky and risky at the best of times but Martin Bamford, managing director at independent financial adviser, Informed Choice, tips the £158m BlackRock Emerging Markets fund.

He says: “This is a great option for investors who want exposure to this sector, which is currently unloved and undervalued. Investors are likely to experience a bumpy ride in emerging markets in the short term but for those who are prepared to hold on for the long run, now should represent a good entry point.” The fund has a good diversification across emerging Asia, south and Central America, as well as developed Asia. Up 84% over the past five years, Bamford says: “It is very actively managed and has to date offered investors an above average return.”

GOING FOR GOLD

Gold shares had a torrid time in 2013 when the price of bullion fell of a cliff. But following a number of bankruptcies and changes in management, the sector has rebounded somewhat but it still remains unpopular. However Lowcock rates the Evy Hambro run Blackrock Gold and General portfolio, which counts the likes of FTSE 100 constituents such as Randgold Resources and Fresnillo among its top holdings. Walloped by the fall in the price of gold and gold shares, the £938m fund is now off 20% over the past five years but Lowcock asserts: “Investors looking to get in early for a potential recovery would benefit from its manager Hambro’s knowledge and expertise on the sector.”

McDermott also believes the sector is due some better luck and is backing the Smith & Williamson Global Gold & Resources portfolio, just 1% ahead over five years, following the sell-off in the sector. The fund typically invests in small and medium sized companies, as well as larger firms, so is more risky and volatile than most notes McDermott, who adds: “At some point, gold shares should re-rate and this means there could be quite an uplift but as we have seen gold is far from being a safe-haven asset class.”

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