Fund your ISA
Andy Parsons, advice team manager at The Share Centre, explains why savers and investors alike should plan to make the most of their ISA allowance and outlines the benefits of a Stocks & Shares ISA that invests in funds.
"A significant proportion of investors are now considering increasing the level of risk they are prepared to accept in order to seek higher income and growth returns.
"With the average Cash ISA currently returning between 2.5% and 5% (for fixed rate) and with Retail Price Index inflation for January 2011 at 5.1%, money kept in a Cash ISA is struggling to keep up with inflation. Therefore, investors seeking reasonable returns and willing to take more risk with their money could benefit from moving in to an asset backed investment.
"Despite the continuing economic uncertainties and stock market volatility post the Lehman's collapse, investors are beginning to appreciate that markets are returning to more normal behaviours.
"Whilst the majority of uncertainty has subsided within the equity markets, for those not comfortable investing directly into the stock market, consideration could be given to funds as a way of reducing the overall risk.
"If you are a new investor, funds can represent an easier way into the market. By their very nature they can help to diversify a portfolio as they can include a variety of equities and other investments. With a diversified portfolio, returns from better performing investments can help offset those which aren't performing as well.
"The Share Centre's low risk ISA pick, the Henderson Strategic Bond fund, is an example of a fund that can offer investors a healthy return. Investors seeking an attractive income return could consider the fund, which is currently yielding 7%."
Parsons suggests three funds from The Share Centre's Platinum 120 for investors seeking to diversify their ISA with funds in 2011.
Low risk - Henderson Strategic Bond fund
This is an 'all-weather' bond fund designed to perform across a range of market conditions. It has a flexible and wide mandate to exploit upside potential and to also protect capital during more difficult market conditions.
The managers take an active approach to running the fund, taking into account the outlook for growth, inflation and interest rates, as well as economic and political factors. These are then married with stock specific analysis including company valuation and credit risk.
With the aid of a well-resourced team and the scope and flexibility of the mandate we believe this fund has potential to generate an attractive return across the fixed interest spectrum. Income is paid out quarterly.
Medium risk - L&G UK Alpha fund
The L&G UK Alpha fund has been managed by Richard Penny since its launch in May 2005. It offers investors a tried and tested hybrid approach to investing in value and growth companies. The fund focuses on companies that have fallen out of favour with the market or are in the process of restructuring with the potential for rapid growth.
Penny can invest across the complete market cap spectrum but generally focuses his attention on AIM listed companies. The fund generally holds in around 30-35 companies which Penny hopes will double in value over three years - showing this conviction in his choices.
This Fund is suited for those investors that are seeking value and opportunity whilst looking for longer term gains. However this fund should not be the only UK equity fund held in a portfolio due to the significant exposure to more volatile smaller to mid cap stocks.
High risk - Aberdeen Emerging Markets fund
Emerging Market investments are attractive because of their broad access to investments in Asia, Eastern Europe and Latin America. These three regions of the world have growing populations, an abundance of raw materials, developing financial markets and some are now even starting to demonstrate internal consumer demand.
The lure of potential higher returns is hard to ignore, but its not for the fainthearted and we recommend it only makes up a small proportion of your overall investment portfolio.
There are a variety of issues that make investing in the emerging markets of the world treacherous. Poor communication, poor regulation, lack of corporate governance and even corruption are just some of the difficulties faced within many of these regions.
This fund also favours a blend of large and mid cap companies. To pick the equities the team focus on a bottom-up approach with the main emphasis on absolute returns rather than the benchmark. Investments are generally bought on the basis of being held for the longer-term rather than regularly traded.