The end of the tax year is fast approaching, which means investors have less than two months to make full use of their Isa allowance.
A stocks and shares Isa allows you to choose your investment and protect from capital gains and dividend taxes.
Investors can put up to £20,000 into Isas each year but if you don’t use it, you lose it. With the end of the tax year approaching, it’s a good time to take full advantage of the allowance.
Stuck for inspiration? Investment experts from leading platforms interactive investor and Bestinvest share their top picks ahead of the 5th April deadline.
Isa inspiration: Investment experts share their picks for income-seeking investors ahead of April’s deadline
Should you opt for funds or trusts?
A stocks and shares Isa can form the foundation of your investment portfolio and give you the freedom to choose where to invest your cash.
This might seem overwhelming given just how many funds and trusts are on offer. To help you with this, investment experts have helped narrow down some trusts depending on whether you’re investing for dividend income or growth.
One step to help you narrow down your options, however, is to think about the type of vehicle you want to invest in, but also to bear in mind that you can hold a mixture of both.
In an open-ended investment fund, investors buy and sell units directly from the manager, which issues or cancels units in line with investor demand.
There is no limit on the number of units that can be issued at any one time. and the number of units goes up and down according to demand.
Investment trusts, which are closed-ended, are investment companies in their own right and listed as such on the stock market. There are a fixed number of shares on offer, which means the price fluctuates more.
Last year, investment trusts saw their discounts widen amid market volatility, but demand stood up well particularly among those looking for a bargain.
Dzmitry Lipski, ii’s head of funds research, says: ‘Both funds and trusts can provide income-generating opportunities. Investors must bear in mind that funds must distribute all the income generated by their underlying holdings.
‘Therefore, when income dries up, as was the case in 2020 during the Covid-19 pandemic, a dividend cut is pretty much inevitable for funds.
‘Investment trusts, on the other hand, can hold back up to 15 per cent of dividends received each year, which means they can build up a reserve to bolster pay-outs in leaner years.
‘So, if your key concern is consistency of income, then investment trusts may prove better suited to your investment goals.’
Before you start thinking about adding to your portfolio ahead of the deadline, it is worth seeing where you’ve already invested your Isa.
Jason Hollands, managing director of Bestinvest says: ‘This will help identify areas where there are gaps to be plugged or where there is already too much exposure. I would strongly encourage people to do this before committing any new cash.’
> For some help on getting started read our How to invest in an Isa guide
Where should income-seeking investors look?
Inflation may have passed its peak but it continues to eat into our savings pots, even with banks raising their savings rates.
There is good reason to consider adding dividend-paying investments in your portfolio, to provide you with reliable income and capital growth.
There are plenty of options available to investors looking to build an income-producing portfolio, across equities, bonds and property, as well as alternatives like infrastructure and renewable energy.
‘The UK is the leading, major market for dividends and in our view UK equity income funds deserve a place as core holdings in portfolios,’ says Hollands.
‘Even if you choose not to take the dividends, reinvesting these is a wise strategy historically most of the real growth from UK equities over the long-term has come via dividend reinvestment.’
Hollands highlights Blackrock UK Income, managed by Adam Avigdori and David Goldman, which invests in UK large and mid caps.
‘[The fund] looks for companies with attractive, consistent cashflows through economic cycles which will lead to long-term dividend and capital growth.
‘They are bottom-up stock pickers targeting primarily high-quality companies such as oil giant Shell and Covid vaccine pharmaceuticals group AstraZeneca, which can be relied upon for consistent earnings and dividend growth.
‘However, they also keep a keen eye out for companies with the potential to produce growing cashflows in the future.’
ii’s head of funds research, Dzmitry Lipski, shares his top picks for income-seeking investors
ii highlights four funds from its Super 60 and ACE 40 lists: Artemis Income, Vanguard FTSE UK Equity Income, Man GLG Income Professional, and Janus Henderson UK Responsible Income.
The Artemis Income fund, launched 21 years ago by Adrian Frost and now co-managed by him alongside Nick Shenton and Andy Marsh, aims to outperform the FTSE All Share and provide a growing income and dividend yield.
‘The team hunt for companies with attractive free cash flow yields, with the goal of constructing a portfolio that generates cash flow in excess of the market,’ says Lipski.
Last year Artemis marginally outperformed the FTSE All Share and IA sector.
Lipski also highlights Vanguard FTSE UK Equity Income as a good option for investors looking for rising income.
‘This is a passive fund, and also a member of the Super 60 list, which had a 12-month yield of 5.5 per cent at the end of 2022. The fund physically invests in the constituents of the FTSE UK Equity Income index, which consists of shares ‘that are expected to pay dividends that generally are higher than average.’
Investment trusts also offer opportunity for income because, unlike open-ended funds, trusts can hold back up to 15 per cent from their investments and use it supplement dividends in future years.
ii highlights global equity income trust Murray International, which returned 20.7 per cent last year.
‘Managed by Bruce Stout, it has been a beneficiary, to date at least, of the change in macroeconomic conditions, which has resulted in sentiment shifting away from high-growth strategies. It has a value focus, and a bias towards Asia and emerging markets.’
It also recommends Super 60 rated City of London, which is unrivalled when it comes to payouts having increased its dividend for 56 consecutive years.
Hollands singles out Temple Bar trust, which is managed by Nick Purves and Ian Lance.
‘They seek to invest in good quality companies with strong balance sheets that are nevertheless trading at attractive valuations, with a balance between large and smaller/medium sized companies.
‘They also have the flexibility to invest in selected overseas stocks, with French oil giant Total Energies being one such example in the current top ten.
‘This is a high conviction rather than a very diversified portfolio of circa 30 stocks. The approach is buy-and-hold, with relatively low turnover.’
Is it a good time to invest in the US?
US-focused funds and trusts have been popular for many years but after a period of underperformance last year, appetite is waning.
The S&P 500 lost 19.4 per cent last year, recording its worst year since the financial crisis.
Jason Hollands, managing director of Bestinvest, is cautious of US equities
Bestinvest is now cautious of investing in the US and its preferred pick is the relatively defensive Dodge & Cox Worldwide US Stock Fund, which focuses on companies with strong valuations.
‘We are wary about US equities as the market has a strong bias to ‘growth’ sectors, which remain vulnerable in a world of rising interest rates and where there is potential for a US recession on the horizon which isn’t priced into current valuations,’ says Hollands.
‘Dollar depreciation is another risk for UK based investors that could eat away at returns. Given most global equity funds are over 60% invested in US equities, investors might also want to bear this in mind before piling into global equity funds this ISA season.’
Instead, Bestinvest prefers UK equities and Asia/Emerging Markets which have been largely unloved, meaning many investors will have scope to add to these areas.
Hollands highlights Liontrust UK Growth, which invests in UK large and mid caps, and Fidelity Special Situations, which holds nearly half of the portfolio in smaller companies.
In emerging markets, Templeton Emerging Markets investment trust ‘is the grandaddy of emerging market funds’, says Hollands.
The trust holds over 80 companies in its portfolio, with the majority invested in Asia although there is some exposure to Latin America.
Bestinvest’s other top pick is the Aubrey Global Emerging Markets Opportunities, which focuses on the growth of the emerging market consumer and therefore the vast majority of the portfolio is held in consumer discretionary and consumer staples companies.
‘India is a key strand of the fund, representing 41% of the fund (India represents about 13 per cent of the MSCI Emerging Markets Index) while Chinese companies are c 30 per cent of the fund,’ says Hollands.
‘The reopening of the Chinese economy this year should benefit the fund as consumers spend savings accumulated during the lockdowns and the Indian government will also remain acutely focused on the economy in the run up to next year’s elections. The fund is quite concentrated, with 36 holdings.’