Interactive Investor

Investing for growth: fund and trust ideas for your ISA

In the first article of a three-part series in the run-up to tax year end, David Prosser considers how to invest for capital growth, including naming some funds favoured by industry experts.

12th March 2024 10:37

by David Prosser from interactive investor

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Financial markets continue to defy the economic and political gloom that currently mires much of the world. The US stock market hit all-time highs during the early months of the year, with Japanese share prices also soaring. European markets, including the UK, have not consistently matched these gains, but have largely performed well. Many emerging markets have also delivered strong gains.

For growth-minded investors, it has therefore been an encouraging beginning to 2024. If capital growth is your primary investment objective – whether you’re aiming for a specific goal or event, or just trying to build up nest egg for the future – it is important to stay focused on the long term, rather than being distracted by short-term ups and downs. Still, it has been reassuring to see markets rise above economic difficulties such as high inflation and slow growth, as well as conflict in the Middle East and in Eastern Europe.

However, the strength of markets – US share prices, for example, rose 28% over the year to the end of February – should serve as a reminder to consider your tax position. And all the more so given the way tax allowances are changing. In the 2023-24 tax year, the maximum profit you can make on investments with no liability to capital gains tax (CGT) is £6,000, down from £12,300 in previous years. From the beginning of the 2024-25 tax year in April, this will fall to just £3,000.

CGT is only payable on profits actually crystallised – that is, when you realise the gains on your investments by selling them. Still, these lower allowances make it even more important to think about your long-term tax exposure.

This is why Individual Savings Accounts (ISAs) are so valuable to growth-minded investors. You can invest £20,000 inside an ISA, choosing from a very broad range of assets, safe in the knowledge that all your subsequent returns – both income and gains – will be tax-free.

One tax planning strategy might be to “Bed and ISA” existing investments. That means using up some of your ISA allowance by selling investments you currently hold – being careful not to realise a profit above the CGT allowance – and then buying them back inside an ISA to protect all future gains from tax. But all new investments you make will also be sheltered from tax.

Diversification is the best defence against risk

Where, then, to invest for the best prospects of long-term growth? Well, one important point to make in the current market environment is that diversification is your best defence against risk. It has rarely felt more important than to spread your bets widely.

A collective fund makes that easier to do than buying individual stocks and shares, since you’re buying into a ready-made portfolio of holdings. But be conscious of the funds you already hold. Avoid being overly concentrated on any one geography – UK investors often end up with too many UK funds, for example. Look for exposure to different asset classes, and different holdings in those asset classes.

Passive funds that automatically track a stock market index up and down can be a good place to start, providing you with solid foundations for your portfolio, typically with very low charges. In which case, Scott Gallacher, a chartered financial planner and director of independent financial adviser Rowley Turton, has a couple of suggestions.

“Investors seeking a straightforward approach may find the Vanguard FTSE Global All Cap Index fund appealing, as it offers broad exposure across global markets,” he says first. “While it's a reliable option, it's important to note that even trackers like this carry risks – understanding these risks is essential for investors considering this fund.”

Gallacher’s second suggestion is Invesco Global ex UK Enhanced Index fund, which tracks global stock markets but avoids the UK – potentially useful if you have other significant holdings in UK equities.

“This fund presents an attractive option for growth-oriented investors aiming to diversify from the UK market bias, which has underperformed in recent years, and it’s very low cost, so it’s a good option for those who are concerned about fund fees,” he explains. “However, investors should note its relatively high risk, concentration, and significant US bias.”

Indeed, passive funds do have their limitations: they automatically mirror the markets they follow, exposing you to the risks inherent in these markets. Plus, there’s no potential to perform better than the market.

Active fund ideas to go for growth

Many investors therefore want a more active approach – perhaps in addition to some core passive holdings. That could include active funds offering a relatively generalised exposure – to a selection of markets or one country’s exchange, say – as well as more specialise options.

In the former category, Alex Watts, an investment data analyst at interactive investor, is a fan of Scottish Mortgage Ord (LSE:SMT) investment trust, which has retained its place on ii’s Super 60 list of recommended global equities funds despite a difficult period of performance over the past 18 months.

“Scottish Mortgage aims for capital appreciation by investing for the long term in best-in-class growth companies,” Watts explains. “The underlying philosophy driving stock selection is to identify the major drivers of change in the world, and then to invest in a select number of companies poised to capitalise on and benefit from these themes.”

The fund’s managers have plenty of freedom about where to invest. In the past, that has paid off handsomely, with Scottish Mortgage regularly topping the tables of top-performing funds. But the past year or so has served as a reminder that historic returns are not necessarily a guide to the future, with the fund suffering as its investment style has become less fashionable.

On this basis, Watts says investors really must have a long-term outlook for Scottish Mortgage to be appropriate. But if you can be patient, exposure to potentially exciting companies, including some privately owned businesses, does have significant upside potential. Current examples of the latter include Epic Games, Stripe, TikTok owner Bytedance and SpaceX. Also, the trust’s current discount of 13% is unusually wide compared to its five-year average, which could represent a bargain. Also, a yearly ongoing charge of 0.34% looks competitive for this style of active management.

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Other growth funds the experts rate

As for more specialist selections for growth-focused investors, Saftar Sarwar, chief investment officer of Binary Capital Investment Management, suggests picking an important investment theme. “Healthcare is going through enormous change – government healthcare budgets are under pressure and need to be better managed, technology is becoming increasingly important, and so are new areas of drug development in disease management and eradication,” he explains.

To this end, his recommendation is Polar Capital Global Healthcare Ord (LSE:PCGH) Trust. “It is ideal for those who wish to take a long-term investment view,” adds Sarwar. “The trust is well managed by an experienced team and, importantly, they invest with high conviction. The top 10 positions account for around 50% of the trust with 40 to 50 investments held overall.”

Elsewhere, Ben Yearsley, director of Fairview Investing, has a couple of different ideas. First, he likes WS Montanaro Global Select, which invests in smaller company shares listed on stock markets around the world. Small-cap shares have, in the past, outperformed larger companies over the longer term but this has not been the case for the past couple of years.

“Small-cap growth has been dreadful, leaving the asset class looking cheap,” Yearsley argues. “Montanaro is a fund manager with real expertise in small and medium-sized companies. In this space, expect higher than average growth, something that is needed in a lower-growth world.”

Yearsley’s second recommendation is a fund to increase investors’ exposure to emerging markets. Traditionally, these developing countries offer higher long-term returns, but with the potential for much greater volatility in the shorter term. The world’s emerging markets include exchanges in Latin America, parts of Europe, Africa and the Middle East, but Yearsley is particularly enthused by the high-growth markets of Asia. “Asia is going to be the dominant growth story of the next few decades,” he argues.

FSSA Asia Focus is my go-to fund for Asia investing,” Yearsley says. The fund aims for long-term capital growth by investing in high-quality companies from across the Asia-Pacific region. This includes both higher-risk emerging markets such as China and India, and developed economies like Hong Kong and Singapore.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

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