ISA inspiration: funds, trusts, income, sustainable options, and more

With the end of the tax year fast approaching, interactive investor shares last-minute ideas.

With the end of the tax year fast approaching, time is running out for investors to make full use of this year’s ISA allowance. The end of the tax year is 5 April and if you don’t use it, you lose it.

In need of some inspiration? Below, ii experts share their ISA picks for investors seeking exposure to different regions and asset classes, looking at growth, income, fund, investment trust, and sustainable options.

As always – diversification is the name of the game. This means owning a range of different investments (asset classes, styles, regions) as a way to reduce risk.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

For investors seeking value

Dzmitry Lipski, Head of Funds Research, interactive investor: “Within the current environment, where we have rising inflation and interest rates, quality value stocks that might trade at a lower price relative to their intrinsic worth, are interesting.

“Value stocks have the ability to grow profits above inflation and pay steady or rising dividends, providing extra cushion to protect real returns. As such, value-oriented sectors such as financials and energy could do well.

“Artemis SmartGARP Global Equity Fund, an ii Super 60 rated fund, covers a broad spread of countries and market sectors. The portfolio is well diversified with a bias to value stocks. It seeks long-term capital growth by investing in attractively valued high-quality companies. Drawing on Artemis’ in-house software tool, SmartGARP©, the fund adopts an objective, systematic approach to investing, overlaid by the judgement of its manager. ‘GARP’ strategies invest in stocks that not only show higher growth characteristics than the market, but that are also trading at a lower valuation than they are intrinsically worth. As a result, investors are exposed to less downside risk than a pure ‘growth’ strategy.”

For those starting their investment journey - sustainably

Lipski adds: “CT Sustainable Universal MAP range, an ii Quick Start Fund - is a one-stop global investing shop that incorporates actively managed multi-asset and sustainable investing with a focus on low cost. The range is actively managed, combining strategic and tactical asset allocation with individual security selection and integrates ESG factors within the process and reviewed by independent Responsible Investment Advisory Council. Head by highly experienced investors, Simon Holmes and Paul Niven, the CT Multi-Asset team has a successful long-term track record of producing strong risk-adjusted returns in running multi-asset ESG products.”

Lipski adds: “Sustainable investing has become increasingly high on many investors’ agenda. The urgency of the climate emergency has contributed to this, as well as the growing amount of evidence that shows companies which adhere more closely to environmental, social and governance (ESG) considerations can produce better long-term returns.

“Another sustainable ISA pick include Montanaro Better World Fund – an ii ACE 40 rated list, which invests in small and mid-cap companies, which aim to help solve some of the world’s major ESG-related challenges and by supporting the United Nations Sustainable Development Goals.

“The fund has been managed by highly regarded managers Charles Montanaro and Mark Rogers since its launch in April 2018. Managers focus on six impact themes: Environmental Protection, Green Economy, Healthcare, Innovative Technology, Nutrition and Well-being.

“Following a strict three-stage process the managers aim to establish if a company is making a good impact. This is done through a variety of screening tools and meeting company management regularly. The outcome is a concentrated portfolio of around 50 quality growth companies, benchmarked against the MSCI World SMID index. Historically mid- and small-cap funds have outperformed their larger-cap counterparts over the longer term, but they’re generally considered to be riskier investments, so should be used mainly for satellite allocation in a well-diversified, global portfolio.”

For investors looking at the bond market

Sam Benstead, Deputy Collectives Editor, interactive investor, explains: “Investors looking for a fixed income choice for their ISA could look at M&G Emerging Markets Bond fund, a member of our Super 60 list of recommended funds.

“I’m backing emerging market rather than developed market bonds because the starting yields are far higher, and if bond prices rise this year because investors conclude that central banks are finished raising interest rates, then emerging market bonds could be some of the biggest winners. 

“The fund is well diversified with around 150 investments, with about two-thirds invested in government bonds and one-third in corporate bonds. Currency exposure is split between dollar-denominated (two-thirds) and local currency debt (one-third). Brazil is its biggest country bet at about 4% of the portfolio.

“This fund yields 6%, which is more than investors get from high-quality corporate bonds or developed government bonds. 

“Emerging market central banks have been ahead of the curve in getting control of inflation. Because they moved quicker than developed market central banks, they could therefore cut interest rates sooner as well which would boost bond prices.  

“Emerging market currencies are also cheap against the strong US dollar, so if their currencies strengthen, then the income paid to investors when converted back to sterling will be greater.

“It is worth bearing in mind, however, emerging markets can be relatively complex and potentially higher-risk markets – with lots of different factors to consider, and therefore such strategies lend themselves towards highly experienced active managers. Ultimately, it comes down to your risk appetite. More experienced investors who can tolerate risk may want to have a small allocation to emerging markets in a global well-diversified portfolio.”

For the income-seekers

It is no surprise that many investors will be on the hunt for income when it comes to their ISA.

During times of such market volatility, dividends have proven to be robust. For investors looking to build an income-producing portfolio, there are plenty of funds to choose from across all the main asset classes – equities, bonds, and property – as well as alternatives, such as infrastructure and renewable energy.

Where to look – funds or trusts?

Dzmitry Lipski explains: “Both funds and investment 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% 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.”

Research last year from the Association of Investment Companies (AIC), shows 17 investment trusts have upped their dividends for more than 20 years, while over half a dozen boast more than 50 years of consecutive increases.

Funds for income

Dzmitry Lipski outlines some fund picks in the UK equity income space from ii’s Super 60 and ACE 40 rated lists.

He says: “The UK is a market with a rich dividend heritage, so for investors looking for exposure to UK equity, there are some key funds to look at. From our Super 60 rated list, Artemis Income, Vanguard FTSE UK Equity Income, Man GLG Income Professional, and ii ACE 40 rated Janus Henderson UK Responsible Income.

“The Artemis fund, which has experienced hand Adrian Frost as one of its co-managers, is a new entrant to interactive investor’s Super 60 list. Frost has managed the fund since 2002, alongside co-managers Nick Shenton and Andy Marsh. Shenton and Marsh have been co-managers since 2014 and 2018. The managers aim to outperform the FTSE All-Share benchmark over the long term, while providing a growing income and a dividend yield at a premium to that of the index. 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.

“Vanguard FTSE UK Equity Income is also a good choice for investors seeking high and 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% 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.’”

Trusts for income

Lipski continues: “Super 60 rated Murray International (LSE:MYI), a global equity income trust, returned an impressive 20.7% 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.

“Looking at UK equity income again, but from a trust perspective, Super 60 rated City of London (LSE:CTY)has a solid track record and a spectacular track record of annual dividend increases.”

Check your diary: a reminder of fast-approaching ISA and Junior ISA deadlines

Full T&Cs linked in the notes to Editors

• New ISA applications – Deadline - 11.30pm, Wednesday 5 April*
• New JISA applications – Deadline - 11.30pm, Wednesday 5 April*
• Add money to your ISA/JISA by debit card – Deadline - 11.30pm, Wednesday 5 April**
• Add money to your ISA/JISA by internal transfer - Deadline - 11.30pm, Wednesday 5 April***           
• Add money to your ISA/JISA by bank transfer – Deadline - 11.59pm, Tuesday 4 April****        
• Bed & ISA/JISA instructions – Deadline 4.30pm, Friday 31 March*****    

** Online and Mobile Apps only.

*** Internal transfers between linked accounts only.

**** The deadline for receipt of cleared funds in our bank account. Note, bank transfers can take up to 3 working days to clear from initiation depending on the payment service your bank uses.

***** The deadline for online instructions. Telephone requests will be dealt with on a best endeavours basis after this time.

For more T&Cs and FAQs, see ii’s website, here.