The most-popular ISA funds today vs five years ago

With tax year end only a couple of weeks away, Kyle is joined by ii fund content specialist Dave Baxter to run through the funds, investment trusts and ETFs piquing investors’ interest. Kyle and Dave also look at back at the funds topping the popularity charts five years ago and explain the dangers of falling into the potential trap of performance chasing.

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

Kyle Caldwell: Hello, and welcome to On The Money, a weekly show that aims to help you make the most out of your savings and investments.

With just a couple of weeks until tax year end, this week’s episode and next week’s are both going to have an ISA focus.

This week, we’re going to be looking at the most popular ISA funds with investors, and we’re also going to look back at what were the most popular ISA funds five years ago.

Joining me to discuss this topic is Dave Baxter, senior funds content specialist at interactive investor. Dave, welcome back to the podcast.

Dave Baxter: Thanks for having me on.

Kyle Caldwell: So, Dave, let’s first look back at what the most popular ISA funds were among investors five years ago. So, the time period we examined was 1 January 2021 to the 28 February 2021.

For those who are watching the podcast on YouTube, we’ll be showing a table of the top 10 overall funds, investment trusts, and exchange-traded funds (ETFs).

So, Dave, as you can see on the table, six of the 10 are Baillie Gifford-managed funds or investment trusts.

If we cast our minds back to five years ago, this was before interest rate rises started to kick in and, at the time, growth-focused strategies were flavour of the month. That’s evidenced by the fact that we had so much demand for Baillie Gifford funds or trusts at that time.

Dave Baxter: Yeah. You have to cast back a bit further, don’t you, to imagine the lockdown period 2020. You’re sat at home a lot, and you had a lot of these trends targeted by funds like Scottish Mortgage suddenly got this massive boost.

Then in 2020, you saw, I think Scottish Mortgage, Edinburgh Worldwide, and Pacific Horizon, made returns of more than a 100%. So, then you’re moving into 2021, and people have clearly seen these big gains, the potential of those themes, and they want to get involved.

Kyle Caldwell:  It shows that at that particular point in time, investors did have a strong preference for growth-focused strategies. And as we’re going to talk about in the podcast, it’s important to diversify in terms of investment style.

At that point in time five years ago, you may have had too much in growth-focused strategies. If you did buy at that point, then you were probably going to be quite disappointed with the returns you received in the next five years.

• Where investment professionals are investing their ISA
• Best-performing funds and sectors since ISA launch in April 1999

Dave Baxter: Yeah. If you look to, say, a five-year performance chart for these 10 funds, some of them have struggled over that period, China ones in particular. But turning to your growth points, of course, in late 2021, with inflation sticking around, we saw interest rates rising, and a lot of those funds, at least temporarily, hit the buffers. So, if you’d purely been piling into those funds at that given point in early 2021, you would have had quite a difficult period.

Kyle Caldwell: What I also find interesting about the top 10 five years ago is that we don’t have any global index funds or global ETFs, or US index funds or US ETFs in there. We have seen very strong demand for those types of products over the past couple of years. But five years ago, people weren’t heavily buying into them. In fact, there’s just one ETF in the list, which is iShares Global Clean Engy Trns ETF $Dist GBP (LSE:INRG).

This is an example, potentially, of the dangers of performance chasing. At the time, this ETF had really strong levels of performance. We now know with the benefit of hindsight that those kind of returns didn’t last forever. They did not continue.

I think it does show if you’re investing in a particular theme, sector or even country, particularly if it’s China or India, an emerging market country, that it’s really important to consider it as a satellite holding and not a core holding, and to diversify accordingly.

Dave Baxter: Yeah. I think diversify. Maybe also use regular investing if you can, so you lessen that risk of buying in at the highest point for valuations. You’re evening things out.

You do need to be a bit cautious and have a bit of a strong stomach when it comes to those more niche holdings. The clean energy ETF is definitely a bit of a warning case for people looking at those thematic funds.

Kyle Caldwell: At the same time, there’s nothing wrong with trying to exploit a short-term theme and to add a bit of spice into your portfolio. I think you just need to take a step back and think, if I buy into this theme now, what are its prospects going forward, rather than looking back at those previous returns and thinking they are excellent. Because if you’ve not participated in that rally and you’re only just buying now, you haven’t received those returns. They went to other investors.

Dave Baxter: Yeah. I’m a bit skeptical personally about thematic funds, and some people disagree with me. But I always think this is a particular risk with those funds because you tend to get a lot of hype drummed up around a certain theme. So, it comes into your awareness just as that hype is very high and potentially those prices are very high.

So, maybe you just need to be a little bit wary of that and perhaps be dedicated and hold for the very long term or, as I said, do some other things like regular investing.

Kyle Caldwell: A final point before we move on to the most popular ISA funds right now is that, obviously, we looked back five years ago at one particular point in time. Many of those funds in the top 10 customers had bought previously. They didn’t just buy at that one point in time, they had been buying for quite a while. So, it wasn’t as if they just bought at that one moment in time, and then five years later, they are nursing losses in some cases.

Dave Baxter: Yeah, that’s true. I guess because these are, I suppose, the more ad hoc investments and things you do beyond your usual plans. But I suppose it is interesting to consider how things might have panned out if you’d been more of a contrarian with those picks because as we’ve mentioned, a lot of these were funds that were doing well at the time.

Perhaps if you’d been buying in things like bombed-out UK equity funds instead, you might have seen a much better outcome for that portion of your portfolio.

Kyle Caldwell: Let’s now move on to the most popular ISA funds at the moment. Again, for those watching the podcast on YouTube, we’ll now be showing a table of the top 10. We are focusing on the start of this year, so 1 January up until 28 February. Within the top 10, the top two are exchange-traded commodity products. They’re the iShares Physical Silver ETC GBP (LSE:SSLN) and the iShares Physical Gold ETC GBP (LSE:SGLN).

So, we’ve seen demand for both silver and gold pick up over around the past nine months, and that has been in response to a really strong showing in terms of the spot prices of both of those commodities. But, again, I think it’s important to treat this type of holding as a satellite holding in your portfolio given that they are more adventurous areas.

• Want to pay less tax? Here are five allowances to use by 5 April
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Dave Baxter: Yeah. We’ve seen a little bit of evidence of the risks on show when you have these high valuations. It seems like a lot has happened in the last few weeks. A few weeks back, you had a new Federal Reserve chair nominated, and that spooked precious metals investors and you saw some big falls.

And then, interestingly, within the first fortnight since the escalation of hostilities in the Middle East, gold originally strengthened, and then it fell back partly with the theory that people are taking profits and covering margin calls elsewhere.

But it is in the context of how much momentum’s been behind the price in the last two years, that it has become, like you say, more of a punchy position, and something maybe to keep in a smaller allocation in your portfolio.

Kyle Caldwell: Within the table, there are only three actively managed funds. One is Artemis Global Income I Acc. This fund is typically popular with our customers, but we’ve seen a real uptick in popularity for it over the past six months, I’d say. I think that’s on the back of how strong its returns have been, particularly over the past one and three years.

It invests very differently from the wider market. It only has 30% in the US. It has a good chunk of exposure to emerging markets, around a third. It also has around a third of its assets in Europe and only a little bit in the UK. So, for me, I think one reason why investors are looking at this fund is because it’s offering something very different from the wider stock market. If you’re buying a global tracker fund, for example, that’s going to have around 70% in the US.

So, you’re getting very different exposure via this fund, whereas there are some global funds and global equity income funds that still do have a pretty high weighing to the US.

Dave Baxter: Do you think, though, investors need to be aware of what we were saying earlier about style and piling in too much? Because this is a classic value fund. Value had a massive resurgence last year. We saw this fund and names like Ranmore Global Equity Institutional GBP having almost perfect conditions.

But I don’t know. Is there a risk maybe of people leaning now too far this way and forgetting those growthier names that will complement them?

Kyle Caldwell: If I was looking at the fund today, I’d think, wow, that performance is impressive over one, three, and five years. Indeed, if you look back at the history of the fund since it launched in 2010, it’s produced very good returns, and I think this is a really good example of active management adding value over the long term.

But I think you need to look at it in the context of your overall portfolio. As you’ve mentioned, Dave, it has a value investment style. So, it’s hunting for companies that are cheaper than the wider market. It’s trying to find those companies that over time, they’re on low valuations, and those low valuations may rerate and that benefits the share price over time.

So, I’d ask myself whether I have already got too much exposure to value-focused funds and investment trusts. And think OK, at the moment, there’s certain growth strategies that have been out of favour. You may want to look at those a bit more now. 

Dave Baxter: It’s interesting to look at how some of the investments in those funds have done because we were looking at Artemis Global Income the other day, and I think it’s top holding recently was Samsung Electronics Co Ltd DR (LSE:SMSN), which has returned something like 200% over a year.

Then, say, you look at classic quality funds, a good example is Nick Train’s funds and, obviously, a lot of his holdings are actually down. So, you’re getting this weird muddying of the waters in terms of what’s value and what’s growth/quality.

• Alternatives to the most-popular ISA funds
• ISA funds around the world: eight pairings to mix and match

Kyle Caldwell: Yeah. I think some of the more classic growth stocks are now becoming today’s value companies, and I think that’s a trend that’s going to continue in the months ahead. I think the lines between what’s a growth strategy and what’s a value strategy will become increasingly blurred.

In terms of the other actively managed funds in the top 10, we have the Royal London Short Term Money Market Y Acc fund. Over the past couple of years, we’ve seen demand pick up very strongly for money market funds. For those unfamiliar, these are funds that own a diversified basket of very low-risk bonds that are due to mature soon. They typically have lifespans of a couple of months.

Money market funds are very low risk, and the yields - the amount of income produced by the funds - is typically in line with the Bank of England base rate. So, at the moment, money market funds are typically yielding around 3.75%, which is currently giving you inflation-beating income.

Dave Baxter: It’ll be interesting to see what the outlook for that is in future. Today, we’re recording on 13 March, and, of course, we don’t know what’s going to happen in the coming weeks with Iran.

But one of the potential takeaways of the possible fresh energy shock is that inflation’s higher and interest rates are likely to remain static or less likely to fall, perhaps we could even see increases. If that happens, then the returns from that fund will be more attractive.

Kyle Caldwell: I completely agree. I think a couple of months ago, the expectations were that UK interest rates were going to be cut once or maybe twice this year. But, obviously due to conflict in the Middle East, the narrative has switched and I think it’s more likely that interest rates will be paused at least for the time being.

However, prior to that, there was thinking that if you were looking at money market funds, there may come a point in time when, if interest rates were cut a couple of times and therefore the yields on money market funds became less generous, then investors might have to take a bit more risk in order to receive a higher yield.

There are certain bond funds that are a bit riskier than a money market fund, but the trade-off is that you’re going to get a bit of a higher yield.

So, just to name two examples. One is the L&G Short Dated £ Corporate Bond Index I Inc fund. This focuses on very high-quality bonds called investment-grade bonds, and it focuses on bonds that are maturing in less than five years’ time. The distribution yield on that fund is 4.7%. So, a percentage point higher than most money market funds at the moment.

Another option is the iShares £ Ultrashort Bond ETF GBP Dist (LSE:ERNS), which also has a higher yield than a typical money market fund. Its distribution yield is 4.6%. That’s based on the 12-month trailing yield. That’s based on the distributions that were estimated to have been made over the past 12 months. So, I would keep that in mind in terms of how that yield figure’s calculated.

But, again, it is offering a higher yield than a money market fund, and that particular ETF focuses on bonds that are maturing within the next year.

In terms of the other actively managed fund in the top 10, that’s Greencoat UK Wind (LSE:UKW). This is an example of investors trying to bargain hunt. It has a dividend yield of around 10%. It’s on a very deep discount, which is around 30% the last time I checked a couple of days ago.

However, it’s total return performance, particularly over three years, has been a pretty heavy loss. So, investors buying in today are hoping for a turnaround in fortunes for that sector, and they’re hoping that that 10% dividend yield, if it is paid, and I think investors can have confidence that it’s going to be paid because during the life of Greencoat UK Wind, it has increased its dividends every single year since it launched around 15 years ago.

Previously, it was increasing its dividends in line with RPI inflation and it’s now changed to the lower CPI inflation rate. However, that is still an inflation-beating return.

• Are you maximising your family’s ISA allowances?
• Active or passive: the ultimate guide to investing your ISA

Dave Baxter: That’s because the government switched the renewable subsidies from RPI to CPI, didn’t it? So, it makes sense.

Kyle Caldwell: Yeah. It means that it can’t produce the same level of income as previously due to that. It was a curveball by the government to introduce that change.

Dave Baxter: I think also, Greencoat, I might be wrong, but I think it stands out because it’s the only one, or one of the only ones, that still tries to increase your dividend with inflation from that sector. And, also, people seem to view it as a sturdier option on the income front, whereas with those renewables trust people have had concerns about whether these really high yields are sustainable.

In the last few days, we did see one of those fears become reality with NextEnergy Solar Ord (LSE:NESF) doing a strategic reset. As part of that, it’s trying to get on a firmer footing, but that means in the short term that it’s basically roughly halved its dividend.

Kyle Caldwell: Let’s now move on to the rest of the table. There’s a global ETF, the Vanguard FTSE All-World UCITS ETF GBP (LSE:VWRL), and there’s also the US tracker, the Vanguard S&P 500 ETF USD Acc GBP (LSE:VUAG).

Both have been popular over the past couple of years, and I think they are contenders to be a core holding in a portfolio, where you can then have other holdings alongside them that are more satellite positions, particularly the global ETF because that’s giving you exposure to lots of different countries, companies, industries, and sectors.

You need to be a bit mindful that it has a large chunk of its exposure in the US. But if you’re holding any global ETF over the long term, I do think it’s a holding that you can tuck away with confidence.

Dave Baxter: Yeah. I mean, you might be exposed…if we do have a big pullback in the US and so on. But, yeah, over the long run, it should rebalance, and it should just reflect whatever the most favoured valuable companies are around the world.

Kyle Caldwell: Also in the top 10, there’s a leveraged ETF that aims to profit from the Nasdaq index. So, say, if the Nasdaq index rises 1%, it aims to triple the return of that index. However, I would be very wary of this type of ETF. They’re very speculative, and there’s a danger that if you own it for more than a week or so, you could get burned in this sort of ETF.

Dave Baxter: Yeah. Because if you’re tripling your moves, that also triples your loss if it is a loss.

Kyle Caldwell: Exactly. I’d be more wary about the potential downside risk than the potential rewards for these types of products.

Dave, you mentioned earlier that if you just follow the crowd, there is a risk that you may miss out on some contrarian investments opportunities. When you’re looking at the top 10 ISA funds today, which areas do you think people aren’t looking at at the moment?

Dave Baxter: Lots of markets have been performing well in recent years, and a few markets that were quite unpopular have returned to life, and investors haven’t always jumped on to these areas.

One is UK funds. We do sometimes see names like City of London Ord (LSE:CTY) and Temple Bar Ord (LSE:TMPL), UK income funds, come into the list. They’re not currently in that list, but you could see people getting more UK exposure and enjoying that rally that we’ve seen in recent years.

Slightly more left field, markets like Japan have been doing incredibly well in recent years. As you mentioned before, past performance, of course, doesn’t mean that’s going to continue, but it fascinates me that some of these more satellite markets have been doing really well for a long time and do seem to still have a positive narrative behind them. In Japan, say, they have corporate governance reforms that have been making companies behave in more shareholder-friendly ways.

So, maybe investors are missing out on some of these areas. Also, if they’re not investing in them that much, then they’re also missing out on diversification.

• How many funds should I own in my stocks and shares ISA?
• How much help do you need when investing?

Kyle Caldwell: I completely agree. I think one area that’s being overlooked at the moment is smaller companies. Not just for the UK, but I think there’s some funds that offer exposure to European smaller companies and US smaller companies. There’s not that many, but there are some global smaller company funds and investment trust options as well.

Some of the UK smaller company funds have performed very well on a one-year view, but I don’t see an awful lot of interest from retail investors. I think that’s reflected by the fact that the discounts on UK smaller company investment trusts are pretty much where they’ve been for the past couple of years, at pretty wide levels.

Just to give an example or two, before we started the podcast I was looking at the River UK Micro Cap Ord (LSE:RMMC) investment trust, that’s up 40% over one year. It’s sitting on a discount of 10%.

You might not want to go as niche as a micro-cap strategy, and if that’s the case, then you can look at things like Fidelity Special Values Ord (LSE:FSV) or Lowland Ord (LSE:LWI). They both invest across the whole of the UK market. They’ve got exposure to both large caps, mid-caps, and small caps, but they both do tend to have a particular bias to UK smaller companies.

Dave Baxter: Yeah. I suppose it just takes us back to our well-rehearsed point about the fact that it’s good to have some of these niche areas, and it’s generally good to look at your overall exposure in your portfolio. So, be careful about overlap. We’ve talked before about things like US funds and global funds and so on. And do just try and get a good mix of things because at some points, some will be up, some will be down, and hopefully that can offset everything within your portfolio.

Kyle Caldwell: I completely agree. Always take a step back and look at your own portfolio. If you are considering a new investment, it’s really important to think, what will this add to my portfolio? What will this give me? Will it give me something sufficiently different compared to the funds, investment trusts or ETFs that I already own?

Dave, thanks for your time today.

Dave Baxter: Thanks for having me.

Kyle Caldwell: And thank you for listening to the latest episode of On The Money. I hope you’ve enjoyed it. We love to hear from listeners and you can get in touch by emailing: OTM@ii.co.uk. I’ll hopefully see you again next week.