Where pro fund buyers are investing their ISAs this year

With not long to go before the 5 April deadline to invest the annual £20,000 ISA allowance before it resets, many DIY investors will be looking for ideas for where to invest.  

A useful source of inspiration is to ask professional investors – who spend their lives researching markets and the best fund managers – where they are investing their ISA allowance this year.  

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We did just that, which revealed a number of exciting fund ideas – both under-the-radar options and popular strategies – across a range of sectors. Here’s what we found.  

Global equity  

One fund buyer with a long investment horizon, allowing him to own higher-risk but potentially higher-reward strategies, is Kamal Warraich, head of fund selection at Canaccord Genuity Wealth Management. 

A global equity fund he owns in his ISA is ii Super 60-rated Scottish Mortgage, the growth strategy run by Scottish fund group Baillie Gifford.  

Warraich said he had been taking advantage of the rare discount on the trust (currently 12%, but it reached 20% a year ago) to add more shares. 

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He said: “This is a good way to gain global growth exposure that is highly differentiated to peers.” 

The trust has an active share of 92%, meaning that there is just 8% overlap with the FTSE All World index. Top stocks include Nvidia, Tesla, Amazon and Moderna, and it has nearly 30% invested in private companies, including SpaceX and Stripe.  

The trust can be very volatile, with shares more than doubling between 2020 and 2022, but halving in 2023.  

Evenlode Global Income is another global fund that Warraich has been buying. “This is a total return/dividend growth-focused approach, with valuation rigour, which means a skew away from the US,” he said. 

The £1.9 billion fund has about one-third invested in the US, which compares with two-thirds for the MSCI World Index, its benchmark. 

Europe is its biggest allocation at 38% of the portfolio, including names such as LVMH, RELX, Nestle and Diageo.  

UK shares 

After falling into a technical recession in the second half of 2023, taking a bet on the UK economy is not for the faint-hearted. But for those expecting a rebound, owning small UK companies is one way of profiting.  

Warraich likes the Liontrust UK Micro Cap fund, which he says operates in the “niche space” of owning small UK companies, with nearly 90% of the portfolio being part of the AIM index.  

“I like the team’s distinctive quality approach,” Warriach said.  

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The team includes Anthony Cross and Julian Fosh, two veteran UK stock pickers who also manage the popular Liontrust Special Situations fund. 

To make the portfolio, companies must have a minimum 3% equity ownership by senior management, which the fund managers believe motivates key employees, helps to secure a company’s competitive edge and leads to better corporate performance.  

Emerging markets 

For investors ready to take more risk in their ISAs, emerging markets offer the potential of high returns. 

Warraich’s pick is Fidelity China Special Situations, a Super 60-rated fund that has been out of favour due to concerns around the Chinese economy and political interference in private companies. 

He said: “This is my personal contrarian bet. China is very unloved at the moment and this is a small bet against the trend.”  

The sharp decline in valuations means that, as of the end of 2023, the price-to-earnings (p/e) ratio of the MSCI China index was just 11.7x, which is lower than the 14.5x of the MSCI Emerging Markets index and the 19.8x of the MSCI All Country World. 

The MSCI World index, which does not include Chinese shares, is on a p/e of 20.7x, meaning that Chinese shares are at a 56% discount to global shares. UBS puts this discount at one of its widest in nearly two decades, with the 2012-16 period also standing out. 

Another emerging market option is Baillie Gifford Emerging Markets Leading Companies, which Nathan Sweeney, chief investment officer for multi-asset at investment firm Marlborough, is buying.  

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He says: “The fund has reasonable exposure to China, so should benefit if the Chinese economy starts to turn around and its stock market begins to recover after three years of depressed performance.  

“The fund also has an overweight position to Latin America, which is a region that’s continuing to perform well because inflation is more under control in a number of countries and central banks have started to cut interest rates.”  

The top stocks are TSMC, Samsung and MercadoLibre.  

Bonds 

High inflation and steep interest rate rises has created a difficult environment for bonds, however Sweeney expects fixed income to perform better in the year ahead due to the expectation of lower interest rates, which should increase demand for bonds.  

Moreover, bond yields are at attractive levels, with gilts yielding around 4%, and sterling investment grade bonds at about 5.5%. The income on offer therefore could offset any falls in bond prices, while adding to returns if bond prices rise.  

He likes the Man GLG Sterling Corporate Bond, which is run by Jonathan Golan. “He uses rigorous bottom-up selection to identify the most attractive opportunities,” Sweeney notes.  

The fund has an income yield of 6.7% and invests at least 80% of its portfolio in investment grade corporate bonds.  

Another sign that now is a good time to consider bonds is that a highly regarded bond fund manager has been increasing exposure to funds he manages.   

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Bryn Jones, a fixed income manager at Rathbones Funds, said: “I didn’t invest in my funds in 2020 and 2021. I thought yields were looking quite expensive, but post the Kwarteng/Truss mini-budget debacle in September 2022, yields rose to 7% on the fund and I was sat on a bit of cash so I decided to buy my Rathbone Ethical Bond fund.” 

Rathbone Ethical Bond, a member of ii's ACE 40 list of recommended funds, currently has an income yield of 4.9%, but the bonds, if held to maturity in the portfolio, currently yield 6.2%. This means that the bonds it owns are trading below par and there will be some capital growth as they mature.  

Jones adds: “I’ve also allocated some of my ISAs into Stewart Chilvers’ Rathbone High Quality Bond, which had a very attractive 6% yield at the time. Recently, we launched a new Global Sustainable Bond fund and I bought that for myself and my kids’ Junior ISAs as well.” 

Rathbone High Quality Bond has an income yields of 3.9%. It owns the debt of high-quality companies, with more than 90% of the bonds in the portfolio maturing in less than five years.