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FEATURE: What should you put in your ISA?

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28/03/2008

For those of you who are yet to use up your self-select ISA allowance, the deadline of 6 April is fast approaching. Kate O’Raghallaigh asks some industry pundits about opportunities in mutual funds and equities

Equities

Graham Spooner, adviser at online brokerage The Share Centre, says: “Cautious investors looking at equities may want to consider a drip feed approach, that is, gradually feeding money into the market over two or three months. At the moment, many investors are likely to be put off by equities as the market volatility has really hit people’s confidence.

“In terms of sectors, we like utilities and water, and would recommend National Grid, Pennon and Northumbrian. National Grid has a good history and a good track record. As for Pennon and Northumbrian, there has been a lot of corporate activity going on and there may be potential for a takeover.

“This option won’t appeal to everyone, but the defence industry is also something worth considering if you want a relatively safe investment. Countries are increasing their spending in these areas, so we would recommend BAE systems.

“In terms of individual equities, we like Land Securities, which is currently going through a restructuring process and its share price has fallen a long way over the past year. Vodafone is another solid one to look at, as it has been expanding into emerging markets and has a good yield.

For more risk-hungry investors, I would say that some financial stocks, in particular the big banks in the FTSE 100, pose opportunities. The FTSE 100 isn’t as reliable as it used to be and the big banks show a lot of potential for the next two or three years – having one of these in your portfolio is worth considering if you are a contrary investor.”

Henk Potts, equities analyst at Barclays Stockbrokers, highlights three specific stocks to begin with. He says: “We consider BHP Billiton, Carphone Warehouse, and Diageo to be stocks that offer value to investors.

“BHP offers diversified growth and defensive characteristics with exposure to iron ore, coal and a broad range of base metals.

“Carphone Warehouse has around 70% of recurring profits and low price positioning within the broadband market. It now looks like one of the more defensive stocks in its sector.

“Diageo’s interim results were better than expected, with guidance reiterated for the full year and its forecasts have been raised due to improved foreign exchange guidance. Their focus on premium and ultra-premium brands is maintaining strong sales growth, particularly in North America, while Europe is benefiting from a return to growth for Guinness.”

In terms of financial stocks, Potts adds: “Prudential’s full-year 2007 results were good quality and demonstrated high levels of growth, with the Asian operations now accounting for over half of new business.”

Guy de Blonay, manager of the New Star Global Financials Fund, discusses financials in more detail. “In terms of the banking sector, I favour companies that are less exposed to the sub-prime fallout, notably in countries where structural growth remains intact – Standard Chartered is an example of this,” he explains. “It operates in Asia, Africa, Latin America and the Middle East and there is stable credit quality in these markets. I am avoiding retail banks with high exposure to potentially problematic loans and those banks likely to experience lower trading volumes on these products.”

Mutual funds

Moving on to the mutual funds that could currently be suitable for ISA investors, Mark Dampier, research director at discount brokerage Hargreaves Lansdowne, says: “For the more aggressive investor I believe one of the best opportunities is Russia. It is the cheapest emerging market at around 10 times earnings and last year was passed over for the more exciting Chinese market. My recommendations here would be Neptune Russia and Elena Shaftan’s Jupiter Emerging European Opportunities fund.

“For the cautious there are two routes I believe. One is to hold your ISA investment in cash and make an investment decision later on. Alternatively, you could you could plump for the BlackRock UK Alpha fund which is effectively a retail hedge fund. The fund has shown its metal during the tough times of the market. Year-to-date it is up 4.4% against the FTSE All Share Index, which is down 10.75%. Its present net exposure is 4.5% and its absolute mandate makes it ideal for those who are cautious and indeed for those who have a lot of money but want capital preservation with some upside.”

Darius Mc DermotT, managing director of Chelsea Financial Services, advises investors to diversify their portfolios. He explains: “As well as adopting a long-term strategy, investors can further mitigate against market fluctuations through diversification. With multi-asset funds we are finally beginning to see portfolios that offer true asset allocation. Funds like Insight DTR and Newton Phoenix offer exposure to a more exotic range of assets than your average has access to, such as funds of hedge funds and commodities. This should allow strong investment returns but with less capital risk.

“Insight DTR and Newton Phoenix have already showed they can cope better than most in the downturn. They have had meagre losses of 0.6% and 2% respectively over the last three months when compared with the battering the average global growth fund has endured – down 9.3%.

“In terms of geography, the emerging markets have had fewer problems with sub-prime issues and are enjoying significantly better growth than certain areas. However, there are much higher risks attached with these areas, in terms of corruption, corporate governance and over zealous stock market valuations. We tend to think that bundling a number of these emerging markets into a fund is a more prudent option. We particularly like the Allianz BRIC (Brazil, Russia, India and China) fund.”

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