Which funds are ISA and Junior ISA investors buying this year?
This year’s Isa season presents a radically different set of options to last year.
In March 2013, equity markets were still relatively unloved, fixed income markets still buoyant and income remained at a premium. Only one of those factors is still present in March 2014 – equity markets have rallied, fixed income has been hurt by Federal Reserve tapering and only the desire for income remains in place.
The dilemma for equity investors is that developed markets now look relatively expensive, while significant problems remain in many emerging markets. It would take a brave investor to re-examine emerging markets, with Russia launching itself into the Ukraine, Turkey on its knees and slowing recovery in China.
In the meantime bond markets look unappealing. Although bonds sold off in the second half of 2013, they have rallied a little since the start of the year and the 10 year UK gilt now sits on a yield of just 2.65%. The ‘great rotation’ finally started to happen in earnest towards the end of last year and beginning of 2014 as investors grew disillusioned with bonds, slowing moving away from the asset class.
The direct to consumer platforms have reflected this trend. Danny Cox, head of advice at Hargreaves Lansdown, says: “With the potential of interest rate rises next year, bond funds have not featured among our best-sellers for many months.” He says that consumers still want income as interest rates remain low, but they are looking to equities or property to provide it.
This is echoed by Darius McDermott, managing director of Chelsea Financial Services, who says that the group has had no bond fund among its top-selling funds this year unlike in previous years where they have dominated. Instead, investors have sought out UK equity income funds, such as the Artemis Income, Rathbone Income and Standard Life Equity Income Unconstrained funds.
However, a big change has been the absence of the Invesco Perpetual funds following the announcement of the departure of Neil Woodford.
McDermott adds: “These funds have always been at the top of our list and fell out of the top 10 this year.”
He also saw improving popularity for property funds, such as Henderson UK Property, again on the back of increasing demand for income.
However, investors have also strayed into the smaller company specialist equity income funds, such as those from Marlborough and Unicorn.
McDermott says: “Smaller companies and smaller company income funds in general were popular. The Cazenove Smaller Companies fund was the top selling fund on the platform [to mid January], which investors piled into ahead of its closure, but Marlborough and Unicorn were also popular.”
Cox has seen the same trend: “Smaller companies also feature heavily given their exceptional track record since March 2009…Any investor brave enough to dip a toe in the water at the height of the crisis early 2009 has probably fared relatively well since. As Western economies have begun to recover, consumer and business confidence has continued to improve and the outlook for smaller and medium-sized businesses in the UK, US and Europe looks good.”
Investors have generally chosen to spend their risk budget on smaller companies funds in developed markets rather than stray into emerging markets, which have been going in the opposite direction in terms of popularity. For example, on the Chelsea platform, Newton Asian Income and Aberdeen Emerging Markets were there last year, but drew little support this year.
Trends among Junior ISA investors this year indicate that even long-term investors are starting to lose a little faith in emerging markets.
As the asset class continues to see growth slow and volatility increase, Junior ISA investors are instead turning to funds which invest more in developed markets.
Last year, three emerging markets funds where among the top ten best sellers on the Chelsea platform. Two of these funds – First State Global Emerging Market Leaders and Aberdeen Emerging Markets – are now closed to new business and, instead of turning to other similar funds, investors are putting their money in global funds that invest the majority of their assets in developed markets.
Rathbone Global Opportunities, Liontrust Special Situations and M&G Global Dividend were among the the top sellers [to 7 March].
The one sector that is holding up, despite the problems, is Asia Pacific ex Japan, which is still the third best selling sector. Within this, Newton Asian Income is the best selling fund for the second year running.
The take up of Junior ISAs among Chelsea clients has grown this year – the platform has seen a 47% increase in accounts opened during the 2013/14 tax year compared with the 2012/2013 tax year.
McDermott says: “Thankfully, the government has indicated that it will allow the transfer of CTFs [child trust funds] into the Junior ISA wrapper from April 2015. I’d hope that this date would be brought forward in the upcoming Budget, but I’m not holding my breath.”