Many people leave it to the end of the financial year before putting money into an ISA. Nervous stock markets should not stop you from doing so if you plan to leave the money invested for the long term.
The tax exemptions of the ISA are now permanent, so by adding to your ISA each year you build up your own personal tax shelter. The allowance for the year ending 5th April is £7,000. In the next tax year it will be £7,200.
Three options for investors
If you want to accumulate a long-term ISA portfolio, you have three options:
• Use a self-select ISA to buy your own selection of shares using a low-cost online sharedealing account: a higher-risk strategy requiring a significant commitment of time
• Buy a low-cost index-tracker fund, which will replicate the performance of the UK stock market: a simple and easy-to-implement plan that requires virtually no management on your part.
• Use a fund supermarket’s self-select ISA to create a portfolio of managed funds: a plan that requires you to review and amend the portfolio regularly but could produce higher returns.
In this article I focus on the last of these three options. Next month I’ll recommend a way of building a fund portfolio from regular savings using a fund supermarket’s regular savings scheme.
Creating a fund portfolio
Lump sum investors have to combine strategy and opportunism. You shouldn’t pile all your money in the areas that look most promising, because you will end up taking far too much risk. And you need to think long-term with at least some of the investments.
A £7,000 ISA fund portfolio
| Type of fund | Name of fund | Amount |
| UK: aims for high and rising income | Martin Currie UK Equity Income | £2,000 |
| Continental Europe: growth | Artemis European Growth | £1,000 |
| Worldwide: focus on small growth companies | Rathbone Global Opportunities | £1,000 |
| Far East: mainly large established firms | Aberdeen Asia Pacific | £1,000 |
| Japan: balanced portfolio with both large and small companies | JP Morgan Japan | £1,000 |
| Worldwide commercial property | SLI Select Property | £1,000 |
| TOTAL | | £7,000 |
I recommend that all investors have a holding in a UK Equity Income fund because over the long term these have proved excellent investments that have often produced higher returns than more risky growth-oriented funds.
At present, Martin Currie’s UK Equity Income fund has an income yield from dividends of 4.1% net of standard rate tax. It’s very likely that this income will grow by between 5% and 10% a year over a 5-10 year period. If that happens the capital value of the fund is also almost certain to rise.
Good track record
Scott McKenzie is not as well known as some other UK Equity Income fund managers but has an excellent personal track record with his previous firm Britannia Fund Managers, and in the two years he has been at Martin Currie he has significantly improved this fund’s performance.
Globalisation has made the world a smaller place. That is good news for investment managers, who can find well-managed fast-growing businesses all over the world. James Thomson is a globe-trotting manager who focuses on the quality of the business and doesn’t worry much about the geography.
Because he invests mainly in smaller companies, his Rathbone Global Opportunities fund will be more volatile than a typical international fund, but is likely to generate higher returns over a period of 3-5 years.
Economic integration
About 50% of the UK’s economy is now deeply intertwined with that of continental Europe. In fact it no longer really makes any sense to see them as separate. And in the steadily-integrating European economy, there are great business opportunities.
Philip Wolstencroft and Peter Saacke at Artemis European Growth, who manage this fund between them, use their own ‘Smartgarp’ system which they claim has helped them to achieve superior results. Just lately the fund’s performance has been relatively poor, but I expect them to return to form in 2008.
Aberdeen Asia Pacific also has relatively poor recent performance, which is explained by the fact that manager Hugh Young, a veteran of Asian investing, adopts a conservative investment style and invests only in businesses with top quality management and financing.
Spivvy means risky
In the speculative boom of the past two years, shares in spivvy high-risk businesses have soared - and many are now slumping - but I expect Young’s fund to reap the rewards of the region’s growth without risking investors’ shirts.
Standard Life Investments’ Select Property is one of a handful of funds investing globally in commercial property. Manager Andrew Jackson draws on a huge international team of analysts and managers and this has enabled him to buy into property in Japan and other markets on attractive terms. This is a volatile fund because many of the holdings are property businesses with stock market listings, but over a 5-year term I believe it will do very well for its investors.
The most opportunistic investment in the portfolio is JP Morgan Japan fund. Japan is the basket case of world stock markets, but the country is financially and economically stable and shares there are now very cheaply valued compared with almost anywhere else.
Discrepancies like that tend not to last for long, so invest now and you could double your money within a few years. Manager David Mitchinson adopts a balanced style with roughly equal amounts invested in safe large companies and in smaller growth businesses.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
