Isa season bargains

That makes this Isa season a bit of a hard sell to many clients. Times of market stress can often be a good moment to take the plunge, but pronounced market falls have historically deterred all but the most practiced investors.

While we all like to wait until something is reduced or on offer for almost every other purchase we make in life, the same cannot be said for our investments, when actually the same rationale should hold true. Look at it this way: a long-term investor prepared to buy shares last Isa season should really be prepared to do the same thing now, when they can buy exactly the same companies for less.

However, there are a lot of worries in the investment world right now and these worries are plain to see when you look at where those still investing are putting their Isa money, or rather, not putting their money.

Worries in the investment world are plain to see when you look at where those still investing are putting their Isa money

Most notable by their absence among clients are Asia and emerging market equities. Both have fallen well out of the top 10-selling sectors on the back of lower market returns and increased volatility in the past couple of years, as well as the more recent headline concerns over slowing Chinese growth.

Arguably, they are some of the areas showing the most value right now, and while stock markets may fall further in the short term, hindsight may tell us that now is a good entry point for medium to longer-term investments. No one likes losing money though, and, with up to £15,240 lump sums now possible in Isas, even a 10 per cent fall can be eye-watering when seen in pounds and pence. It would take a brave investor to go down this route – though perhaps one for consideration by monthly savers for next year’s Isa allowance. Who knows though, Jason Pidcock’s imminent return to the market with the launch of Jupiter Asian Income may result in a last-minute return to the area.

Also out of favour are bond funds – even strategic bond funds, which have, until now, been holding their own. It is the only fixed-income sector in the top 10, and sales into the asset class have halved compared with last year.

Most of 2015 was spent wondering if and when the US Federal Reserve would raise interest rates, and bonds were relatively volatile as a consequence. When the Fed finally did move in December, however, the fixed-income markets took it pretty much in their stride, with the exception of high yield, which fell a couple of percentage points.

With Europe and Japan still in easing mode and Bank of England Governor Mark Carney in no rush to raise UK interest rates, the Fed now looks to be more out on a limb than ever, and the question is now whether the US economy is headed into a recession or not. If a recession is imminent – and the signs of a slowdown are pervasive – then common sense would suggest that the Fed will have to admit it has made a mistake, but that in itself is an assumption of heroic proportions.

So the outlook for bonds is still uncertain and, with yields pretty unattractive in most parts of the asset class, it is perhaps no wonder bonds are being shunned.

Instead, developed market equities are attracting the most money – mainly UK, but also global equity funds such as Fundsmith Equity and Rathbone Global Opportunities. As always, UK Equity Income funds are top of the Isa shopping list, although multi-cap funds are more popular than those investing just in large caps. This is possibly due to a number of big-name FTSE 100 companies, such as Tesco and Glencore, cutting or stopping their dividends in the past few months. Dividend cover among the UK’s larger companies is under real pressure at the moment, but smaller and medium-sized companies are faring a lot better. A decent sustainable yield is becoming increasingly hard to come by, so funds that offer more diversity and a track record of consistently growing their dividend payments are being rewarded.

Away from dividends, funds investing in smaller and medium-sized companies for growth are also popular. This, too, is an encouraging sign as, believe it or not, smaller UK companies are vastly under-owned by the investing public. Since the turn of the millennium, inflows into this asset class have plummeted. The small uptick in popularity is a good sign and perhaps some of the lesser-known funds such as Wood Street Micro Cap and Liontrust’s UK Micro Cap fund, which launches in March, will reap the benefits.

The one area I feel is being overlooked, when it’s actually attractive in a very volatile environment, is targeted absolute return. The sector has a bad press, but unfairly so in my view. There are a number of good funds that have consistently achieved their aim over the years and, when there are still question marks over bonds, act as a very good alternative diversifier in a portfolio.

Some of them are quite simple to understand, some more complicated, but I think they are worth taking the time to review. Since the FTSE peaked in April last year, the average UK All Companies fund is down 10 per cent, the average mixed investment 20-60 per cent shares fund is down 6 per cent, the average Strategic Bond fund is down 3 per cent, and the average Targeted Absolute Return fund is down just 0.6 per cent. Surely that is worth some consideration?

Darius McDermott is managing director of Chelsea Financial Services

Key points

Isa season is a bit of a hard sell to many clients

Now is a good entry point for medium to longer-term investments

The one area being overlooked is targeted absolute return