InvestmentsMar 22 2012

Spotlight on ISAs: building blocks to success

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BySimon Ellis

Isa season is gathering pace and we expect income to be a hot topic for many clients. Interest rates have been at their record low for years now and, given the persistent economic malaise, I do not expect them to rise any time soon.

Clients need other investments to fill the gap and, at a time when so many people are struggling to make ends meet, fund providers and advisers can be a real force for good by helping clients achieve immediate income and long-term financial security.

When Isas replaced Peps (13 years ago, how time flies) the yearly allowance was £7000: a fortune for some, but a pittance to others. Back then I sometimes heard advisers say they did not bother with Isas for their high net-worth clients. It struck me as odd that anyone would ignore such a flexible and tax-efficient vehicle. I doubt that anybody ignores Isas today, especially now that the allowance is more generous and is linked to inflation.

So whether you are mopping up your clients’ Isa allowances or making plans for early in the new tax year, there are a wide range of income options to consider.

Equity income funds are some of the best known and most successful funds in the UK. Their enduring popularity is testament to the appeal of dividends combined with capital growth potential.

The ability to pay consistent dividends is a great indicator of a strong company. This can give investors confidence, but the recent fiscal crisis has demonstrated that even stalwarts of the market – such as banks – are not immune to the cycle of boom and bust. So we must remember the principles of diversification.

Asian equity income funds have recently emerged as an alternative to the UK. You will not need me to tell you that Asia is the engine that will drive global economic growth in future. What is more, the investable universe is large, with more companies in Asia yielding over 4 per cent than in the UK and continental Europe combined. The long held belief that you can combine good levels of income where the income rises over time and get above average capital growth is really being borne out in many Asian companies - and it is a great geographic diversifier.

For those whose risk profile does not allow for equities, or if you simply want to introduce some diversification, then bonds are of course the other obvious asset class to consider. The shakeout in the corporate debt market in the last few years has created a situation where astute active managers can use their research expertise to add value.