For the first time Share Centre research shows that, although equity stocks still heavily outweigh funds in the average stocks and shares Isa portfolio, the UK’s appetite for diversification and growth through investing in funds is dramatically growing.
Five years ago, the average stocks and shares Isa portfolio was comprised of a 98 per cent equities to 2 per cent funds split. This increase equates to a 450 per cent increase in that time in the popularity of holding funds within an Isa.
The number of trades made during an Isa season has increased since 2007/08, with the average investor completing six trades this tax year. This is a 100 per cent rise on the three trades made on average five years ago, and suggests that investors are following the strategy of drip feeding sums into their stocks and shares Isa rather than transferring large amounts in one trade.
The research also shows that age plays a major part in both the make-up of a portfolio, the level of activity and the average value of trades.
Younger investors (18-24 years) are more likely to invest their Isa portfolio in funds than older investors. They are also less likely to trade (five trades), and more likely to have a lower value of trades (£1,200.41). In comparison, older investors potentially approaching retirement (55 years plus) hold a 90 per cent to 10 per cent split between equities and funds, and make six trades with an average value of £2,192.86.
The research reveals that men are more active traders than women, with seven trades so far this year, in comparison to women’s six. Women are also more likely to have a higher value of trades than men, this year making trades worth £2,159.10, £55 more than men.
In spite of the number of trades increasing, Isa investors are still missing out on making the most of their tax efficient investment portfolio. All adults in the UK can invest up to £11,280 this tax year into a stocks and shares Isa.
On average, investors so far are using just more than half of their average Isa allocation, roughly £6,655. Older investors are seemingly wisest to the benefits of using an Isa and are already using 69 per cent of this season’s allocation, while younger investors are missing out by only utilising 40 per cent of theirs.
It is vital investors take advantage of their Isa allowance and protect what they can from the taxman. Cash Isa rates remain unattractive as when compared to the current rate of inflation, investor’s purchasing power is likely to be negative. For those prepared to accept a higher degree of risk, the rewards of a stocks and shares Isa are potentially more fruitful.
While volatile markets may have left some wary of investing, it is worth bearing in mind that in the longer term, returns from equity backed investments have consistently outperformed cash.
Andy Parsons is head of investment research at The Share Centre
The research- key stats to consider
74 per cent - The percentage of young Isa investors aged between 18-24 are more likely to invest in funds.
69 per cent - The amount of the total Isa allocation investors aged over 55 utilise.
40 per cent - Younger investors use less than half of the total allocation amount in an Isa.
Top picks funds for your isa
Lower risk
Standard Life UK Equity Income Unconstrained fund
The Standard Life UK Equity Income Unconstrained fund differs from the traditional UK equity income fund, as it looks outside the core UK blue chip income stocks and offers real portfolio diversification. While there will be a number of familiar top holdings, just more than 50 per cent of the fund is from the mid-cap arena. This flexibility ensures the portfolio does not merely follow the herd and this can be seen by the current top 10 holdings – which include Cineworld Group, Hiscox, Easyjet and Close Brothers.
The manager, Thomas Moore, is a rising star within the investment world and the portfolio has certainly benefited since he took to the helm in January 2009. For both three and one-year performance on a cumulative basis, the fund is ranked first quartile and this strength has continued into 2013.
Medium risk
BlackRock European Dynamic fund
The BlackRock European Dynamic fund provides diversification that a portfolio invested solely in UK companies cannot. For example, Demark is a world leader in alternative energy solutions and Germany has world- class engineering companies and car manufacturers.
Compared with other developed markets, European companies are potentially more attractive due to the extent to which the woes of Europe have driven down company share valuations, as stocks have been marked down almost for association with the region. However, companies are now better financed than they were pre-crisis and many remain the strong global brands they were before. If the eurozone does show real signs of recovery in 2013 and beyond, these could perform really well.
The fund’s sector preferences are consumer products, financials, industrials and healthcare.
Higher risk
Invesco Perpetual Global Smaller Companies fund
The Invesco Perpetual Global Smaller Companies fund is suitable for investors looking to diversify their portfolio through geographical representation as well as company size.
This fund tends to have a large number of holdings, providing investors with the comfort that given the often volatile nature of such companies, risk and diversification is spread across not only a vast number of companies, but more importantly across geographical regions as well.
The fund is managed on a team basis by Invesco Perpetual, with individuals responsible for identifying investment opportunities from within their geographical area of expertise. The fund is exposed to a significant number of different countries and the largest holding only accounts for 0.95 per cent of the fund. The top four sectors are financials, industrials, consumer discretionary and technology.”
Source: The Share Centre
