Quite a lot has changed in the world since last Isa season. In the lead up to 5 April 2016, Britain was yet to face the Brexit polling booths, Hillary Clinton and Donald Trump were battling it out in the US election primaries, and Europe had just announced extra stimulus after disappointing growth figures.
Faced with this kind of uncertainty, it is little wonder last year’s Isa investments brought few surprises. Woodford Equity Income was our clients’ most bought fund, followed by Fundsmith Equity. Another familiar favourite, Invesco Perpetual Monthly Income Plus, also made it into our top 10.
Yet despite all the global political upheaval that has since occurred, client buys for this year’s Isa season look set to follow similar trends. In the three months to the end of December 2016, Woodford and Fundsmith retained their top spots, while the Invesco fund came in third.
All three are excellent funds run by some of the best managers in the business, so these are certainly solid choices.
However, 2017 may mark a bit of a departure from the market patterns we have seen in the previous few years. For investors that are willing to make a few changes or additions to their regular portfolio this Isa season, there may be some new opportunities.
Even if investors are reluctant to stray from the UK, there may be scope to introduce them to some funds they have not previously considered. Over the past few years, quality growth style investing has been firmly in favour. Ultra-low rates and quantitative easing around the world laid solid foundations for bond proxy stocks to outperform.
Throughout 2016, however, a rotation began back towards value investing. Now that the US has raised rates – and suggested three further rises in 2017 – the outlook for global growth seems suddenly sunnier.
Inflation may start to tick up here in the UK – albeit on the back of a falling pound – which would likely discourage the Bank of England from making any further rate cuts. Indeed, we may also see a rise on this side of the Atlantic before the year is out.
In this kind of environment, cyclical companies and cheap, value stocks tend to do best. This means we may see an increasing preference for funds with a value tilt this Isa season. In 2016, some excellent value-driven funds were among the top performers, in terms of total returns, in the IA UK All Companies sector.
For example, Schroder Recovery came in second, returning 30.5 per cent, and R&M UK Equity Long-Term Recovery was fifth, delivering 27 per cent (against the FTSE All Share’s 15 per cent). If the trend continues, some exposure to value style funds may turn out to be very worthwhile for investors in 2017.
As Trump’s first 100 days in office begin, we should finally start to get some detail about his plans for the US economy. Markets surprised to the upside after his election and the Fed went ahead and raised rates, despite many forecasting such things may not happen if Clinton did not win.