Five end of the tax year ISA fund ideas for uncertain times

There are a whole range of uncertainties facing investors at the moment. Rising global inflation was already threatening to erode investment returns before the invasion of Ukraine and rising borrowing costs, as central banks have tried to tame inflation, have sent bond yields higher and shaken the share prices of ‘growth’ stocks in particular. It is likely that the conflict’s effects on oil and gas prices, and supply chains, could exacerbate inflationary pressures.

Jason Hollands, managing director of investing platform Bestinvest says, ‘The appalling events in Ukraine and the uncertainty inherent in this major crisis have unsurprisingly resulted in heightened volatility on the financial markets. It is clearly a fast-evolving situation with major companies cutting their investments in Russia and there will be longer-term economic implications as governments rethink their energy supply chains and ratchet up defence spending.

‘The public are therefore confronted with a combination of inflation eroding the real value of their savings, the prospect of a higher tax burden, given frozen personal allowances and hikes to National Insurance and dividend tax rates, and turbulent markets.’

In this environment many may be wondering not just where they should invest their ISA but also whether to utilise their allowance at all before the tax-year end. It’s important to flag that the tax year-end deadline is simply the point at which an ISA allowance needs to be funded. It does not mean you need to invest the cash, so one option is to secure the allowance with cash and invest it later when uncertainty and volatility has receded. This will ensure that a valuable long-term tax allowance is not forgone.

‘Others will be reluctant to see the real value of their money being eroded at the inflation rate of 5.5%, which is set to increase and stay high for the rest of the year,’ adds Hollands. ‘For them there are certain funds that can place a high emphasis on capital preservation alongside real returns, whether that is from income or capital gains.’

What investors should consider adding to their portfolios will depend in large part on what is already there, and how they see global markets responding to unfolding world events.

1. Absolute Return: Ninety-One Diversfied Income

The Ninety One Diversified Income fund is a multi-asset ‘absolute return’ fund that aims to provide an income return, with the opportunity for capital growth over at least a five-year period. It has a target return of 4% per year and aims for low correlation with equity market volatility.

Co-managers Jason Borbora-Sheen and John Stopford seek out assets offering reliable and sustainable income such as blue-chip global equities, developed sovereign bonds, emerging market sovereign bonds, investment grade and high yield corporate bonds. Exposures are controlled according to their contribution to risk. Most foreign currency exposure is hedged back to sterling.

Its holdings on the bond side include the Indonesia Treasury Bond while in equities it is invested in companies such as pharmaceuticals firm Johnson & Johnson. The fund has successfully hit its performance objectives since its launch in 2013. An additional selling point for the fund is its competitive charges in what can be an expensive sector.

2. Multi-asset: Personal Asset Trust

For investors who are looking to add some extra resilience to their portfolios with a multi-asset fund, Hollands highlights Personal Assets Trust.

‘This investment trust has a strong emphasis on capital preservation and real returns that beat inflation. This includes exposure to US Treasury Inflation Protected Securities (index-linked bonds) - a potential safe-haven asset where yields are rising – as well as gold,’ he says.

Its holdings are split between blue-chip equities (39%), gold (9%), US index-linked bonds (32%), and UK short-term money market instruments and cash (20%). The fund’s equity strategy focuses on high-quality companies with the ability to generate strong cashflows consistently over time.

3. Income: TM Redwheel UK Equity Income /Temple Bar IT

Bestinvest's Hollands says investors should be taking note of dividends again.

He explains: 'During the growth stock boom of recent years, many investors didn't give dividends a second thought. Even those who wanted to take an income from their portfolios often did so from overall returns rather than targeting high-yielding investments.

‘In the current troubled environment, the opposite view might emerge: that even if you don’t want to take an income, at a time of unpredictable capital gains, a regular yield can add some stability to total returns – provided those dividends are well covered by earnings.’

Income-generating shares and funds should preferably be held inside a tax-free Isa because dividend taxes are rising from April 6. For example, a basic rate taxpayer will pay 8.75 per cent on any dividends received in excess of the £2,000 annual tax-free allowance. Currently, the rate is 7.5 per cent.

Hollands says the UK remains the premier stock market for dividends, and one of Bestinvest’s favourite income funds is the TM Redwheel UK Equity Income fund, alongside the Temple Bar Investment Trust (managed by the same teams), whose ‘value’ approaches - focused on companies the managers believe are undervalued - could also be timely.

'TM Redwheel UK Equity Income has 10 per cent of its portfolio invested in basic materials stocks,’ says Hollands. ‘Its largest position is a 5.9 per cent investment in Anglo American, but it also holds gold miners Newmont and Barrick Gold. Temple Bar has 11% in basic material, with its largest sector exposures being to financials and energy.’

4. Infrastructure: HICL Infrastructure

Infrastructure investments is an area which provides investors with a degree of predictability in times of uncertainty, as well as an element of inflation proofing too.

Infrastructure projects - to run things like toll roads or the management of schools, hospitals and prisons - are typically agreed under very long-term projects of 25 years or more. It is often the case that these contracts provide for annual adjustments to compensate for inflation, so investment in infrastructure investment companies can help protect against inflation.

To invest in this theme, Jason Hollands suggests stock market-listed fund HICL Infrastructure, which holds 100 assets including hospitals, tunnels, roads and schools.

It is yielding 4.8% and with capital growth potential too.

5. Gold: Invesco Physical Gold ETC

Gold is a traditional diversification asset that investors often flock to in times of uncertainty . Government bonds are struggling to fulfil the stabilising role they have traditionally played in portfolios by counterbalancing riskier equities because surging inflation is eroding the real value of their yields. With the benefits of this primary diversification strategy weakened, many investors have looked towards other assets to add some balance to their portfolios.

Some look to property, others to infrastructure, but gold remains an easy low-fee choice as it can be accessed by a number of index and exchange-traded funds. Those with equity-heavy portfolios who are feeling fearful might look to the Invesco Physical Gold ETC, with ongoing fees of 0.12%.