Investment ideas for your ISA allowance

Using tax efficient wrappers is even more important in the current environment with tax allowances having been chopped. It only takes a modest level of interest, dividend income or capital gain to trigger a tax liability.

The dividend allowance falls in April from an already diminished £1,000 to just £500, a blow to investors receiving dividends outside of tax saving products such as ISAs. What’s more the annual capital gains tax allowance drops to £3,000 from April – down from £12,300 two years ago. Those investing carefully for the long term are being caught in an ever-tightening tax net.

The ISA allowance is a vital sanctuary

At £20,000 a year under current rules, a couple could shelter as much as £400,000 from tax by using their allowance in full over the course of a decade with all profits and income free from tax. But it’s not easy to decide where to invest your ISA. Some like to build their own portfolio, tailored to their own views and personal preferences. Others would like a simple, balanced solution that doesn’t need much attention over the years.

There are also those that aren’t sure right away and opt to secure their ISA allowance as cash first before deciding. However, take care not to wait in cash too long. Interest on cash in a Stocks & Shares ISA is unlikely to be enough to keep up with increases in the cost of living, and for the longer term you stand to be better rewarded by investing.

Whatever your preference, Charles Stanley Direct has a solution for you with thousands of funds and individual shares available to buy. Sometimes it can feel like there is too much choice, so if you are looking for inspiration here’s a selection of investment ideas for your ISA that have been researched by our Collectives Research Team, plus one option for a ready-made portfolio managed by our experts.

As always, diversification by sector, geography and type of asset is wise to help reduce risk and ensure you are not overly reliant on one area or on certain circumstances. All of these funds should be considered long term investments meaning five years plus. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus to ensure they meet with your objectives and risk appetite. The very broad risk category is indicated. The value of investments, and any income derived from them, can fall as well as rise and may be affected by exchange rate variations. Investors may get back less than invested.

Investment ideas for your ISA

1. Vanguard Global Credit Bond (medium low risk)

Traditionally, bonds perform well as inflation peaks and rolls over, and if inflation and rates continue to subside then bonds should provide diversification from share markets that might be buffeted by the headwind of an economic downturn constraining earnings.

Yet economies are slowing, and simultaneously refinancing needs will pick up for many businesses. Given the gap between the amount corporates pay on existing debt and what they must pay on new debt, this could be expensive, potentially impacting business spending. The situation is likely to be more problematic for smaller and more indebted companies, which in fixed interest markets supports our preference for good quality investment grade debt over riskier high yield. Returns could also benefit more from higher interest rate sensitivity if government bond yields start to fall.

There are a wide variety of options for investors wishing to invest in bonds, and there are many different types of funds available: government, corporate, strategic, emerging markets and high yield. However, for those seeking medium-risk funds, along with broad, ‘core’ exposure to the asset class we believe Vanguard Global Credit Bond Fund is worth considering. It seeks to provide a moderate level of income through investing in a diversified portfolio of corporate bonds on a global basis. The focus is predominantly on developed markets and on relatively secure investment grade bonds, but with some scope to buy high yield and investment grade emerging market bonds too.

Investors’ bond exposure is often dominated by UK corporate bond funds, but the UK is only around 5% of the global fixed income market. The active, global approach taken by this fund provides a much greater opportunity set and is sufficiently selective to add value but diversified enough to mitigate stock specific risks. Overseas currency exposure is hedged in order to remove the additional volatility associated with foreign exchange markets. The very wide portfolio of predominantly high-quality bonds should have more limited default risk during a recession, and the yield could provide investors with a solid income return with the added potential kicker of some capital growth if interest rates expectations subside further.

2. Charles Stanley Multi Asset Moderate Fund (medium high risk)

Successful investing involves ‘diversification’. Not having all your eggs in one basket helps reduce risk and means you are not reliant on specific investments or areas performing well. The usual approach is to spread money across different asset classes – a mix of shares, bonds and cash and possibly other areas such as property or alternative investments.

If you are looking to invest in a spread of assets but don't want the hassle of putting together, monitoring and rebalancing a portfolio of multiple holdings our Multi Asset Funds could be worth considering. They invest in equities, bonds and other assets, and typically look to provide more consistent returns by blending these together carefully. Each fund is a professionally-managed portfolio in a single product – which means buying, monitoring and managing individual funds, trusts, shares and other assets is not necessary. Investors do, however, need to be careful in selecting the fund(s) appropriate for their needs.

Charles Stanley Multi Asset Moderate Fund takes a balanced approach. This means being willing to tolerate some short-term fluctuations in value to achieve the potential for better long-term returns, typically controlling risk through holding a broad spread of investments but maintaining a bias to shares. It’s a compromise between maximising long term returns from the stock market and providing a smoother ride than investing only in shares. The annual management charges are highly competitive, meaning investors can access a ready-made portfolio run by Charles Stanley’s experts at low cost.

3. FTF ClearBridge Global Infrastructure Income (medium-high risk)

Infrastructure investments aim to provide steady income and often have a certain amount of contractual inflation protection built in, which is reassuring in the current environment where there is uncertainty as to the direction of price rises. They can potentially provide investors with an attractive, income-orientated return and welcome diversification. The area is also expanding with the transition to net zero carbon calling for huge investments in new, more efficient electricity generation, storage and transmission.

There are a variety of fund and investment trust options for investing in this specialist area, which looks relatively well placed to generate consistent returns. The managers of this fund are experienced infrastructure specialists based in Australia and have built an impressive record whilst consistently delivering a decent yield. The fund invests in companies around the world operating in infrastructure-related sub-sectors. The fund is exposed to both regulated assets (gas, electricity and water utilities) and to ‘user pay’ assets (toll roads, airports, rail and communication towers).

Around 90% of underlying revenues in the portfolio are inflation-linked, so the portfolio should be resilient in a scenario of higher inflation. However, it may be more challenging if economic activity drops off, particularly in respect of companies with ‘demand-based’ revenues, such as toll road operators and airports. The historic yield is around 5%, which is variable and not guaranteed, so it may interest income seekers as well as those looking for a relatively defensive equity holding.

4. M&G Global Dividend (medium-high risk)

Dividends, the pay out of profits a company makes to its shareholders, are an important feature of investing in share markets. Yet they are frequently overlooked. Not only do they form an integral part of overall return, but the process of providing income to investors them instils capital discipline. Companies whose earnings and dividends can repeatedly withstand the travails of a changing economic environment will likely have strongly performing share prices. In contrast, those that disappoint investors with static or lower dividends often see their share prices punished.

Identifying companies with growing dividends is the goal of ‘equity income’ fund managers and these investments can help form an important part of an income seeking portfolio. But it’s not just yield hunters that should take notice. Any investor wanting to focus on quality and income with a view to maximising overall returns should consider funds that focus on dividend payers. In particular, these funds can blend well with more growth-orientated holdings, perhaps dominated by the low-yielding parts of the technology sector, for diversification.

One fund that offers a pragmatic, well-rounded approach to dividend investing is M&G Global Dividend Fund. It’s a higher risk fund that invests globally in businesses that have the potential to grow dividends significantly over time. Often this means manager Stuart Rhodes accepting a lower starting yield in exchange for probable future growth in payments. Conversely, companies that are only able to maintain their dividends or, even worse, forced to cut them, are actively avoided, though inevitably this is difficult to achieve across a broad portfolio. Any business can fall victim to changing industry dynamics or misfortune.

Mr Rhodes balances wide a variety of companies: Disciplined firms with reliable growth strategies that can usually thrive no matter what is going on in wider economy, including more defensive areas such as pharmaceuticals and food producers; More economically-sensitive businesses whose earnings are less consistent but should still trend higher over time, energy or commodities companies for instance; And faster-growing companies whose pace of expansion and dividend growth has the potential to surge thanks to rapid expansion in a new market or product line.

5. Aberforth Smaller Companies Trust (high risk)

Sentiment surrounding UK shares, smaller companies in particular, has been depressed for several years now. Smaller businesses are often more sensitive to both economic activity and borrowing costs compared with larger, more established ones. In addition, they tend to be more orientated towards the UK’s domestic economy where there are currently concerns of an extended slowdown.

However, as evidenced by recent bid approaches, trade buyers are eyeing value in the market and brave investors do stand to be rewarded for their patience. Presently, investors can benefit from a ‘double discount’; cheap valuations across the spectrum of UK companies and the discount to net asset values of investment trusts targeting the sector.

Aberforth Smaller Companies is one option for investors who want to choose an investment trust for their portfolio. It’s trading on a 10% discount to NAV presently, with a strong value bias to its investment approach, typically buying stocks when they are unloved. This means the portfolio is even less expensive than an already cheap broader market.

The managers place valuation, dividend yield and balance sheet strength at the forefront of their thinking, so the trust doesn’t capture the more expensive but potentially faster growing parts of the smaller company universe. However, if this is a concern it could be blended with a more growth-orientated fund or trust.

The focus on valuation combined with balance sheet strength has historically meant that several holdings within the portfolio become the target of merger and acquisition activity, a factor that usually provides an uplift to share prices and could continue to help generate superior performance in the current environment.

Follow the link for more on how to choose an investment trust.