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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The tax year is almost over so make the most of your annual ISA allowance
Thursday 25 Mar 2021 Author: Steven Frazer

Many Brits have seen their incomes remain much the same through the year of lockdowns but their spending plummet. It’s time to put that spare money to work in an ISA.

Investing spare cash is a sensible option for many people. Take George, for example. He put £10,000 in a Cash ISA account five years ago on a fixed 2% a year interest rate. At the same time, his sister Mildred also decided to put £10,000 away, but she chose a low-cost FTSE 100 tracker fund, the iShares FTSE 100 ETF (CUKX), held in a Stocks and Shares ISA.

Mildred turned her £10,000 into £13,230 by investing versus George’s cash savings which became £11,040 after five years.

There were ups and downs in the stock market during those five years and Mildred might even do worse than George at times in the future, particularly if the stock market is going through a bad patch.

However, historically shares have outperformed cash over the long term. A study by Barclays found that shares returned 5.3% a year, adjusted for inflation, in the 50 years to the end of 2019. Over the same period, cash only returned 1% a year.

Nevertheless, it’s worth considering that investing isn’t suitable for everyone and putting money in a Cash ISA could still generate better returns than leaving it gathering dust in a current account.

FINAL CALL FOR ISA CONTRIBUTIONS

There are only a few days left for savers and investors to take advantage of this tax year’s £20,000 ISA allowance before the new tax year begins on 6 April. Some readers will be ahead of the curve and have already topped up their ISAs to the limit, but many will not.

Whether you’ve used up part of your allowance, or none at all, this feature shows
you how you could put that money to work for tax-free returns.

We have pulled together 10 fund and stock ideas to make those investment decisions as easy as possible before it’s too late to take advantage of this tax year’s ISA allowance. You can pick and choose selections that sound best for you or treat the fund selections as a full portfolio plan.

Don’t worry if you haven’t got the full £20,000 going spare, we doubt many readers would have, but invest what you can now and then keep investing as time goes on. After all, you get another £20,000 allowance for your ISA on 6 April, and hopefully the same or more each year in the future.


FIVE DIFFERENT TYPES OF ISA

There are five main types of ISA, all protecting your investments from the taxman – there is no tax to pay on capital gains or dividends. We haven’t covered the Help To Buy ISA in the list below as new accounts can no longer be opened.

You can hold different ISAs at the same time and switch between them, but you cannot invest more than £20,000 in a tax year across all types of ISAs. Some of the ISA types have specific limits, which we discuss below.

It’s also worth noting that unused ISA allowances cannot be rolled over into a new tax year.

Cash ISA

A Cash ISA is suitable for people with a low-risk appetite or those with an investment horizon under three years. You can deposit up to £20,000 each tax year.

You need to be over 16 years of age to open a Cash ISA. Savings up to £85,000 are protected by the Government under the Financial Services Compensation Scheme.

Stock and Shares ISA

A Stocks and Shares ISA can be opened by anyone over the age of 18 and there is a £20,000 maximum contribution limit each tax year. Investing money is higher risk than saving in cash because markets can go down as well as up.

You can hold shares, funds, investment trusts, exchange-traded funds and bonds in Stocks and Shares ISAs.

Investing via funds, investment trusts and ETFs reduces risk because they generally provide diversified portfolios, rather than betting all your money on a single company. Investing in individual stocks carries higher risk and requires some investment knowledge.

Junior ISA

Junior ISAs are for children aged 17 or less with an annual contribution limit of £9,000. A guardian will need to open the account for a child under the age of 16.

Lifetime ISA

The Lifetime ISA is primarily intended to help first-time buyers accumulate a deposit for a house purchase, but it can also be used for long-term savings.

Anyone aged 18 to 39 can open an account and pay in up to £4,000 each tax year. The Government will pay a bonus worth 25% of each contribution, so a maximum of £1,000 a year. The bonus is paid until the account holder reaches age 50, at that same point they will
no longer be able to make contributions into the account.

If you’re not buying a first home and are not terminally ill then taking out the money before age 60 will incur a 20% charge, rising to 25% from 6 April 2021. The maximum value for a house purchase using a Lifetime ISA is £450,000.

Innovative Finance ISA

This is designed to hold peer-to-peer investments, such as when you loan money to someone via a P2P platform in exchange for regular interest and your capital back after a fixed term.

The key risk is that borrowers might not be able to pay the interest or return the capital to you.

A maximum of £20,000 can be put in an Innovative Finance ISA each tax year.


SIX FUNDS FOR YOUR ISA

If you’re new to investing, only have limited experience or want to put your money somewhere that doesn’t need constant monitoring, then funds can be a better route than individual shares.

You get the benefits of diversification. For example, if you only invested in a couple of shares and one of these companies issues bad news then your portfolio value could take a big hit. But if you owned funds, any bad news from one company in a fund would be cushioned by all the other companies in the portfolio, so the damage is a lot less to you.

Our six fund ideas all have a global focus to ensure the broadest diversification as well as capturing faster growth opportunities.

The selection covers fund ideas in large cap, small cap, income, bonds, sustainable investing and real assets offering inflation protection.

Global large cap: Fidelity Global Special Situations Fund (B8HT715)

The £3 billion fund is managed by Jeremy Podger and co-manager Jamie Harvey and seeks to outperform the MSCI AC World index across a variety of market conditions through investing in a well-balanced large cap portfolio.

The fund adopts a ‘bottom-up’ stocking picking approach and looks to identify three different types of investment opportunity – corporate change, exceptional value and unique businesses.

The fund has an excellent long-term track record, outperforming its benchmark and peers over the last five and 10 years, delivering annualised returns of 16% and 12.5% respectively. The benchmark achieved 14.2% and 11.3% annualised returns in comparison.

Just over half of the portfolio is invested in the US market with 23.5% in Europe, 8.7% in Japan, 6.7% in developed Asia and 5.7% in the UK.

The largest holdings include Apple, Microsoft, Google’s owner Alphabet, Amazon and Charter Communications.

The fund holds stakes in just over a 100 names and yields 0.67%. The annual ongoing charge is 0.92%.

Global small cap: ASI Global Smaller Companies Fund (B777SP3)

The £1.4 billion fund is managed by Harry Nimmo and Kirsty Desson. The pair are supported by a team of analysts and the investment process utilises the firm’s proprietary screening tool which shrinks the global small cap universe to a more manageable level, matching their specified criteria and then further fundamental research is undertaken.

The fund has outperformed the MSCI ACWI small cap index over the last three and five years delivering annualised returns of 14.3% and 18.8% respectively against 7.6% and 13.6% for the benchmark.

The US region represents 49% of the portfolio with Europe at 19%, Japan 11%, UK 7.7% and developed Asia at 7.6%. The largest holding is Israeli-based industrial digital printing company for the textiles and apparel industries, Kornit Digital.

Student learning platform company Chegg and power generation equipment company Generac also feature in the top holdings. The fund has an ongoing charge of 0.95% a year.

Global income: Guinness Global Equity Income Fund (BVYPNY2)

The £1.3 billion fund is managed by Ian Mortimer and Matthew Page and differentiates its investment process by focusing on profitable companies that have generated persistently high returns on capital over the last decade.

The fund is managed for income and capital growth and invests in companies that are well placed to be able to pay a sustainable dividend into the future. Dividends are paid twice a year and the last 12 month’s yield is 2.7%.

The fund has outperformed the Investment Association Global Equity Income sector over the last three and last five years delivering annualised returns of 8.6% and 11.2% respectively compared with 5.7% and 9.3% for the benchmark.

The US represents 57% of the portfolio with Europe at 10.3%, Japan at 8.2%, UK at 7.1% and developed Asia at 2.7%.

Around 46% of the fund is invested in defensive sectors with the largest being healthcare at 20.7% and consumer defensives at 18.5%. Only 23% of the fund is invested in cyclically sensitive sectors where dividend cover is less robust. The ongoing annual fee is 0.84%.

Global bonds: Allianz Strategic Bond (BYT2QW8)

The £2.9 billion fund is managed by Mike Riddell and Kacper Brzezniak and seeks to outperform the Bloomberg Barclays Global Aggregate Hedged index through a flexible investment approach.

The significant resources of Allianz Global Investors are available to support the portfolio managers with all aspects of the bond market.

The managers utilise a combination of top-down macroeconomic and bottom-up stock selection analysis to manage the fund. They differentiate their approach by ensuring that the fund provides protection against falling equity markets.

The track record of the fund is excellent having delivered a three-year annualised return of 13.4% compared with 3.3% for the benchmark.

The portfolio is underweight riskier corporate bonds with only a 4.5% weighting compared with 58% for the benchmark while it is overweight in government bonds.

The fund pays a dividend twice a year and the trailing 12-month yield is 3.2%. The annual ongoing charge is 0.42%.

Global sustainable investing: Liontrust Sustainable Future Global Growth (3003006)

The £1.1 billion fund is managed by Simon Clements, Peter Michaelis and Chris Foster and aims to deliver long term capital growth by investing in global companies that are driving sustainable growth trends.

The team run the fund on a thematic basis utilising a four-stage process which companies must pass to be considered as an investment candidate. A proprietary sustainability matrix has been developed to rank companies.

The track record is good with the fund delivering five and 10-year annualised returns of 18.9% and 14% respectively, versus 18.3% and 13.9% from the benchmark.

The portfolio is predominantly invested in large cap names with 61% invested in the US, 16.6% in Europe, 6.2% in the UK and 5.9% in Japan.

Top holdings include Alphabet, scientific instruments company Thermo Fisher Scientific and trading platform Charles Schwab. The fund has an ongoing charge of 0.88% a year.

Real assets: Jupiter Gold and Silver Fund (BYVJRB3)

The £800 million fund is managed by Ned Naylor-Leyland who has nearly two decades of precious metals investing.

The fund seeks to achieve a total return greater than a composite benchmark comprising 50% of the gold price and 50% of the FTSE Gold Mines index with net dividends reinvested over rolling three-year periods.

The strategy is to build a portfolio of gold and silver-listed funds and gold and silver equities and rotate weightings between them according to the team’s view of market conditions.

The portfolio has delivered five and three-year annualised returns of 13.5% and 17.2% respectively, versus the benchmark’s 12.8% and 19.5% return.

In terms of geographic spread, the portfolio is 61.8% exposed to Canada and 20.6% to Australia, while the UK represents 4%.

Top holdings include First Majestic Silver which has gold and silver mining assets in Mexico and Sprott Physical Gold Trust which invests in physical gold. The fund has an ongoing charge of 0.87% a year.


FOUR STOCKS FOR YOUR ISA

When we researched our stock ideas for this article, we deliberately ignored some of the popular names this year, such as US games retailer GameStop, UK bitcoin firm Argo Blockchain (ARB) or the emerging options in cannabis.

Many of these so-called meme stocks have still to demonstrate that they have business models capable of producing sustainable cash flows and long-term profits for shareholders.

We have restricted our search to companies with a proven track record of earnings growth and quality, bullet-proof balance sheets and plenty of free cash flow that can be paid out to investors or ploughed back into the business for superior returns.

Adidas (ADS:XETRA) €286.60

Investors seeking a compelling reopening play should buy shares in German sportswear maker Adidas (ADS:XETRA). It should benefit as vaccinated consumers flock back to sports stadia and events trigger sports-related purchases, hopefully starting with football’s delayed European Championships and the postponed Olympics.

Adidas has now reopened 95% of its stores following lockdowns and forecasts mid-to-high teens sales growth for 2021.

Chief executive Kasper Rorsted aims to double Adidas’ e-commerce sales by 2025 while making products more sustainable under a plan to raise profitability closer to Nike.

An additional upside catalyst for Adidas is the planned sale or spin-off of underperforming brand Reebok, and Adidas has also teamed up with Peloton to create a co-branded athletic apparel and lifestyle gear collection which should incrementally boost revenue growth.

Games Workshop (GAW) £94.30

Shares in fantasy miniatures manufacturer Games Workshop (GAW) have dropped by 18% since the start of the year as investors have ditched growth shares in favour of cyclical value.

Also dragging on the shares has been disruption to distribution channels and a well flagged slower product release programme through January and February.

We believe this price weakness represents a great buying opportunity for investors with a long-term investment horizon.

The underlying factors which drove an 80% increase in consensus earnings estimates over the last few months haven’t faded.

According to investment bank Jefferies, indicators such as site traffic, YouTube subscribers and search frequency have remained robust despite the spikes seen in the summer.

Games Workshop is a unique asset achieving high returns on capital which are protected by sustainable barriers to entry and better than average growth opportunities.

Judges Scientific (JDG:AIM) £61.20

The science equipment maker is a favourite of many retail investors, and it has rewarded them handsomely with an average yearly total return (share price gains plus dividends reinvested) of nearly 30% over five years, according to SharePad.

It has an almost identical record over the past decade, showing superior performance again and again.

Judges runs a portfolio of niche science-based businesses spanning nanotechnology, fibre optic testing, advanced materials, LED design and x-ray technology.

It is exposed to many of the major themes attractive to fund managers, such as smart materials, faster and more flexible communications and technology in healthcare.

‘Judges remains strongly positioned,’ said Shore Cap analysts in January, talking up opportunities arising through this year and beyond. Such a great growth track record underlines our view that the stock will continue to reward investors. 

Vistry (VTY) £10.42

Housebuilder Vistry’s (VTY) acquisition of housebuilding and regeneration assets from Galliford Try (GFRD) in early 2020 may have been ill-timed in that it elevated borrowings ahead of the pandemic.

However, longer term we think this deal will benefit the business and there are signs that’s already happening. The regeneration or ‘Partnerships’ business is higher margin than other activities in Vistry and this was reflected in a very positive contribution to the group in the second half of 2020.

Recent measures announced in the Budget around increased availability of 95% mortgages and stamp duty holiday extension should help underpin demand. Canaccord Genuity analyst Aynsley Lammin says: ‘Vistry is in good shape to enjoy good growth as well as pay attractive dividends over the coming years.’

This potential looks attractively priced with a dividend yield of 4.8% and price to book ratio of 1.4 based on Canaccord’s 2021 forecasts. Housebuilders tend to trade at 1 times price to book value in bad times and at 2 times in boom periods.

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