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Pass the portfolio

Eavesdrop on a conver-sation in early February and there is a fair chance you may hear some people casually talking about their disappointment at once again failing to keep to their resolutions.

Cigarettes are still being smoked, alcohol is still being eagerly consumed and gym memberships continue to gather dust.

In the UK financial services arena, the disappointment which has col-oured the past few Isa seasons seems to be fading – not because 2005 is going to be the year when the Isa strikes back but rather it seems that, these days, nobody expects an Isa season and pessimists are rarely disappointed.

The risk aversion to equ-ity investing in the past few years still lurks and many feel that Chancellor Gordon Brown appears to be doing his utmost to destroy the Isa.

Getting rid of the 10 per cent tax credit on dividends hardly encouraged savers and for a while it seemed the annual savings limit was going to be slashed by 2,000 but for now the 7,000 limit remains.

Anticipating a busy Isa season may seem somewhat futile but providers and advisers believe this time of the year is an excellent time to take a hard look at the make-up of investor portfolios.

T Bailey fund manager Jason Britton believes this time of the year represents an occasion where the UK’s archaic tax system reminds investors that there is an incentive to save and to review their investments.

Britton says: “It is also a time to look at Peps as they should be transferred if they are not delivering what they were previously expected to. There must be a lot of Pep money which was invested in funds in the 1990s whose managers have since moved on and portfolios may not be delivering the same returns they were back then.”

Chelsea Financial Services managing director Darius McDermott says he does not anticipate any strong themes or trends to emerge from this year’s Isa term. He firmly bel-ieves that this a very suitable time of the year to re-examine investments as a whole.

He says: “All the Isa season does is remind everyone that they have a tax advantage and it should really be used to review a portfolio. Investors should be looking at their investments at least once a year, if not twice. If investors are finding this difficult, it is a very good opportunity to consolidate within a fund supermarket, something we very much recommend.”

McDermott predicts that some clients may start to fill up the satellite portions of their portfolios.

He says: “Investors may look to other regions such as Eastern Europe or they may look at what I would call more higher-alpha UK funds such as the Framlington select opportunities fund run by Nigel Thomas or Anthony Bolton’s Fidelity special situations fund.”

He says he is not expecting to see any specific trends this year but he notes in 2004 that Chel-sea’s top sellers during the run-up to the end of the tax year were equity income vehicles and he believes this will be the case again this year.

Britton also says he is confident that 2005 will once again see investors buying equity income funds.

The popularity of the UK equity income sector should not come as a surprise. Over the five years to January 17 2005, the sector average return is 20.1 per cent while during both three-year and one-year periods to January 17, the category achieved mean performances of 16.3 per cent and 16 per cent respectively.

The UK equity income sector has significantly outperformed the UK all-companies sector over one-year, three-year and five-year periods to Jan-uary 17.

Seven Investment Management marketing director Justin Urquhart Stewart says that with perhaps the exception of cash Isas, the days of investors walking off the street into an adviser’s office to buy an Isa are over.

He says: “Following the debacle of 2002/03, investment Isas have been dropping off the investor interest radar. It does not have the same allure as it did in 1999/2000, where everyone was interested in technology.

“There has been a slight pick-up in interest since then and the Isa will stagger on but, really, as a savings device, it has very thin attraction.”

Urquhart Stewart bel-ieves investors will be seeking relatively defensive buys such as equity income funds but he cautions that if everyone jumps on the same bandwagon, there could be problems.

Britton believes a good long-term buy might be the Old Mutual UK select mid-cap fund managed by Ashton Bradbury.

He says: “We like this portfolio because we see a lot more pricing inefficiencies in the mid-cap market than we do in the FTSE 100 which therefore presents more chances to make money but simultaneously in mid-caps there is not the liquidity problems which are present in smaller caps.”

For the more adventurous investor, Britton recommends the Saracen growth fund.

He says: “The fund is managed by Jim Fisher and Julian Fosh and is around 17m in size so it is a very nimble portfolio. It is a concentrated fund of best ideas with around 45 holdings and it is run with conviction. The turnover is low and stocks are bought for the long term.”

McDermott says: “For a cautious investor, I would point them in the direction of Rathbone income managed by Carl Stick or the Invesco Perpetual highincome fund run by Neil Woodford. However, for the more adventurous, I would say perhaps the Framlington select opportunities fund.”


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