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Surprise sectors of the Isa season

This Isa season was supposed to be dominated by equity income and bond funds. In an environment where corporate earnings are unlikely to exceed even the gloomiest expectations and volatility shows little sign of abating, these two sectors were set to take the market by storm.

But despite the fact that most companies with funds in these areas are concentrating their depleted marketing budgets on aggressively promoting them, the prediction does not seem to have come true.

Last month, the top 10 biggest selling funds for Isa investors on Skandia&#39s fund supermarket, Multi-fundshop, included not only the obvious choices – Credit Suisse and Jupiter income funds – but also some real surprises. Not many expected Invesco Perpetual&#39s European growth fund to be in there, let alone in third place, or Fidelity&#39s European fund to be placed eighth.

In fact, of the top 10, just four are income funds or have an income element. The other six seek capital growth. There are no bond funds. This suggests that fund managers have again called the market wrong, that they have misread investors&#39 needs. But once the figures are broken down between regular savers and lump sum investors, a clearer picture emerges.

Seven of the top 10 biggest-selling funds for lump-sum Isa investors are income funds and one is a bond fund.

Of the remaining two funds, one – Fidelity&#39s special situations fund – features in most top 10 lists while the other is cash (in third place).

This comes much closer to reflecting the trends that have long been predicted by fund managers and IFAs. However, the top 10 for regular savers differs again, with seven growth funds, two income funds and one growth and income fund. Skandia says the disparity is simply due to investor demographics.

Head of investment sales Angus Duncan says: “Regular savers are buying funds that are much more volatile. Henderson&#39s global technology fund is the fourth-biggest seller in that category, for instance. These investors are clearly not going to be retiring any time soon – most will be younger people who want funds that do not do much for a while before they go boom and suddenly shoot up.”

The majority of Skandia&#39s customers, however, are lump sum investors. Duncan believes that, of the two categories, the lump sum top 10 is most representative of the market as a whole, as investors continue to seek security amid volatile markets.

His contention is supported by figures from other supermarkets such as Cofunds, which have seen income and bond funds dominate their best seller lists. Seventeen of Cofunds&#39 top 20 funds are bond or income funds, with the exceptions again being Fidelity&#39s special situations fund and Gartmore&#39s selected opps fund. The other – HSBC&#39s All-Share index fund – is not only the biggest seller but also a tracker fund. Cofunds sales & marketing director Rodney Aldridge, who attributes the unusual presence of HSBC&#39s fund to a significant flow of business from one particular IFA, says he does not expect the income and bond stranglehold to be broken in the foreseeable future.

He says: “I do not expect it to change. Inter-mediaries are still revolving around income investing. Even investors who want growth are being advised to buy an income fund with the intention of reinvesting the income.”

Breaking Cofunds&#39 top 20 down into regular premiums and lump sum business is unnecessary as Aldridge says only 5 per cent of its investors are regular savers.

He expects this situation to continue well into the coming months as lump sum business traditionally accelerates in the run-up to the end of the Isa season.

IFAs agree, with many predicting that the shift towards income and bond funds will persist until the stockmarket shows signs of making a sustainable recovery.

Chartwell Investment Management director Patrick Connolly says: “Most portfolios of new clients are overweight in growth, from when the market was rising. They often have no bonds.

“What we do is rebalance their portfolios away from growth to reflect their changing risk profiles, which means putting the majority of clients into bond and equity income funds.”

Nevertheless, Connolly says that many investors come to him asking to be switched into equity income funds without having sought advice – perhaps demonstrating that the blanket marketing for these funds is having an impact.

But he makes the point that this proactive stance could vanish when the stockmarket takes a turn for the better, with investors likely to wait too long before switching back towards growth stocks.

Bates Investment Services head of investments James Dalby believes this will not be a problem for at least two years as equity income continues to make a compelling case.

He says: “There will be value there for quite a while. The FTSE All-Share index has a price/earnings ratio of 17.7 at present and is yielding 3.76 per cent. But the FTSE 350 Higher Yield index – the main hunting ground for equity income managers – has a p/e ratio of 15.36 and is yielding 5 per cent. It looks attractive.”

Investment Management Association figures show the best-selling funds in January were in the UK corporate bond sector followed by the UK equity income sector. This has been the case in eight of the last nine months. There will undoubtedly be occasional blips but as long as IFAs believe no other sectors offer as much value and safety as the two front-runners, this is a situation that is unlikely to change for months.

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