Isas are available throughout the year but many investors leave it to the last moment. So this week I thought I would give some thought to the so-called Isa season, particularly at a time of stockmarket volatility caused by geopolitical problems in Libya, continuing debt problems in Europe and the tragedy of the Japanese earthquake.
Starting with the most obvious asset of all, cash, many investors do not realise that rather than making a hasty investment decision with their stocks and shares Isa, they can put the entire allowance in cash and make a choice later. This is not a cash Isa as such because any interest will be taxed and interest rates are low but do not forfeit Isa allowances because you are nervous about markets in the short term – put it in cash and invest later.
Isas have been revitalised since the previous Government raised the amount you could invest to £10,200 and after April 5 it goes up a further £480 as the limit is now linked to inflation. Either this Government or a subsequent one may decide too much tax revenue is being lost through Isas so my view is to build up allowances as far as possible while you can.
Turning to the investment strategy, do not look at Isas in isolation. Consider other investments, Sipps for example, and view any portfolio as a whole, taking care not to place too much emphasis on one area such as commodities or emerging markets. These are both areas I have liked for some time but I am wary about them in the short term. Commodities in particular have had the most tremendous run over the last few years and have a high correlation with emerging markets. I am not suggesting investors should not have any exposure here but be careful you do not have everything tilted in one direction.
The poor performance of equity income funds over the last few years has had much to do with the fact they do not hold mining or other commodity-related firms, mainly because they offer little or no yield. So if you want to be a true contrarian investor, this is one area to consider for your Isa, including Neil Woodford’s Invesco Perpetual high income fund, of which he has a high proportion in the unfashionable pharmaceuticals sector. His passion for this area is reminiscent of 2000 when he claimed tobacco stocks were being overlooked. Since that time, they have risen fivefold.
Given all the problems in the world, you may also want to look for funds that aim to perform well in all economic conditions. Perhaps one of the best all-weather funds is Artemis strategic assets, managed by one of the finest fund managers I know, William Littlewood. It has the ability to invest in just about every asset class with the additional ammunition of being able to go short when it might be required. It is an important part of my own portfolio.
An alternative strategy is to back experienced fund managers rather than spending too much time on asset allocation. We have many with an excellent pedigree in Europe and the UK. In Europe, I would highlight Richard Pease, who manages Henderson European special situations, and Alex Darwall’s Jupiter European growth fund. In the UK, Harry Nimmo at Standard Life UK smaller companies and Richard Buxton at Schroder UK alpha plus are worthy of a place in any portfolio.
The UK market is not on a demanding rating and although I believe the economic recovery will be anaemic, there is plenty of value still to be found. Any decent dips should be seen as buying opportunities.
Finally, after April 5, you are entitled to another Isa allowance and why wait another year to take out the Isa? Using all available tax-efficient entitlements really does add up over the years. In fact, it is possible for someone to have accumulated £184,800 using all available Peps, Isas and Tessas – and that is before any growth.
Mark Dampier is head research at Hargreaves Lansdown