Using tax efficient wrappers, like a Stocks and Shares ISA, 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 was cut last 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 (CGT) allowance dropped to £3,000 – down from £12,300 just a couple of years earlier. 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 later. 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 essential to help reduce risk and ensure you are not overly reliant on one area or on certain circumstances.
Each 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. iShares £ Ultrashort Bond UCITS ETF
Risk level: low to medium
This Exchange Traded Fund (ETF) could appeal to investors looking for a low cost, stable, income-generating holding capable of returning a bit more than cash but resilient to changing inflation and interest rate expectations.
The fund blends together a variety of investment grade, short-dated bonds. Put more simply, it invests in loans to relatively secure companies which are close to being paid back. The underlying investments include fixed rate bonds maturing between 0 and 1 year and floating rate bonds (where interest paid rises or falls according to interest rates) with a maturity of between 0 and 3 years.
Being short dated the underlying bonds typically don’t move up or down by a significant degree when inflation and interest rate expectations change. Instead, the expected return remains anchored by the proximity of the repayment date. There is a risk that any individual issuer could default on its bond, although this is less likely compared to more risky bond funds because it sticks to the higher quality ‘investment grade’ part of the market. In addition, there is only a short window of ownership within the portfolio before each holding is due to be redeemed.
Income is distributed to investors on every six months with the present yield to maturity in the underlying portfolio a little over 5%, though please note all yields are variable and not guaranteed. This income could be attractive in the tax-free environment of an ISA, though rather like returns on cash the level of payouts will likely fall if interest rates are gradually cut this year as the market anticipates.
iShares Ultrashort Bond UCITS ETF
2. Personal Assets Trust
Risk level : medium
For investors seeking steady, less-volatile returns and a balance of growth and wealth preservation Personal Assets Trust managed by Sebastian Lyon and Charlotte Yonge of Troy Asset Management is an option to consider.
The managers’ first principle is not losing money in ‘real’ terms i.e. versus inflation – rather than being concerned with relative performance against a benchmark. With this in mind they blend together four main areas: equities, index-linked bonds, cash and gold.
Their more cautious stance has led to some rather dull periods of performance, and over the past few years it has been left behind by funds more fully invested in the stock market. Yet it has tended to come into its own during difficult times, although past performance is not a guide to the future. And like any investment it can fall as well as rise.
For some time, Mr Lyon has been concerned by what he sees as stretched valuations in many parts of the equity market. That conservative position remains today with the share component of the portfolio around 30%, concentrated in large, blue-chip stocks such as Unilever, Alphabet and Diageo.
Instead, the portfolio is currently dominated by bond exposure, but with an emphasis on protection against inflation risks. There’s around a third in US TIPS (inflation linked government bonds), which the managers believe will provide a beneficial above-inflation return based on current pricing. Short-dated US Treasuries and UK Gilts, which should be relatively insensitive to inflation and interest rate movements, account for a further 22%. Meanwhile, the managers continue to view some gold as essential portfolio insurance.
With a disciplined record of asset allocation and the flexibility to add to equities on weakness, the Trust’s philosophy could resonate with private investors wishing to balance opportunity and risk. However, it is worth noting that as an investment trust there can be additional risks associated with share price volatility at times of market stress.
Personal Assets Investment Trust
3. Charles Stanley Multi Asset Moderate Fund
Risk level: medium to high
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, investment 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. Plus, there are no platform fees when held with Charles Stanley Direct.
Charles Stanley Multi Asset Moderate Fund
4. JOHCM Global Opportunities Fund
Risk level: medium to high
For those that expect a continued broadening out in stock market performance from the big US tech stocks, diversifying into differentiated actively-managed funds could be worth considering to provide something different to passive funds and more growth-leaning active strategies.
JOHCM Global Opportunities is a consideration for this. The managers, Ben Leyland and Robert Lancastle, have a decent long-term record of keeping up with global markets when they rise but have also shown ability to preserve capital more when they fall. They have also shown strong stock selection over their tenure, although past performance is not a reliable guide to future returns.
As well a highly selective approach resulting in a concentrated portfolio where stock picking has a significant impact, the approach emphasises capital preservation. If there aren’t sufficient investment opportunities they find attractive, the managers are happy to hold some cash, an unusual tactic as most funds tend to remain close to fully invested at all times. For instance, the managers took the cash weighting all the way to its 10% limit in 2021 and, more briefly, almost to that level in November 2023.
In terms of stock selection, the managers stick to developed markets, seeking shares in good-quality businesses where there is underappreciated durability of earnings and cash flow. The fund is neither growth nor value biased, instead exploring what the managers refer to as the ‘forgotten middle’. The fund can be considered for part of a core allocation to global shares, especially for investors wishing to keep their portfolio anchored by characteristics of quality and value.
JOHCM Global Opportunities Fund
5. M&G Global Dividend Fund
Risk level: medium to high
Dividends, the pay out of profits a company makes to its shareholders, are an important but often overlooked feature of investing in the stock market. Companies whose earnings and dividends can grow despite a changing economic environment provide a flow of income returns to shareholders and will likely have a resilient share price to boot.
Aiming to offer a pragmatic, well-rounded approach to dividend investing, M&G Global Dividend Fund, 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. On the other hand, 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.
The manager balances a wide variety of companies to create a core global equity portfolio with an income bias:
- 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.
- 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.
This fund could be a useful diversifier in growth-stock laden portfolios and be of particular interest to investors wishing to harness a rising income stream. The historic income yield is 3.0% with potential for payouts to rise over time. All yields are variable and not guaranteed.
6. WS Gresham House UK Smaller Companies Fund
Risk level: high risk
Smaller companies are widely considered cheap, even within the context of an inexpensive UK market, despite frequently being able to maintain their growth potential regardless of the economic backdrop. With corporate and private equity buyers continuing to sniff around, there may be opportunity to benefit from share price uplifts resulting from mergers and acquisitions.
To make the most of the area, funds investing in smaller companies should ideally be large enough to be efficient and lower cost but small enough to react quickly to opportunities. It’s also a sector where knowledge and skill combined with a sound selection process can make a big difference to long term returns.
One fund option that could harness the long term potential is WS Gresham House UK Smaller Companies. Gresham House might not be a household name, but are experienced investors in both market-listed companies and private businesses. This crossover means they apply a private equity perspective to public markets, focusing on high quality companies with strong management, market positioning and business models. They also fully consider the potential strategic value of the business to potential trade or private equity buyers.
Managed by the longstanding Ken Wotton, it could be something of a hidden gem in the sector. However, it is worth noting that the concentrated approach of investing in just 40 to 50 holdings adds to the risk of an already adventurous area. Smaller companies are typically riskier and less diversified than larger businesses.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.