Fund ideas for your ISA allowance

The spread of coronavirus is hugely troubling, and markets are volatile. For those willing and able to use their ISA allowance, Rob Morgan summarises the current environment and offers three fund options to consider.

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  1. Rob Morgan

The worldwide coronavirus outbreak will change the economic and market prospects for 2020, and how long the damage continues remains uncertain.

A worst-case scenario would be a prolonged outbreak of the virus globally, with many more closures and significant economic disruption alongside the tragic human consequences. This would likely lead to a world recession, a substantial fall in profits and earnings. Under this scenario, economic growth and corporate earnings would take a long time to recover – indeed some businesses could go bust – and we might expect little improvement in financial markets.

Yet, it’s also possible that a sharper recovery occurs, as governments give the all-clear based on an early reduction in infections. Chinese authorities have now seemingly been able to get to grips with the virus, and reports suggest life is returning to normal in affected areas. The outperformance of the Chinese market in recent weeks is testament to this, and there are likely to be some valuable lessons we can draw in terms of our own efforts to minimise disruption and fatalities.

Vacuum of information

The simple fact is nobody knows how this pans out. At the present time, investors are operating in a vacuum of information. Official forecasts of country output and growth have not yet adjusted for the impact of the virus, and guidance from companies is largely impossible.  Many have decided not to update their shareholders given the uncertainties affecting their businesses – they, like everyone else, are in the dark. Without the usual ‘anchor’ of earnings estimates and other company guidance investors have little to go on.

What we do know is as communities go into temporary ‘lockdown’ we can expect consumers to increase spending on necessities but cut back dramatically on non-essential goods, including cars, luxury goods and electronics. Industrial production will be constrained by the availability of workers and supply chain disruptions. This is likely to reduce revenues for many companies and put some into severe difficulty. In such an interconnected world, the demise of one firm can have consequences for others, including its customers, suppliers and lenders.

The other side of the ‘unknown’ is the policy response. A self-reinforcing financial panic can be contained with the right steps to underpin confidence. Policymakers across the globe are forging a huge response to contain the fallout, and there are reasons to be positive that they can be successful. Unlike the global financial crisis in 2008/09, we know that the root cause of the problem will not last forever. Eventually, ‘herd immunity’ to the virus should be built up and it is contained, or a vaccine is found. In addition, the global economy is healthier than a decade ago and many company balance sheets are in better shape.

Investing during a crisis

We know from studying stock market history that the best times to invest are in often in moments of great uncertainty. Anyone who was investing at the time of the global financial crisis in 2008 and 2009 will recall it was also a time when stock markets were plunging, companies were getting into difficulties and authorities appeared to have lost control of the situation. Some were even saying it was the ‘death of capitalism’. Yet after a painful period markets bottomed out and then recovered, providing decent returns for investors. So, while it’s easy to become disillusioned during such times, it’s important to take a balanced view and look to the long term. This is a crisis that will have far-reaching and tragic consequences, but it will likely pass.

Although volatile, and occasionally exceptionally so, stock market investing builds wealth over long periods, and by adding to your ISA pot each year you can at least build up a valuable tax-efficient shelter around those investments. Over time, this could mean higher returns so it’s important to try and use it when you can.

If in doubt secure your ISA allowance in cash

This year’s £20,000 ISA allowance must be used by April 5th or it is lost forever. While it is possible to invest in a Charles Stanley Direct Stocks & Shares ISA using a debit card up until midnight on 5th April 2020, we recommend you don’t leave any subscriptions too late in case of any problems.

If you don’t want to commit to an investment right now that’s fine. It’s possible to open or top up a Charles Stanley Direct ISA with cash and leave the decision about where to invest to a later date. Please note there is no interest currently paid on cash balances.

Fund ideas

If you looking to commit money to investing here are three fund options you might consider. Each represents a different investment approach and level of risk, and they are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the fund’s Key Investor Information Document or Key Information Document, and Prospectus.

Cautious - BNY Mellon Real Return Fund

Targeted absolute return funds aim to be the ‘plodders’ rather than the ‘leapers’ of the fund world, aiming to provide more modest but consistent returns. This objective resonates with more cautious investors or those wishing to diversify a portfolio in order to balance more risky areas such as shares. However, there is still risk involved and the fund can fall as well as rise in value.

One of our preferred targeted absolute return funds is BNY Mellon Real Return. It invests in a diverse portfolio of assets, aiming to beat the return on cash by 4% a year (before charges) while limiting the scope for losses. However, prioritising capital preservation is an aspiration rather than a promise, and the fund can fall as well as rise in value.

The fund comprises a ‘core’ of assets chosen to generate attractive long-term returns, which are offset by stabilising, lower-risk assets and hedging positions to dampen volatility and to provide downside protection. The core is currently invested in shares of high-quality companies with predictable and stable cash flows, alongside bonds which the managers believe offer value. Among the offsetting positions are typically gold and US Treasuries, while the tactical use of ‘put options’ can serve to protect the portfolio against a significant fall in the market.

The managers use a thematic approach to investment decision making, which focuses on identifying long-term structural changes impacting the global economy. This includes demographic shifts, growing demand for healthcare and environmental change. This analysis provides the basis for the views taken on asset classes, sector positioning, stock selection and risk. The fund benefits from a strong team who make full use of the wider resources across BNY Mellon, and it may appeal to investors looking for modest long-term growth while aiming to control volatility.

Balanced – Charles Stanley Multi Asset Moderate Fund

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, 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 and is considered ‘medium risk’. This means being willing to tolerate some short-term fluctuations in value in order 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 on the were substantially reduced on 1st January 2020 from 0.75% a year to 0.30%, helping investors access a great value ready-made portfolio run by Charles Stanley’s experts.

Adventurous – Scottish Mortgage Investment Trust

Scottish Mortgage offers investors a portfolio of the most exciting technology and growth companies worldwide. If you are looking for a convenient and low cost way of owning the likes of Amazon, Tesla and Netflix alongside Chinese tech giants Alibaba and Tencent as well as iconic consumer stocks such as Ferrari and Gucci’s owner Kering, then this higher risk investment could be worth considering.

The Trust's managers, James Anderson and Tom Slater of Baillie Gifford, aim to invest in companies that harness the power of technological change, create new markets or disrupt existing ones, and in doing so provide investors with substantial growth opportunities. With no limits regarding geographical or sectoral exposure, they are free to invest in what they consider to be the world’s most exciting companies. That’s whether they are listed on a stock market or are private companies accessed through their network of contacts.

A key part of the managers’ process is to understand emergent technologies before they get to public markets by speaking to businesspeople, emerging companies and academics. This farsighted approach has seen the managers back many winners among the global internet giants, investing at an early stage in Google, Facebook and Amazon. The Trust has reaped the rewards of exposure to these businesses and produced exceptional performance, though past performance is not a guide to the future.

The managers believe the pace of technological change is faster today than ever before, and only an exclusive band of businesses will benefit significantly from this progress – often disrupting incumbent businesses or even entire sectors along the way. In order to maximise returns, they take large stakes in companies they believe have exceptional potential for the very long term. The drawback is risk to capital in the shorter term. At times a good deal of optimism can already be factored into the share prices of high-growth companies, meaning any disappointing news can be severely punished, especially in a market downturn. In addition, there is gearing (borrowing to invest) within the Trust, which serves to increase the risk of the investment further, exacerbating the price movements of an already-adventurous portfolio. 

We, therefore, believe the Trust should be considered a higher risk global equity option for those who share the managers’ long-term perspective and are happy to ride out significant short-term volatility.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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