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ISA tips provided by Hargreaves Lansdown, one of the UK's leading independent stockbrokers and financial advisors and are one of the most cost-effective providers of share dealing in the UK
Many experts believe that the price falls seen in shares and bond markets over the last 12 months make it a great time to be investing in the markets.
Here are four stocks and shares funds that you can place in an ISA an hopefully watch grow over the longer term. They have been picked by leading stockbroker and financial adviser Hargreaves Lansdown as providing outstanding opportunities at the current time:
Investec Sterling Bond Fund
President Reagan famously said that the nine most terrifying words in the English language are 'I'm from the government and I'm here to help'. This must ring especially true for corporate bond investors. The current bargain prices in bond markets are due in part to the actions of the American government.
Goodness knows what drove the US authorities to let Lehman Brothers fold, despite previously rescuing its smaller brother Bear Stearns and the mortgage giants Fannie Mae and Freddie Mac. The bankruptcy of Lehman Brothers wiped out its bond holders and threw markets into disarray; it had been thought that such financial titans were too integral to the system to be allowed to fail. The ensuing reluctance of institutions to lend money probably hastened the arrival and increased the severity of the global recession.
Where's the silver lining? Well even before the Lehman Brothers debacle we were saying that there was excellent value in corporate bonds. Bond markets have fallen substantially since then and in our view that value now looks truly unprecedented. This year has seen a great deal of distressed selling as beleaguered institutions have sold bonds to raise cash, thus driving prices down and pushing yields to record highs.
Corporate bond prices have been driven so low that they only make sense if we have a recession many times worse than the Great Depression of the 1930s.
Now clearly the economic outlook is poor, but in our opinion all of that and far more is already reflected in bond prices. It is impossible to pick the exact moment to buy, however investors who buy now should receive an excellent yield (tax free in an ISA or SIPP, don't forget) while waiting for a recovery.
The Investec Sterling Bond Fund is well placed to take advantage of these opportunities. It is a flexible portfolio that can invest in all the key areas of the market: government bonds, higher yield, higher risk bonds and investment-grade corporate bonds. While much of the portfolio is invested in the UK there is also some overseas exposure. The lead manager of the Sterling Bond Fund is the highly experienced John Stopford, the head of Investec's 26-strong fixed interest team. Investec has expertise in all areas of fixed interest, from bonds in developed and emerging markets to currency, giving John Stopford and his team the resources to gain a full picture of the investment landscape.
Currently the portfolio has a running yield of 6.6% and a redemption yield of 9.3% (variable and not guaranteed). Falling markets have always thrown up superb opportunities and in our view investors who are prepared to ride out the volatility should consider the Investec Sterling Bond Fund.
Corporate Bond Fund Yields - An Explanation
The distribution yield is an indication of the level of income you might receive, based on the income paid over the last year and the current value of the fund. The redemption yield is a theoretical figure which also takes into account the gain or loss that would be made if all the corporate bond holdings were held to maturity. Yields are variable and not guaranteed.
Artemis Income
We expect interest rates to fall to 1% next year and if so they will be the lowest since records began in 1694!
Savers may soon find the return on their cash is the worst ever seen. Money in the bank is guaranteed, but such low rates will leave its value vulnerable over time to the ravages of inflation. Equity income is one of the few investments that can provide part of the solution. It has the potential to grow both your capital and the income you receive, but unlike cash its value can fall as well as rise.
Equity income funds pay their income out of accumulated share dividends, and by investing in companies paying them consistently. Dividends have formed the bulk of investment returns over the long term. For example, £10,000 invested in the UK stock market 20 years ago would now be worth £21,900 without dividends, but that would have more than doubled to £45,476 if dividends were reinvested.
Stock markets have fallen a long way, but we believe equity income funds could be among the biggest winners when markets recover. A consistent dividend is a sign of a healthy business and equity income funds invest in some of the most established names in the UK. Many struggling companies will cut their dividend, but the highest quality will maintain (and may even increase) their payouts to shareholders. Not only will such shares pay an attractive income, but they should gradually command a premium as private and institutional investors alike search for better returns. Finding those companies is not easy, so the key is to invest with the best fund managers.
The Artemis Income Fund stands out from the crowd. Its flexible mandate allows its managers, Adrian Frost and Adrian Gosden, the freedom to diversify across different sectors. They have shown a remarkable ability to outperform their peers. Their focus is on generating a good total return (capital growth plus dividends) for their investors while growing the income over the long term.
The fund has been extremely successful in generating a growing income, although remember that past performance is not a guide to future returns. The fund managers look to invest in attractivelyvalued companies with plenty of cash flow. To them cash is vital because it gives a company the freedom to maintain dividend payments, and even increase them over the years.
The first funds we ever highlighted to our clients were UK equity income funds and the sector has been a firm favourite ever since. We believe it can be a superb area for investors who want income, capital growth or a combination of the two. Recent market falls serve as a reminder that stock markets are volatile, but we believe that when markets start to recover equity income funds will lead the charge. In the meantime you should receive a healthy level of income for your patience.
Jupiter Financial Opportunities
The woes of the financial community are well documented, with bank nationalisations, recapitalisations, special liquidity schemes and insurance company bail outs. Many financial shares are at all time lows with predictions of more bankruptcies to come. Why on earth, therefore, would I be suggesting that you consider investing in a financials fund?
Share valuations of banks, asset management companies and some insurance companies are pricing in an extremely pessimistic view of the global economy. The market doesn't expect these companies to make money over the coming years.
No one wants to touch them, they are unloved with seemingly no prospects however if we are to have any kind of recovery ultimately financial stocks will surely have to lead.
Despite the malaise not all fund managers have suffered. The FTSE global financial index has fallen a staggering 44% over the last 12 months, whereas the Jupiter Financial Opportunities Fund has only fallen by less than 1%. While past performance is not a guide to future returns, by any measure this is outstanding performance which can be firmly attributed to the fund manager, Philip Gibbs.
This year he has had the foresight to move the majority of the fund out of equities and into defensive assets such as fixed interest and cash. He has a negative view on the economy and global stock markets, which has led to big positions in government bonds, mainly from France and the US, which have helped his fund as sterling has weakened.
This is not the first time Philip Gibbs has fundamentally made such sweeping changes to his portfolio. Ever since the fund launched he has backed his convictions; benefiting from the boom in Irish financial services and the demutualisation bonanza in the late 90¢s; commercial property stocks earlier this decade; inter dealer brokers and hedge fund managers in 2002 and European and global investment banks after the end of the second Gulf war.
He won't always get the timing right, but his record to date is impressive. Since launch this is the best performing fund in the UK, returning 651% since June 1997, but please remember past performance is not guide to future returns.
Ultimately this fund is an equity based fund; however Philip Gibbs took a pragmatic approach during 2008 to try and preserve investors' capital. If you are looking for someone to make the most of the opportunities in all markets today and increase your exposure to the financial sector as and when he believes the time is right, this could be the fund for you.
