As a result of announcements in the Budget 2014, from 1st July 2014 ISAs will be reformed into a new simpler product called the New ISA, or NISA for short. And with the new ISA (NISA) savers can hold up to £15,000 in cash or stocks and shares. With the removal of the former cash ISA / Stocks and Share ISA wall this has potentially opened up investing in stocks and shares to a new DIY investing audience. But the question then is where to invest your NISA allowance?
Below is my opinion on how DIY investors might invest their new £15,000 NISA allowance, written in a Q&A style. Obviously this does not constitute advice in anyway and you should obtain independent, professional advice for your own particular situation.
The stock market has done well over the last five years. Is now a good time to invest, or a dangerous time to throw in £15,000?
If you are investing in UK equities the market has recently hit highs not seen since the dot com boom in 1999. We have experienced a 5 year stock market rally and asset bubbles are being inflated by low interest rates and money printing. Plus stock market measures of volatility are at multi-year lows. Taking these factors together, DIY investors may think that now is a great time to invest, but the reality is that these factors could also be indicative of market complacency and represent the ‘calm before the market sell off storm’.
Many developed equity markets are overvalued, especially the US. Stock markets are being driven artificially by a flood of money printing from central banks, rather than fundamentals such as strong earnings growth, but at some point reality is likely to catch up.
Ask an investment manager if you should invest now in the market and he/she would say yes, because he/she gets paid to run money.
But objectively is now a good time? If you are investing for the long term (15 years+) then even if the market collapsed you may have time for your portfolio to recover. If you are only years from retirement then I’d urge caution.
The key to successful investing is to buy low and sell high. But research has shown that asset allocation (what and where you invest) accounts for around 90% of investment returns.
So market timing doesn’t affect performance as much as people think. Of course the longer your investment timeframe the lesser the impact of market timing. But the beauty of the NISA is that people will have the ability to put £15,000 in cash and move into investments over time.
Dripping into the markets means that if markets do tumble in coming months you can buy more shares/units for your pound and so make more money when markets inevitably rebound.
Where to invest your NISA allowance?
If we are looking at equities then one strategy is buy what is cheap or fair valued and avoid expensive markets. CAPE (cyclically adjusted price to earnings ratio) is used to measure whether a market is cheap or expensive based on history - and is one of the best indicators of future stock market returns.
So which markets are currently cheap or attractively valued? Well markets such as Japan, India, China or Russia. But remember if a market is cheap it doesn’t mean it won’t get cheaper first.
Also some opportunities still exist within the UK, the market valuation of the FTSE 100 is just below the long term average. Markets looking expensive are US equities and Indonesia
But what about bonds? Bonds have been the big surprise in 2014. The consensus was to avoid bonds as we come to the end of the 30 year bond bull market, but bonds have been among the best performing assets year to date. Largely coming off a terrible 2013 for bond investors.
As a result of the market movements year to date Gilts are now expensive. The chase for yield means that Investment Grade bonds are now more attractive from a risk/return perspective than High Yield bonds.
2014 so far has shown how the consensus can be wrong (again) and also why diversification into bonds can aid overall portfolio returns. But what has driven the bond market in recent months could also reverse.
The call of the ‘death of the bond bull’ was premature but it is still seems inevitable. Those funds which have performed the strongest year to date are typically those with the longest duration. So performance chasers need to keep on their toes, because if interest rate/inflation expectations suddenly shift they could be left licking their wounds.
Even if you plan on putting £15,000 in bonds you have got to be comfortable with the likelihood of capital loss given their current price.
NISA funds ideas
In the UK I would still look at smaller companies funds despite the sell off in recent months. Smaller Companies funds had a stellar 2012 and 2013 (average fund was up 22% and 37% respectively) but have struggled in 2014. Valuations are less attractive now, trading near long term value so I would look at a fund with a good track record for stock picking and identifying opportunities. A fund like Unicorn UK Smaller Companies, which has proved more resilient than most small cap funds. While small caps would suffer in a market sell off, they are less affected by macro headwinds.
If I looked at a mainstream UK fund then I might look at something like Schroder Recovery. UK stock market valuations`are around historical averages but with value stocks generally lagging growth stocks in the market rally of the last 5 years, there is now potential for value stocks to outperform. This fund invests in companies that have had setbacks which the manager believes can be turned around. Accordingly the fund will have periods of underperformance but the manager’s pedigree has seen the fund return 64% over 3 years (making it one of the top performing UK All Companies funds).
Those looking to also invest outside of the UK might want to research Artemis Global Income. Not only has it delivered from an income perspective, managing to grow its income payouts, but it has outperformed most global growth funds, including its global growth stablemate. Run by Jacob de Tusch-Lec since launch, a manager not afraid to back his convictions, previous astute calls include getting back into European equities earlier than other managers. Unlike most of its peers the fund is just not US focused (it accounts for 29% of the fund), the manager uses his global remit including a 21% exposure to the Eurozone and 11% to Asian equities. The fund has a current yield of 3.85%
For those happy investing for the long term and happy with a punt, India looks attractive with over 5,000 listed businesses (more than any other market in the world) opportunities remain at the stock level despite market valuations being less attractive than they have been, with cyclicals and midcaps at multiyear lows. I cover the options and funds in my article, Is now a good time to invest in India.
As for bonds…….
Those investors happy to leave the strategic allocation of bonds (i.e. gilts vs HY vs investment grade corporate bonds) to a bond manager might look at a fund such as Artemis Strategic Bond - a soberly run strategic bond fund which has demonstrated an ability to preserve capital. The manager (James Foster) made some astute allocation calls in 2013 around the decision of the US to taper its QE programme helping the fund to be one of the top performers within its sector over the last year.