Making the most of opportunities offered by Isas

SAVERS starved of returns from cash are piling into equities in one of the busiest individual savings account (Isa) seasons on record. The October increase in the annual allowance for over 50s to £10,200 (£5,100 in cash) helped propel Isa fund sales to their highest level since 2001 last year, after five successive years in which more money was withdrawn from Isas than invested.

Inflows in January set a new record for the month as investors sought to use their annual tax-efficient allowance before the 5 April tax year end.

Where is the money going? The Isa season is often characterised by massive sales of fad funds, with technology and commercial property prominent examples since Isas were introduced in 1999. This year there is, so far, little evidence of a single overarching theme, although some patterns are emerging. The big fund platforms, such as Cofunds and Skandia, have reported high demand for bonds and absolute return funds as investors lean towards the perceived lower risk options.

The paucity of returns from cash has also boosted the popularity of income funds, particularly those sourcing yields from outside the UK.

Elsewhere, the fragile resurgence of commercial property has seen property fund inflows rise sharply, while UK investors are increasingly willing to accept the volatility of emerging markets in exchange for the sector's greater growth prospects.

These are the sectors and funds that the experts believe currently offer the best opportunities for investors.

GLOBAL INCOME

The global equity income sector has attracted growing attention as investors looking for income but affected by dividend cuts in UK Plc are forced to look further afield. The number of funds investing globally for income is growing, with several launches in recent months and existing UK funds expanding their remit to include overseas opportunities.

Last week, Edinburgh-based Baillie Gifford & Co changed the name of its income fund to the global income fund to reflect the newly global reach of the fund.

Juliet Schooling Latter, head of research at Chelsea Financial Services, said: "If you have a big portfolio that leans towards the UK you probably have a high concentration of a few top stocks, and most income is concentrated in a few top shares. So it is not a bad idea to diversify and there are more global, European and Asian equity income funds available now."

She recommended the M&G Global Dividend fund, run by Stuart Rhodes.

He commented: "The most compelling argument behind income investing on a global basis is that it offers the flexibility of choice.

"Compared to the 1,500 companies listed in the UK, the global investor has 15,000 companies to choose from."

CAUTIOUS/FIXED INCOME

With interest rates unlikely to rise for the foreseeable future, many investors are looking for a low-risk alternative to cash. Tom Munro, director of Tom Munro Financial Solutions, singled out the fixed income-based Moderately Cautious fund from Seven Investment Management (7IM) as an option for those seeking steady, reliable returns.

"It is a fund-of-funds type of portfolio consisting of around 36 carefully selected best of breed funds from across the industry to meet the asset allocation set by the panel of analysts at 7IM who realign the portfolio every quarter," Munro explained.

Corporate bond funds are not seeing the inflows of a year ago and do not offer the level of risk insulation that many investors assume, but they do offer security of income at a time when it is in short supply elsewhere.

Malcolm Cuthbert, partner at financial planners and brokers Killik & Co: "Corporate Bonds may be attractive for investors wishing for a higher degree of certainty over the timing and amount of income they will receive from their investments."

ABSOLUTE RETURNS

Investors piled millions into these funds last year in search of investment growth leavened by some protection from market turbulence. Absolute return funds, which target positive returns by using a variety of investment strategies to minimise downside risks, are enjoying a boom period, with three more funds launched into the sector last month.

Cuthbert said: "As all of these funds are close to market neutral in their approach, they have limited exposure to the market and they should deliver high single digit/low double digit returns in most years whilst minimising capital losses."

EMERGING MARKETS/ASIA

Investing in emerging markets is still not for the faint-hearted, with rapid growth inevitably accompanied by a level of volatility that ensures it's far from a one-way bet. Yet as the developed economies have struggled to find a way out of the recession, appetite for investing in Asia and Latin America in particular is growing.

Among unit trusts the popular Aberdeen Emerging Markets is up 100 per cent over the last 12 months and 198 per cent over five, while the best known emerging markets trust is the massive Templeton Emerging Markets, run by emerging markets veteran Mark Mobius, which is up 224 per cent over five years.

For those focusing specifically on Asia Cuthbert recommended the First State Asia Pacific Leaders fund, which has topped its peer group over a five-year period. He explained: "Particularly bearing in mind that the relative strength of the balance sheets among Asian governments compared to the UK should mean that sterling is likely to remain weak against Asian currencies in 2010."

PROPERTY

This has been the best selling unit trusts sector for four consecutive months, with investors regaining confidence in an asset class that bombed spectacularly in July 2007. Investors have been tempted back by solid yields, but the jury is still out on the credibility of the current resurgence and there are fears that the market is attracting too much money too soon.

Munro said the recovering commercial property sector gives investors a good opportunity to add more balance to their portfolios: "Funds to consider are Aberdeen Property Share, along with Threadneedle UK property – two funds investing in property shares and bricks and mortar respectively."