Comment: Stay calm on Isa investment

Bill Jamieson. Picture: Jane Barlow
Bill Jamieson. Picture: Jane Barlow
Have your say

It NEVER fails to trouble me how much space is devoted at this time of year to “last minute”, panic-driven Isa investing. “Don’t miss out! Hurry to get your application in now!”

All this, of course, is for Isa applications for the financial year just about to end. And I cannot think of a worse approach to investment than a deadline pressed to the head like a loaded gun. It’s the Bruce Willis approach to investment: “Fill the form in now or die hard.”

This approach is even more alarming today given that the FTSE 100 has recently broken through to an all-time high (and retreated smartly from that last week), begging questions on the wisdom of private investors plunging up to £15,000 in a lump sum into a toppy-looking stock market and just weeks ahead of a highly uncertain UK general election. You would be taking a sanguine view of the world to commit £15,000 of your savings to the equity market at this time.

The way round this is to get “ahead of the curve” on your Isa and commit for the 2015-16 financial year just about to start. And it doesn’t mean having to find a large lump sum to invest up front.

By getting in at the start of the financial year, you can spread your Isa commitment over 12 monthly instalments. For example, the maximum Isa allowance for the new financial year is £15,240. This can be broken down into monthly commitments of £1,270.

Investors thus avoid the risk of committing when the stock market is at or near a peak, while reaping the benefit of pound cost averaging – the average cost of your investment over the year is lower than the average price of the shares or units acquired.

Stock market risk can be further diluted by investing across a range of trusts and funds. For example, an investor opting to commit to the maximum £15,240 by way of 12 instalments can earmark the £1,270 monthly contribution to be invested across a basket of five or six different holdings.

Exactly which trusts, funds or shares investors should consider depends on individual circumstances and preferences. Younger investors may be willing to take on more risk and opt for adventurous investments, even forgoing income to maximise opportunities for capital growth.

For mainstream investors, looking for a balance between dividend income and capital growth, there are literally hundreds of investment trusts and open-ended investment funds from which to choose.

My own personal preference is for investment trusts and in particular those at the defensive end of the spectrum, this based on a conviction that re-invested dividend income is a major driver of total return over time.

So the trusts I am earmarking for the 2015-16 financial year are well-known, well-diversified trusts that will be familiar to many readers. The list includes Scottish American Investment Trust (Saints) at 243.5p, standing at a discount of 5.9 per cent to net assets and yielding 4.31 per cent, significantly above the FTSE All Share average. The trust, managed by Dominic Neary and James Dow, has successfully grown its dividend every year for more than 30 years and pays out a regular dividend every quarter.

I am biased towards income, so I am adding Aberdeen Smaller Companies High Income (18.9 per cent discount, yield 3.2 per cent) and Shires Income (6.6 per cent discount, 4.8 per cent yield).

The fall in the euro should continue to help continental companies, so I am leaning towards F&C European Assets Trust, yielding 5.35 per cent and still standing at a discount to net assets – albeit fractional at 1.1 per cent.

Another on my shortlist would be Ecofin Water & Power Opportunities, a £475 million trust that aims to achieve a high, secure dividend yield and “to realise long‐term growth while taking care to preserve shareholders’ capital.” It has not been a great capital growth performer, but the shares at 146.25p stand at a discount of 22 per cent to net assets and yield 4.79 per cent.

Finally, as an outlier, I might opt for the Baillie Gifford managed Monks Investment Trust, sister to the widely acclaimed Scottish Mortgage. This £915m trust has not been a good performer and the discount to net assets is worryingly akin to that at Alliance Trust – 14.7 per cent. The dividend yield is just 0.92 per cent. But the management has just been changed, with Charles Plowden of the successful Baillie Gifford Global Alpha Growth trust taking over, and I am persuaded by an informed investment note from Alan Brierley of Canaccord Genuity to put Monks onto my Isa shortlist.

So, with six investment trusts on the shortlist, the maximum exposure to each over 12 months would be £2,540. I have used the cost-competitive Alliance Trust Savings platform for such “spread investing” in the past and can recommend it with confidence.


Get the latest business headlines from a variety of news sources emailed to your inbox each morning