It's not enough to pick good funds for your individual savings account (Isa) - you need to make sure you are not paying over the odds for fund or Isa administration charges.
With the end of the tax year approaching, if you have not already used your individual savings account (Isa) allowance and you are planning to invest, no doubt you are looking to add some good investments to your portfolio by 6 April. To help you do this, we've asked four advisers and brokers what they suggest as cautious and aggressive fund choices.
But taxes are not the only thing that eat into your investments: fund charges and Isa wrapper charges also put a dent in your returns, so, as well as picking a good fund for your Isa, you should also try to minimise your costs. For this reason, we are not just setting out eight fund picks for your Isa, but have also researched where you can buy them most cheaply.
Many brokers and fund platforms offer the option of a stocks-and-shares Isa, with various fund and wrapper charges. There is no one answer to which one is cheapest because this depends on what you hold in the Isa and a number of other factors. The Isa with cheapest charges for one fund, for example, might not be as competitive on the other funds you want to hold.
Isa wrappers purely for investment in open-ended funds such as unit trusts or open-ended investment companies (Oeics) tend to be cheaper than those that also allow listed investments such as investment trusts, shares and exchange-traded funds (ETFs). For example, Hargreaves Lansdown Vantage Isa and Fidelity Isa do not charge for trading or switching funds, but Hargreaves Lansdown does charge for trading listed investments while Fidelity does not offer the option of holding these at all.
If you want to trade and switch funds frequently you need to consider whether it is more cost effective to opt for an Isa wrapper with free or cheap trades, or one that minimises fund charges. The best option for minimising fund charges is probably Alliance Trust Savings' Isa, but this charges £12.50 a trade for all investments after your two first free deals. Also, it doesn't offer as large a selection of funds as you may find elsewhere.
Alliance Trust Savings and some other providers waive the initial fund fee (which is often as much as 5 per cent of your investment) and offers rebates on the annual management charges (AMC), which sometimes run to 1.5 per cent of your investment. The rebate means that you get paid a percentage of the AMC back in cash.
Other things to look for are set-up fees, transfer in/out fees and annual administration charges.
If you have an idea of what you want to invest in, how large your holdings will be and how frequently you are likely to trade them over the year, you could try to build up a rough estimate of how much the different Isas will cost for you.
Also remember that rates and charges continually change, so keep an eye out for any good deals or changes.
Some brokers offer deals on specific funds. For example, for fund purchases via the Share Centre, Isa investors pay the annual management charge and the initial fee unless the fund is on the Share Centre's list of 120 Platinum funds, for which the initial charge is waived.
Cautious: M&G UK Inflation Linked Corporate Bond
The rise in inflation to 4 per cent means you will need to factor some protection into the fixed-income portion of your portfolio. Index-linked bonds are a good option, but UK index-linked gilts are expensive. An alternative is corporate inflation-linked bonds, and one of the few fund options available is M&G UK Inflation Linked Corporate Bond, which Bestinvest has awarded four out of a possible five stars.
M&G UK Inflation Linked Corporate Bond seeks a return consistent with or greater than UK inflation. As the majority of total returns will be in the form of capital returns from indexation; however, income yield is low.
You can buy it via Alliance Trust Savings' Isa for no initial charge and a 0.6 per cent AMC after rebate. However, Alliance Trust Savings charges a £25 plus value-added tax (VAT) annual administration fee. You get two free trades and thereafter pay £12.50 for every trade, although if you hold Alliance Trust shares you can trade from as little as £6.25. If you invest on a monthly basis the cost is reduced to only £1.50 per security traded.
If you buy this fund from broker ClubFinance, which invests through the Skandia Investment Solutions platform, there is no initial charge. Plus, with a ClubFinance rebate, the annual fee falls to 0.8125 per cent. ClubFinance rebates 75 per cent of the commission it receives from Skandia to the investor. There is also no set-up charge and 0 per cent is charged for switches within this Isa. But the annual fee for using the Skandia platform is £52.32 and set to increase to £68.50 a year.
Chelsea Financial Services offers fund supermarket Cofunds' Isa and waives all initial charges on most of the funds available, so you just pay the AMC; in the case of M&G UK Inflation Linked Corporate Bond, 1 per cent. With this Isa there is no set-up fee, although Cofunds charges a 0.25 per cent transfer fee if you switch from another provider. Trades are also free.
Hargreaves Lansdown Vantage Isa, Bestinvest's white-label Isa and the Fidelity Isa remove the initial charge so you just pay the 1 per cent AMC. Neither takes a set-up or transfer in fee. However, Bestinvest charges 0.25 per cent for switching, but fund dealing is free in the Hargreaves Lansdown Isa, and in the Fidelity Isa if you do it online.
Aggressive: First State Asia Pacific Leaders
If you have a longer-term investment horizon you cannot ignore the Asian growth story. First State Asia Pacific Leaders is one of the best-performing Asian funds and is in the top quartile of its sector, Asia Pacific ex-Japan, over one, three and five years. Although the fund invests in a higher-risk region this is somewhat mitigated by its focus on high-quality shareholder-friendly companies.
The fund is also managed by one of the most experienced Asian investment teams headed by Angus Tulloch.
You can buy the fund via Bestinvest minus a 1.5 per cent AMC. You could also purchase it via Clubfinance for an AMC of 1.125 per cent after rebate, or Hargreaves Lansdown for an AMC of 1.35 per cent.
Hargreaves Lansdown recommendations
Cautious: Invesco Perpetual Distribution
This cautious-managed fund currently has around 64 per cent of its assets in bonds, including high yield, helping it offer a generous yield in excess of 6 per cent. It is balanced with a portion of high-yielding equities run by Neil Woodford, considered to be one of the best UK equity income managers, and his holdings include resilient defensive businesses such as pharmaceuticals and utilities. This makes the fund a good yield option in a time of high inflation as it is not just reliant on bonds for its income.
You can buy Invesco Perpetual Distribution via the Alliance Trust Savings' Isa with no initial charge and an AMC of 0.875 per cent after your rebate, or 1.005 per cent via ClubFinance.
With the Hargreaves Lansdown Vantage Isa you pay an AMC of 1.182 per cent after rebate.
Aggressive: Neptune Russia and Greater Russia
This fund could be a good option for investors prepared to take on emerging markets risk with, at times, considerable volatility. Around half the Russian stock market is accounted for by oil, gas and mining companies, and should continue to do well if prices of these continue to streak ahead. As UK inflation is largely fuelled by the rises of prices in these commodities, Russian stocks should also act as a good diversifier. Neptune Russia and Greater Russia is also more diversified than a commodities fund with around 26 per cent of its assets exposed to consumer-facing stocks, which are fuelled by this fast-growing part of the Russian economy. The fund also invests outside Russia in some of the surrounding economies.
You can buy this fund via Alliance Trust for a 0.875 per cent AMC, or a 1.375 per cent AMC from ClubFinance
Hargreaves Lansdown Vantage Isa charges a 1.6 per cent AMC.
Chelsea Financial Services recommendations
Cautious: CF Miton Special Situations
This multi-asset fund gives exposure to global equities, bonds, cash and collective investment schemes and proved its worth delivering positive returns as the average fund in its sector lost money during 2007 and 2008. Although CF Miton Special Situations sometimes lags the average fund in better years it has always delivered positive returns, as the fund's managers seek to stabilise it by investing around 30 per cent of its assets in more defensive areas.
You can buy this fund via ClubFinance after rebate with a 1.125 per cent AMC. You can also buy it in the Hargreaves Lansdown Vantage Isa with an AMC of 1.35 per cent after rebate.
If you buy it via the Chelsea Financial Services Isa, you just pay the 1.5 per cent AMC.
Aggressive: M&G Global Basics
M&G Global Basics is a global equity fund that invests in companies considered to be the building blocks of the world's economy, and as a global fund it could help to iron out currency movements as it has diverse exposure. While the fund seeks to take advantage of global structural themes such as rising incomes in developing economies, its manager also has an eye on asset-rich companies and those that can grow independently of the economic environment.
M&G Global Basics has delivered strong total returns for its investors over one and five years.
After rebate, with the Alliance Trust Isa you pay a 0.9 per cent AMC, while ClubFinance offers it for a 1.125 per cent.
Hargreaves Lansdown Isa offers it for a 1.25 per cent AMC, and Chelsea offers it for a 1.5 per cent AMC.
Killik & Co recommendations
Cautious: RIT Capital Partners investment trust
RIT Capital Partners investment trust is a multi-asset fund that diversifies its portfolio across private equity, hedge funds, fixed income and listed equity. It has a consistent track record and maintains good discount control, though currently trades at a premium to its NAV of around 2 per cent, making it a more expensive option.
This investment trust has delivered positive returns in most years and even during 2008 its net asset value fell just over 11 per cent in contrast to 30 per cent-plus for some equity markets.
Aggressive: Impax Environmental Markets investment trust
In the current high inflationary environment, investing in a wide variety of asset classes such as equities, funds and commodities is a good way to try to beat inflation. Killik & Co says areas such as alternative energy could provide attractive returns and yields for Isa investors over the coming years. Concerns over oil prices and oil security are likely to involve a greater focus on alternative energy via green technology, and you can get exposure to this via Impax Environmental Markets investment trust.
The trust is a good portfolio diversifier relative to mainstream holdings and an obvious choice if you are interested in green investments.
Impax Environmental Markets has delivered good net asset value (NAV) returns over one, three and five years relative to other green-focused investment trusts, but investors should bear in mind that on a yearly basis both its NAV and share price are very volatile.
At the time of writing the trust was trading at a discount to NAV of more than 12 per cent.
Tel: 020 7189 9999
Tel: 0117 900 9000
Chelsea Financial Services
Tel: 020 7384 7300
Killik & Co
020 7337 0777
Tel: 0800 41 41 61
Alliance Trust Savings
Tel: 01382 573 737
Tel: 01442 217 287
Tel: 01296 41 41 41
Tel: 0845 0700 720
The value of rebates
|Fund value - £20,400||5 years||10 years||15 years||20 years||25 years|
|Alliance Trust Savings rebate||£27,400||£36,900||£49,800||£67,300||£91,000|
Source: Alliance Trust Savings
Notes: Figures are based on Isa annual charge of £25+VAT (20 per cent) plus a £5 charge for reinvesting the rebate. A couple each investing £10,200, invested one fund with an annual management charge of 1.5 per cent and a rebate of 0.75 per cent paid annually. Projections assume an annual growth rate of 7 per cent, which is the FSA’s mid-projection rate. Competitor figures are based on an initial charge of 5.5 per cent, an annual management charge of 1.5 per cent, no dealing charge and that no rebate is paid. All figures are rounded to the nearest £100.