Shortly before this financial year began, FE Research head Rob Gleeson explained why ISA season simply whips up a marketing hype and causes people to panic buy. 
Rather than rushing to utilise the £15,000 tax-free ISA limit at the last minute, Gleeson believes investors should choose their funds carefully and drip-feed into them year-round, only re-balancing their portfolio if necessary.
In light of this and following Daniel Boardman-Weston’s fund picks last month, AXA Wealth’s Adrian Lowcock (pictured) gives FE Trustnet his top five ISA picks to invest in on a monthly basis and not just weeks before the deadline.
Threadneedle UK Equity Income
Lowcock said: “Equity income funds are a popular place to put money during ISA season but are also excellent long-term investments. While the sector is no longer cheap, the attraction of a good income and the potential for long-term growth remains strong in a low-interest rate environment.”
This five FE Crown-rated Threadneedle UK Equity Income’s yield is attractive at 4 per cent. What’s more, the fund’s performance is strong, achieving total returns of 90.4 per cent over five years which is almost a third more than its benchmark and 16.23 percentage points more than its peer average.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“Managers Leigh Harrison and Richard Colwell use a combination of fundamental company analysis with their understanding of the wider economic picture to build a portfolio of high-quality stocks,” Lowcock explained.
“Their disciplined approach to building a high-conviction portfolio with strong sector bets has resulted in consistent outperformance.”
Over five years, the fund has achieved a top-quartile alpha score, which indicates returns over the benchmark’s, of 1.57 and a top-quartile Sharpe ratio, which measures risk-adjusted returns, of 0.84.
The fund’s top performance, in addition to Harrison’s FE Alpha Manager status and the fact that it’s recommended by the AFI panel of leading financial advisers, has won it a place on the FE Research Select 100 list.
The fund also received “Highly Commended” status in the FE Group Awards.
Threadneedle UK Equity Income has a clean ongoing charges figure (OCF) of 0.86 per cent.
Bonds have been far from popular of late as yields remained at very low levels and some called the end of the three-decade fixed-income bull run. However, Lowcock argues that bonds provide diversification from equities and a more stable yield for income seekers.
“Following a bond bull market that has lasted over 30 years they are looking expensive and prices would fall when interest rates start to rise,” he admitted.
“A strategic bond fund allows manager James Foster to identify anomalies and opportunities in the bond market in which to invest. He uses his outlook on interest rates, inflation and knowledge of the individual bonds to determine where he will invest.”
Foster and co-manager Alex Ralph have allocated the fund’s largest weighting to the financial sector at 37.6 per cent. The fund also holds its larger weightings in consumer products at 16.8 per cent, utilities at 11.9 per cent and telecom, media & technology at 11.3 per cent.
“Their focus is very much on good quality businesses,” Lowcock continued. “[The managers] also use the research from equity managers to get a different angle on a business.”
“This fund is a high-conviction fund which means the managers do not closely follow a benchmark.”
Artemis Strategic Bond has just managed to outperform its benchmark by 0.19 percentage points over three years with a total return of 24.38 and has outperformed its average peer by 4.03 percentage points.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Not only has it performed well, it currently yields a healthy 4.6 per cent. The £835m fund has a clean OCF of 0.59 per cent.
Lowcock says that while it is essential for a portfolio to be well-diversified, it can be difficult for many investors to manage that diversification on an ongoing basis.
As such, he recommends adding a global equity fund to an ISA, such as M&G Global Dividend headed by FE Alpha Manager Stuart Rhodes.
“Global managers can adjust their allocation to different countries and sectors as valuations change and opportunities arise,” he said.
“This fund combines investment in higher-yielding companies at attractive valuations with businesses which pay a lower dividend but have greater growth potential.”
“The result is a fund which pays an attractive and growing dividend and long-term capital growth. Rhodes is a patient manager so it is suitable for long-term investors.”
While the fund has underperformed its benchmark and sector over shorter time periods, M&G Global Dividend has achieved total returns of 105.55 per cent since its launch in 2008 compared to its benchmark’s returns of 87.65 per cent and its sector’s returns of 70.74 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The £8.6bn fund has also made its way onto the FE Research Select 100 List as analysts rate M&G very highly for international equities. The AFI panel is also very supportive of the fund.
In regard to its underperformance over shorter time periods, the FE Research team said: “The portfolio will not outperform its benchmark to the same extent in both rising and falling markets. It has a bias towards large companies which are more resilient during crashes, while its regular income stream will mean it beats other global funds that target capital growth alone.”
Its resilience was proven by the fund’s performance during the financial crash in 2008, making far smaller losses than its sector average at 4.47 per cent over the course of the year.
M&G Global Dividend has a clean OCF of 0.91 per cent and yields 3.15 per cent.
Standard Life Global Absolute Return Strategies
“Equity markets generally look fully-valued and in some places on the expensive side, so it is important investors are well-diversified and look to have some protection or hedge in their portfolio,” Lowcock advised.
“Guy Stern leads the team of analysts who manage [Standard Life Global Absolute Return Strategies]. The fund’s strategy is to run a highly-diversified portfolio investing in bonds, equities, currencies and derivatives.”
Lowcock adds that this diversification means the fund can make money in almost any market, whether it’s rising or falling. The fund’s low-risk formula is demonstrated through its steady performance, as shown in the graph below.
Since its launch, Standard Life Global Absolute Return Strategies’ returns have rocketed above its sector average by more than double and its benchmark by more than five times.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“Its aim is to provide a positive return in all market conditions and is a suitable hedge for investors. It is likely to underperform a strong equity bull market but has proven to protect investors from volatility seen in equities and protect against overvalued markets,” Lowcock said.
The huge £25.2bn fund, which is also on the FE Research Select 100 list, is managed by a large team which is split into three divisions. The first team judges the state of the global economy through seeking out market inefficiencies, then creates investment strategies to produce returns in a number of tricky scenarios.
A multi-asset management team then implements these ideas on the markets and a risk team ensures this is done securely and that the fund has a variety of sources of returns.
Standard Life Global Absolute Return Strategies has a clean OCF of 0.9 per cent.
Smaller companies are often an acquired taste among investors due to their higher levels of volatility and their potential for lower liquidity.
However, according to Lowcock, smaller companies have been an exceptional place to make money for investors over the longer term.
“At present the sector once again looks cheap relative to its large-cap peers,” he said.
As such, Lowcock says that Franklin UK Smaller Companies would be a good year-round ISA pick for investors to drip-feed into.
“Managers Richard Bullas and [FE Alpha Manager] Paul Spencer are two experienced and pragmatic investors,” he explained.
“They take a three-pronged approach to investing in smaller companies, looking for a backbone of high-quality steady growth companies. This is complemented by investments in recovery companies which are more cyclical in nature and the final prong is those companies which the market has got wrong and undervalued.”
The fund is bottom quartile for annualised volatility ratio over one, three and five-year periods.
Since Spencer and Bullas took over the fund in June 2012, it has made a first-quintile 84.42 per cent and outpaced the 75.80 per cent rise in the Numis Smaller Companies ex Investment Companies benchmark and the 65.44 per cent return from its average peer.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
The £145.8m fund has a high conviction portfolio of just 42 stocks, almost half of which are in the industrials sector. It also holds some of its bigger weightings in real estate at 10.97 per cent, distributors at 8.54 per cent and telecom, media & technology at 7.53 per cent.
Franklin UK Smaller Companies has a clean OCF of 0.84 per cent.