Biotech, smaller companies and Japan funds are among some of the investment vehicles that The Share Centre’s Andy Parsons (pictured) thinks investors should consider when building their 2016 ISA. 
With less than two months left to take advantage of this years’ tax-free ISA allowance, it could be prudent to scope out which investment vehicles to buy into before the frenzy starts and panic-buying occurs.
As such, Parsons gives the name of six funds that he thinks investors should consider buying for their ISA this year.
AXA Framlington Biotech
Managed by Linden Thomson since 2012, this £736m fund invests in biotech, genomics and medical research stocks from around the globe. The fund has a concentrated portfolio of 57 stocks and its top 10 holdings, which include the likes of Biogen, Vertex Pharmaceuticals and Illumina, account for approximately 60 per cent of the portfolio.
As such it may not be suitable for the more cautious investor, as it has a higher annualised volatility and maximum drawdown than its Nasdaq OMX Biotechnology benchmark, which is already high compared to many other indices.
“For those investors seeking a very specific sectorial investment, the AXA Framlington Biotech fund may be worth consideration,” Parsons said.
“Demographically, the world is continually changing and emerging economies now need to tackle many of the diseases and illnesses that the Western world has faced for a number of years.”
“Meanwhile, medical advancements, technology, understanding and analysis are developing at a greater pace than ever, as treatments become more specific and highly targeted.”
Over Thomson’s tenure, the three crown-rated fund has provided a total return of 55.83 per cent, underperforming its benchmark by 7.53 percentage points.
Performance of fund vs sector under Thomson
Source: FE Analytics
Parson says that the fund will experience bouts of high volatility because it is a sector-specific investment, and points out that biotech and healthcare sectors have seen a significant sell-off recently.
“We are still of the opinion that the overall investment theme has strength and longevity despite the recent underperformance,” he said.
AXA Framlington Biotech has a clean ongoing charges figure (OCF) of 0.83 per cent.
CF Miton UK Value Opportunities
FE Alpha Manager George Godber and Georgina Hamilton’s CF Miton UK Value Opps fund was launched less than three years ago and has already beaten its peer average in the IA UK All Companies sector by 41.41 percentage points with its total return of 50.73 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
The managers adopt a bottom-up stock-picking process and look for companies that they think are undervalued but also have strong balance sheets and a good cash flow.
While they can invest across the entire market cap spectrum, most of their stocks are from either the small or mid-cap space.
“For investors seeking a fund with the potential to offer rewarding growth opportunities predominantly through UK exposure, then the CF Miton UK Value Opportunities fund’s management team have certainly forged a strong reputation,” Parsons said.
“Despite a relatively short investment history, this team has already proven their stock- picking ability and we believe they have the attributes and approach to continue doing so going forward. There are a number of funds that strive to adopt a deep-value investment strategy, and this fund is one that we feel truly delivers.”
The £725m fund, which consists of 63 holdings, has a clean OCF of 0.89 per cent.
Fundsmith Equity was launched by FE Alpha Manager Terry Smith in 2010, and aims to generate growth through long-term investments in equities from around the world.
“The Fundsmith Equity fund is a true global offering, managed by one of the industry’s most respected leading managers and founder of the business, Terry Smith,” Parsons continued.
“With a long-term ‘buy and hold’ strategy, this highly concentrated fund is a shining example of high-conviction investing, unlike many others which aspire to this investment philosophy.”
The £4.7bn fund consists of just 27 holdings, 56.2 per cent of which are in US stocks. It also holds a 25.8 per cent weighting in UK companies, 12.4 per cent in Europe and has 5.6 per cent in cash.
Despite being so high-conviction, the five crown-rated fund has achieved a below-average annualised volatility over one, three and five years as well as a top-decile return over the same time frames.
“The fund has a preference for defensive companies that are resilient to change, technological innovation and who have existing advantages that are difficult to replicate,” Parsons explained.
“Due to the fund’s global nature and its focus on defensive companies, investors should not be surprised to find it contains a strong US presence and a raft of household company names.”
Fundsmith Equity has a clean OCF of 0.99 per cent.
Legg Mason Japan Equity has been headed up by Hideo Shiozumi for almost 20 years and over this time frame it has outperformed its average peer in the IA Japan sector more than 11 times over.
Performance of fund vs sector under Shiozumi
Source: FE Analytics
As shown on the above graph, it is highly volatile though and has delivered a bottom-decile return in three out of the last 10 years on an annualised basis.
“The Legg Mason Japan Equity fund has the accolade of being the top performing fund in 2015,” Parson said.
“The fund seeks to benefit from the economic and structural changes that Japan faces, as the promises and directives of Prime Minister Shinzo Abe’s ‘Abenomics’ policies continue to take hold.”
“The portfolio will comprise between 25 and 60 stocks, with the lower number clearly indicating the strength and conviction the manager has in those companies.”
Shiozumi is able to invest across the cap spectrum, although generally he buys into companies that are between £330m and £1bn in size.
“Investors should be prepared to accept a higher degree of volatility with this fund, but for those seeking the potential for strong growth, this fund may well be suitable for 2016,” Parsons added.
Legg Mason Japan Equity has a clean OCF of 1.11 per cent.
Liontrust UK Smaller Companies
FE Alpha Manager duo Anthony Cross and Julian Fosh have managed this £433m fund for 18 and eight years respectively, and its process is driven by what the managers call the ‘Economic Advantage’.
“This involves a rigorous appraisal of prospective investments against a number of intangible criteria, which include ‘intellectual property’, ’distribution channels’ and ’repeat business’,” Parsons explained.
“The fund managers believe these measures form the bedrock of a company’s strength and competitors will struggle to replicate this, creating high barriers to entry.”
As such, the four crown-rated fund has provided a top-decile annualised volatility, Sharpe ratio, which measures risk-adjusted performance, and maximum drawdown, which measures the most money an investor would have lost if they had bought and sold at the worst times, over both managers’ tenure.
Not only does the fund score well on risk metrics, it has achieved a top-decile return over one and five years as well as a top-quartile return over three and 10 years.
“They also seek to identify and evaluate other key intangible strengths such as ‘franchises and licences’, ‘customer databases and relationships’, ‘procedures and formats’, ‘culture’ and ‘brand’,” Parsons said.
Liontrust UK Smaller Companies has a clean OCF of 1.38 per cent.
Schroder European Alpha Income
Europe is a region that is popular among investors due to supportive monetary policy and cheaper valuations compared to other developed markets such as the US.
Parsons is also keen on this region, and is playing this through James Sym’s Schroder European Alpha Income fund.
“[Sym] adopts a cyclical approach to investing. As the economy progresses through the phases of recovery, expansion, slowdown and recession, the fund’s holdings will subsequently be aligned with those that perform best within these areas,” he said.
“The portfolio will generally hold between 30 and 50 stocks, demonstrating the conviction the manager has in his stock selection. With the benefit of quarterly income distributions, this may well appeal to investors seeking to diversify their income streams.”
The four crown-rated fund currently yields 3.64 per cent, and has almost doubled the total return of its average peer in the IA Europe ex UK sector over Sym’s tenure.
Performance of fund vs sector and benchmark under Sym
Source: FE Analytics
Schroder European Alpha Income has a clean OCF of 0.94 per cent.
