He believes that leaving major decisions to the last minute leads investors to make hasty decisions, exposing their lump sum to short-term movements in the market.
Hollands says setting up a savings plan now eliminates the risk of market timing, ensuring that investors do not invest their full ISA allowance at the very top of the market.
"Investing regularly either through a monthly savings scheme or via a series of lump sums has a number of potential benefits," said Hollands (pictured).
"Primarily, it should help reduce market-timing risk as you’ll end up with an average entry price that reflects some days when the market is up and others when it is down. This is called pound/cost averaging."
"Investing regularly also takes the emotion out of investing: no-one wants to invest when markets are down and the news is unremittingly bad, yet actually those are often the best times to put cash into the market, providing you have a long-term horizon."
"By subscribing to a monthly savings scheme you will automatically keep on going through the ups and downs," he added.
FE’s Rob Gleeson says all funds suit monthly savings plans, because it is impossible to predict what way the market will turn in any asset class.
"Monthly saving plans always make sense," he said. "If it so happens that you get a yearly bonus close to the ISA deadline, perhaps it does make sense to leave it to the last minute, but in general a monthly savings plan makes sense because it smooths out the volatility."
He points out that many fund managers anticipate a short-term pull-back in markets following a strong rally for risk assets, which illustrates the risk of leaving ISA dealings to the last minute.
Aside from the fact that investors cannot always afford to use up their ISA allowance in one lump sum, sometimes investors are actually better off drip-feeding.
If markets go up, it is almost always better off investing a lump sum at the beginning of the year than investing it gradually.
However, if the markets fall, it is often a different story – particularly for anyone investing in a high-risk fund.
A lump sum of £1,300 invested in BlackRock Gold & General at the end of the tax year in 2008 would have been worth £1,145 a year later.
If the same £1,300 was drip-fed in over over the year, it would have been worth £1,357.08, representing a slight profit.
With this in mind, FE Trustnet highlights five higher-risk funds that are well-suited for a monthly savings plan this year.
Templeton Frontier Markets
Hollands points to emerging and frontier markets funds as the obvious choice for investors looking to build a monthly savings plan.
"Templeton is the only frontier fund on our buy-list," he said. "We like the process, but it’s very, very volatile, and so lends itself to a regular savings plan."
Performance of fund vs sector and index since launch
Source: FE Analytics
Templeton Frontier Markets has significantly outperformed its MSCI Frontier Markets benchmark since launch, with returns of 101.16 per cent.
It has been slightly more volatile than the index however, and is susceptible to big losses. In 2012, it fell 23.52 per cent.
The $1.6bn fund is headed up by industry legend Mark Mobius, who is currently backing Nigeria, Saudi Arabia and Kazakhstan as his biggest regional bets.
Templeton Frontier Markets has four FE Crowns and is available for a minimum investment of £5,000.
For anyone investing directly, the minimum top-up is £1,000, which comes down significantly if bought through a platform.
It has an ongoing charges fee (OCF) of 2.57 per cent.
Hollands told FE Trustnet earlier this year that he was considering adding the fund to his ISA.
First State Global Emerging Markets Leaders
While First State Global Emerging Markets Leaders is less volatile than its peer group, Hollands says investors should still be prepared for a bumpy ride in a fund such as this.
Gleeson agrees, insisting that anyone investing in the fund should have at least a 10-year horizon, even if they are using a monthly savings plan.
First State Global Emerging Markets Leaders is consistently one of the best-performing funds in the IMA Global Emerging Markets sector, boasting top-quartile returns over one, three and five years and since its launch in December 2003.
The five crown-rated fund is headed up by Jonathan Asante and FE Alpha Manager Glen Finegan, who count South Africa as their biggest country overweight, and China as their biggest country underweight.
It is available for a minimum investment of £1,000 and has an OCF of 1.58 per cent.
BlackRock Gold & General
Hollands says he is currently adding BlackRock Gold & General to his own portfolio, but only very gradually.
"I’ve been putting more and more into it, for the simple reason that gold shares have bombed out so much in recent months," he said.
"It’s more a personal punt than anything else. If it works then the rewards could be huge, but it’s a risky one."
BlackRock Gold & General has an annualised volatility of 29.98 per cent over the last decade, which puts it in the very top decile of the IMA universe. By point of reference, the FTSE 100 has a score of 13.58 per cent over the period.
The BlackRock fund is less volatile than the average gold fund in the IMA universe, however.
As Hollands points out, gold shares have had a tough time of late. BlackRock Gold & General has lost money over one, three and five years, but its long-term record is still very strong.
Performance of fund over 10yrs
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| BlackRock - Gold & General | -18.17 | -21.29 | -6.94 | 239.67 |
Source: FE Analytics
The fund is headed up by FE Alpha Manager Evy Hambro. It requires a minimum investment of £500 and has an OCF of 1.93 per cent.
Investec Enhanced Natural Resources
Hollands points out this fund is particularly well suited to a monthly savings plan because it uses short positions, thus increasing the risk profile.
The fund, which is headed up by FE Alpha Manager Bradley George and George Cheveley, has also suffered recently as a result of the poor performance of commodities.
It is still up 12.22 per cent since its launch in May 2008, putting it slightly ahead of its composite benchmark, split 50/50 between the MSCI ACWI Energy and MSCI ACWI Materials indicies.
Around 25 per cent of the fund’s assets are in short positions, with the remaining 75 per cent in long positions. Iron ore and steel are among the positions in his shorting portfolio.
The four crown-rated fund requires a minimum investment of £1,000 and has an OCF of 1.68 per cent.
However, it does charge a performance fee, which has caused controversy among some industry experts.
Standard Life UK Equity Unconstrained
Ed Legget’s £577m portfolio is one of the most volatile in the entire IMA UK All Companies sector, and tends to fall very hard in down markets.
It lost 41.05 per cent in 2008 – around 10 percentage points more than its sector and benchmark.
The manager focuses on cyclical stocks, which tend to fall harder and faster during market sell-offs because they are very economically sensitive.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, good stockpicking at crucial times has seen Legget significantly outperform his rivals during rallies, which translates in to very strong numbers over the long-term.
The fund is up 112.06 per cent over five years, putting it in the top decile of its sector.
Among Legget’s biggest sector bets at the moment are banks and industrials. Lloyds and GKN are both top-10 holdings.
Standard Life UK Equity Unconstrained requires a minimum investment of £1,000 and has an OCF of 1.9 per cent.