Bonds, US stocks and commodities are among the areas of the market to avoid this ISA season, according to expert fund pickers and investment professionals.
ISA season is in full swing but markets are subdued compared to the same periods in the past six or seven years, following the widespread sell-off in risk assets has been the over-arching theme of 2016 so far.
In fact, as it has been the worst start to the year for financial markets ever recorded, investors are split between a mentality of bargain hunting and a want to protect against further downside in more defensive ways.
While most investors use their ISAs to buy and hold so as to grow capital, the benefit of the tax wrapper could be reduced by investing in a hurry into something that then plummets for several years afterwards.
With this in mind, FE Trustnet has asked a panel of financial experts which assets, sectors or regions investors should avoid at all costs this ISA season.
Fixed income
Bond markets have been one of the best areas of the investment market in 2016, surprising many investors expecting a sell-off in the near term. However, several of the professional investors we talked to warn it is a bad time to hold exposure to fixed income in an ISA, despite this strength in the first quarter of the year.
Performance of indices in 2016
Source: FE Analytics
John Husselbee (pictured), head of multi-asset at Liontrust, said: “Whether you are looking at gilts or treasuries or anything in the developed market then you are looking at yields that are closer to their historic lows and you are looking at inflation that – while benign today – will clearly start to rise soon.” 
“As a long-term investor, your starting yield on a bond dictates your long-term return. Today if you're buying government bonds, you're locking in to negative real returns going forward. To me at these levels, bonds look dangerous to enter into.”
Adrian Lowcock , head of investing at AXA Wealth, also says sovereign debt, particularly from the UK government, is best avoided.
“I would probably avoid gilts. Although they have repeatedly surprised investors with how low their yields can fall. But as they do the risk continues to rise,” Lowcock said.
“My concern is they [gilts] are still often perceived as a low risk but investors could lose a lot of money if interest rate expectations change. There are other ways to get protection in a portfolio and keep risk down.”
Ben Willis (pictured below), head of research at Whitechurch Securities, also thinks gilts present an unattractive prospect due to their tiny yields following their long-term rally, shown below.
Performance of gilts since 1998
Source: FE Analytics
“We would avoid investing directly into UK gilts. With yields on 10-year gilts circa 1.5 per cent we just see better opportunities elsewhere,” he said.
“We believe that the interest rate environment is going to remain lower for longer and so do not see gilts coming under pressure in the short term but we believe they offer ‘return free risk’ over the longer term.”
Commodities
Charles Stanley Direct’s Rob Morgan thinks another strongly performing part of the market this year – commodities and natural resources funds, which bounced back after hefty falls – are now precariously placed despite their longer term battered status.
The likes of BlackRock Natural Resources Growth & Income, Investec Natural Resources and JPM Natural Resources are all up near 15 per cent in 2016 but are still far down from their longer term highs.
Performance of funds and index over 3yrs
Source: FE Analytics
Morgan said: “In the short term I am still cautious on commodities – there will come a time to get involved and focus on survivors in the sector that can go on to be stronger. However, there could be more pain to come and I would expect the sale of more high profile, prized assets to mark the bottom. So far we haven't really had this rout."
Charles Hepworth (pictured), investment director at GAM, is also reluctant for the short term on UK miners as well as oil & gas. 
“If it’s for the short to medium term then you would have to point to those income funds in the UK that have high allocations to oil and mining stocks. Dividend cuts from the mining giants since last year will inevitably morph to the oil sector if we continue to see oil at multi-year lows. Under that scenario, quite severe pressure will remain on oil companies’ share price performance,” he said.
However he adds that, broadly, UK equities are also set to suffer due to concern around the EU referendum until the 23 June 2016 vote.
“Arguably UK assets for the next 100 days will struggle to gain much momentum as we get nearer to the Brexit referendum – despite the bookies showing a ‘remain’ win, the closeness of the result and indeed current polls – will lead to heightened volatility, as we saw with the Scottish referendum. There may be better entry points later down the line.”
US equities
Husselbee is also staying away from US stocks (as well as gilts) mainly due to US dollar strength ahead of the Brexit vote.
“You can argue they are at fair value against their own history but relative to other countries and regions, there is better value elsewhere,” he said.
“The strength of the dollar is also worth bearing in mind. You have had a strong dollar over the last 12-18 months and so not only have you had the gain in terms of the equity market but most of the overall gain has come from currency moves.”
Performance of sterling versus dollar over 1yr
Source: FE Analytics
“Once again the dollar is at a point where it has strengthened quite significantly and that is not to say it can’t continue to do so and perhaps we are in a period where you are taking on extra currency risk as well.”
For Simon Evan-Cook, investment manager at Premier, US equites are also hazardous but he thinks four of the super tech companies – Facebook, Amazon, Netflix and Google – who make up the ominous FANG acronym are particularly toppy.
“One area that is conspicuous by its absence in our funds currently is US growth, and in particular the FANGs, which drove the US market higher last year while almost everything else struggled. Valuations" look unappealing, and in many aspects they remind us of the narrow market that dominated the late 90s.”
