Investment Opportunities for Your Isa: The INVESTMENT EXPERT's Tips on Current Profitable Spots
Considering the flexibility and tax advantages of an Investment Isa, it's essential to plan wisely for the long term, especially as we approach retirement. The fiscal drag resulting from past chancellors refusing to raise the higher rate tax threshold might mean even minimum wage earners paying the higher rate by retirement.
With this in mind, it makes sense to have savings in a relatively accessible form. When thinking about the type of investments to pursue, we might prefer those with a strong outlook over five to ten years and less likelihood of significant drawdowns or prolonged slumps, just in case we need funds sooner than anticipated.
This could lead us towards more generalist funds rather than specialist, punchier ones. Alternatively, the desire for ready access to our savings might make the case for investments with a margin of safety in valuations.
Long-term growth assets, currently less favored, could serve as a potentially fruitful pool to fish in. But is investing in technology – with its outstanding returns over the past five years – the best approach for doing so?
Technology may continue to be an excellent investment. However, recent short-term sell-offs and high valuations in mega-cap tech stocks might discourage investing a lump sum in tech right now for an Isa.
One area that could fit the bill instead is investing in smaller companies. Historically, these have delivered higher returns than large caps, though they have underperformed in recent years. Interestingly, there have been cycles of outperformance and underperformance in the past, over 10-year or longer periods, with small caps doing better than large and vice-versa.
The last period of small cap outperformance began around 2001 and lasted until approximately 2013. Since then, large caps have been in the ascendant, again led by technology-related companies. As such, small caps have shown their potential to deliver market-beating returns over the long run.
In addition, small caps are relatively cheap after this period of underperformance, while large caps are relatively expensive. This might provide the desired margin of safety.
For those interested in investing in UK small caps, a good generalist investment could be Global Smaller Companies Trust (GSCT). Managed by Nish Kumar of Columbia Threadneedle, it invests in small caps listed around the globe, including the UK and other developed and emerging markets.
Another interesting option could be Aberforth Smaller Companies (ASL). This fund is run by a team of dedicated managers who invest only in UK smaller companies, with a value-focused style, seeking out cheap, unloved companies.
Investing in large FTSE 100 stocks can also be another attractive option, as some of these stocks are considerably undervalued compared to their US peers, particularly in light of the negativity surrounding the UK economy and stock market.
One such investment trust that could help take advantage of opportunities in cheap UK large caps is City of London Investment Trust (CTY). It has a reputation for providing a bulletproof income record and has outperformed the UK market over different periods, using a diversified, risk-averse approach to stock picking.
In conclusion, considering the state of the economy and the stock market, small caps in the UK could potentially offer intriguing opportunities. By understanding the risks and appropriate strategies, investors may find that small caps can provide market-beating returns over the long run.
- In the context of planning for retirement, it's crucial to have savings that are relatively accessible.
- Investments with a strong outlook over a period of five to ten years, less likely to experience significant drawdowns, might be preferable.
- Generalist funds could be a more suitable choice for those seeking a margin of safety in their savings.
- Alternatively, investments offering ready access to savings might be prioritized, with a focus on valuations.
- Long-term growth assets, currently less favored, can potentially offer substantial returns over time.
- Investing in technology, with its impressive returns in the past five years, could be an option, but high valuations might discourage lump sum investments.
- Historically, small companies have delivered higher returns than large ones, but they have underperformed recently.
- Interestingly, cycles of outperformance and underperformance in small caps and large caps have occurred over 10-year or longer periods.
- The last period of small cap outperformance was from around 2001 to approximately 2013, followed by underperformance of large caps.
- Small caps, having underperformed in recent years, are now relatively cheap, offering a desired margin of safety.
- The Global Smaller Companies Trust (GSCT) is a potential investment option for those interested in UK small caps, as it invests in small caps globally.
- Aberforth Smaller Companies (ASL) is another fund worth considering, focusing on UK smaller companies with a value-focused style.
- Investing in large FTSE 100 stocks can be attractive, as some of these stocks are undervalued compared to their US peers, given the negativity towards the UK economy and stock market.
- The City of London Investment Trust (CTY) could help capitalize on opportunities in cheap UK large caps, with a diversified, risk-averse approach to stock picking.
