As the end of the tax year looms, the traditional rush among investors to use up their allowances reveals two clear trends.
Retail investors are continuing to shun UK funds, while the thirst for yield dominates thinking among those directly investing in shares, at least judging by sales figures from Hargreaves Lansdown, Bestinvest and The Share Centre.
Investors shun UK funds
Professional investors have been shunning the UK since the Brexit vote, and the fund picks of ISA investors show they are no different. Of the 10 bestselling active funds for ISA investors in 2018, only one - Jupiter Income - has an explicit UK focus.
'Both active and passive investors continue to plump for overseas funds with their ISA money so far this year, with the UK barely showing its face in the most popular fund listings,' said Laith Khalaf, senior analyst at Hargreaves Lansdown.
'Sentiment towards the UK is steadfastly negative at the moment, with Brexit and political uncertainty casting a shadow over confidence in the domestic stock market.'
Top 10 ISA active funds on Hargreaves Lansdown this year*:
- Baillie Gifford Japanese Smaller Companies
- EdenTree Higher Income
- First State Asia Focus
- FP Crux European Special Situations
- Fundsmith Equity
- JPMorgan Emerging Markets
- Jupiter Income
- Legg Mason IF Japan Equity
- Lindsell Train Global Equity
- Man GLG Japan CoreAlpha
*in alphabetical order.
It's a similar story among investors using the Bestinvest platform. Only five of the online stockbroker's top 20 best-selling funds among ISA customers this year have a UK focus, although three of those - Liontrust Special Situations, Threadneedle UK Equity Income and Woodford Equity Income - make it into the top 10.
The ever-popular Fundsmith Equity, run by Citywire AAA-rated manager Terry Smith (pictured) tops the list, pipping AAA-rated Michael Lindsell and AA-rated Nick Train’s Lindsell Train Global Equity fund.
Top 10 ISA funds on Bestinvest this year:
1. Fundsmith Equity
2. Lindsell Train Global Equity
3. Liontrust Special Situations
4. HSBC American Index
5. Stewart Investors Asia Pacific Leaders
6. Fidelity Emerging Markets
7. Threadneedle European Select
8. Artemis Global Income
9. Threadneedle UK Equity Income
10. Woodford Equity Income
Jason Hollands, managing director of Bestinvest, said the top 10 proved that investors were still positive about equity markets, despite Investment Association figures showing a shift into bond funds.
‘This is a very different picture to that presented by data released from the Investment Association over recent months,’ he said.
‘These have revealed vast inflows into bond funds across the wider industry which is intriguing as we are just not seeing this trend amongst our ‘DIY’ investment clients and we are also underweight bonds in our managed and advised portfolios.’
Although UK funds are out of favour, Hollands highlighted the continued popularity of Liontrust Special Situations.
‘The fund has outperformed consistently, beating the FTSE All-Share index in every one of the last five years,’ said Hollands. ‘It has done this with much lower volatility than the market and since inception it has also proven particularly resilient in tough times.’
Dividend demands drive stock choices
The need for yield shines through in ISA investors' choice of stocks for their portfolios.
Investors using The Share Centre platform have opted for big-name FTSE 100 players this year as they tried to navigate tough markets.
Best-selling ISA stocks on The Share Centre this year:
'So far this year, investors in general are demonstrating a desire for income, cemented by nine of the top 10 purchased stocks in ISAs so far this year offering a good yield,' said Helal Miah, analyst at The Share Centre.
He highlighted yield of 5% or more offered by the top three stocks, with Lloyds yielding 6.4%, National Grid 5.7% and GlaxoSmithKline 5%.
'The data reinforces the same theme we were seeing this time last year where customers were searching for lower risk, safer investments in the run up to the general election,' said Miah.
‘Given the market volatility that investors have had to navigate so far this year, it’s therefore unsurprising that once again the majority are seeking steady, reliable, and bigger blue chip companies.'
It's a similar story on Hargreaves Lansdown, where companies with strong dividends dominate the list of bestselling ISA stocks.
ISA investors' top 10 shares on Hargreaves Lansdown this year:
1. Legal & General (LGEN)
2. Royal Dutch Shell (RDSB)
3. BP (BP)
4. Lloyds (LLOY)
5. Vodafone (VOD)
6. Imperial Brands (IMB)
7. National Grid (NG)
8. GlaxoSmithKline (GSK)
9. Capita (CPI)
10. Glencore (GLEN)
'Income stocks dominate the top ten most popular shares, which shows investors appreciate the importance of dividends, and the value of using an ISA wrapper to protect them,' said Khalaf.
'That’s particularly relevant in this tax year seeing as the dividend allowance is being slashed from £5,000 to just £2,000 from 6 April.'