What are investors backing with their Isa Best selling funds

While the popularity of a fund or trust isn’t an indicator of success, it’s always interesting to see what others are buying as the Isa season draws to a close.

Inflation continues to top investors’ concerns, as it eats into savings pots and they have been forced to look for funds and trusts that make their money work harder.

It means investors have been looking to add dividend-paying investments to their portfolio to provide reliable income and capital growth.

Ahead of the Isa deadline, markets have been thrown into turmoil by the fallout from the collapse of Silicon Valley Bank and problems with Credit Suisse – this could mean a last minute tilt towards wealth protection funds and trusts. 

But ahead of that they have also been bolstering their portfolios with passive trackers as active funds have failed

We ask three of the biggest platforms – AJ Bell, Fidelity and Interactive Investor – where investors have been putting their money so far this year.

Caution sees investors opt for passives 

Conventional wisdom has it that active managers tend to navigate down markets better than passive strategies that just follown them, but 2022 and 2023 has shown their limits.

Morningstar’s 2023 European Active/Passive Barometer reveals just 29 per cent of active equity managers were able to outperform their passive peers during 2022.

Vanguard funds continue to dominate the top choices among investors, and make up seven of the 10 most popular funds among ii customers.

‘Fund investors are continuing to shy away from actively-managed strategies, with passive strategies, and most notably – Vanguard funds, dominating the top choices for ii customers so far, this year. In fact, Terry Smith’s Fundsmith Equity is the only poster child for active management in the top 10,’ says Kyle Caldwell, collectives specialist at Interactive Investor.

‘During such a turbulent time for markets last year, in which active funds had a tough year and many failed to beat the index, it is no surprise that fund investors have been preferring passive over active. 

‘Time will tell whether this stays the case, or starts to shift if we see more buoyancy in the markets later in the year.’

A key attraction of passive funds is that they are simple and much cheaper than active funds.

Investors can be comfortable in the knowledge that they will broadly get the return of the index they have chosen to track. It means that while they won’t outperform the benchmark, they are also unlikely to underperform.

In the face of rising interest rates and with the outlook for markets still uncertain, passive trackers are perceived to be a less risky option.

Tracking funds from Fidelity and Legal & General are popular choices among Fidelity customers, although they are increasingly cautious against the current backdrop.

Tom Stevenson, investment director for Personal Investing at Fidelity says: ‘The Fidelity Cash Fund is the preferred fund for Sipp investors and features in the top 10 for Isa too. The Royal London Short Term Money Market Fund is also popular this year. x

‘Cash is finally offering a viable alternative to riskier equity and bond investments and for many investors the safety of cash is appealing even if returns remain negative in inflation-adjusted terms.’

Investing in the UK is in demand 

Elsewhere, UK funds are in particular demand.

AJ Bell customers have opted for iShares Core FTSE 100 UCITS ETF, given the index’s strong performance in 2023 compared to other global indices.

Similarly, Vanguard FTSE UK Equity Income Index has been a popular pick for ii customers so far this year. The fund invests in the constituents of the FTSE UK Equity Income Index, which consists of stocks that are ‘expected to pay dividends that generally are higher than average’.

It has a current dividend yield of 4.9 per cent.

Caldwell adds: ‘As ever diversification is always key. For many investors, having a mixture of active and passive funds is a sensible approach. 

‘One way to structure a portfolio is the core and satellite strategy.

‘The core of the portfolio should be investments that provide few surprises – such a global or developed market funds – either actively or passively managed. 

‘The satellite holdings are spicier – higher-risk funds in the hope of generating higher growth. Ultimately, with any investment – there are no guarantees. It’s a long-term game, and much of your choices as an investor will come down to your risk appetite.’

Portfolio stalwart Fundsmith Equity remains popular

Passive trackers might have become the go-to strategy this year, but investors are still opting for well-known names despite a period of underperformance.

Fundsmith Equity, managed by Terry Smith, has long been one of the most popular investment funds and has shown consistent staying power.

Across all three platforms, it remains among the top five funds picked by investors , despite a difficult few months.

In 2022, the fund returned -13.8 per cent, trailing the benchmark MSCI World Index which delivered a total loss of -7.8 per cent.

Its focus on ‘high quality’ businesses that can sustain a high return, helped the fund deliver a 1.5 per cent total return in February, outperforming the benchmark by 1.7 percentage points.

Alena Kosava, AJ Bell’s head of investment research says: ‘Quality companies held by the likes of Fundsmith saw valuation multiples extend over the years, but these contracted dramatically through 2022. 

‘In an environment where global growth is slowing and there is a need for greater visibility and dependability of corporate earnings, quality stocks might not be a bad place to weather the ongoing uncertainty and heightened volatility through 2023.’

‘For investors, while it is incredibly difficult to time markets, over the long run having exposure to global companies has paid off handsomely over time and it is important to keep that in mind, especially when markets face a challenging period.’

Scottish Mortgage is still popular 

Scottish Mortgage has remained a fixture in many investors’ portfolios, topping both AJ Bell and II’s trusts list.

The investment trust has long been popular among investors looking for exposure to growth sectors, but the tech rout that characterised much of 2022 has led to a period of underperformance for the trust.

It has delivered a NAV total return of -11.7 per cent over the past year, trailing the global AIC sector’s average -2.8 per cent. Its share price has also suffered, returning -23.5 per cent while the sector average returned -6.9 per cent.

Kosava adds: ‘Whilst we are not out of the woods yet and valuations of growth stocks may decline further, investors may feel a lot of the bad news is already be priced in.’

Investors are looking for income

There is good reason to consider adding dividend-paying investments to your portfolio, to provide you with income and growth.

Investment trusts have been a good source of income for many investors – the list of ‘dividend heroes’ now features 18 trusts, eight of which have raised dividends for at least 50 years.

City of London Investment Trust, managed by Job Curtis, has increased its dividends for 56 years in a row, meaning it remains a popular choice for income-seeking investors.

> What is a dividend and how are they taxed? What you need to know 

F&C Investment Trust is another trust investors have flocked to, despite a turbulent 2022 in which the share price and NAV both lost ground. 

In January, the trust’s NAV return was 4.3 per cent and shareholder returns were 5.8 per cent, compared to the FTSE All World Index return of 4.6 per cent.

Like City of London, it is another dividend hero, raising its dividend for 52 consecutive years.

Greencoat UK Wind features in ii’s list , in large part because of its attractive yield of 5.6 per cent currently.

Caldwell adds: ‘Another notable trust in the top 10 for 2023 so far is Merchants Trust, which also has as a higher yield than peers, at 4.6 per cent. It aims to deliver an above-average level of income and income growth, as well as long-term growth of capital, through investing mainly in higher-yielding large UK companies.’