ISA Special: Where is the hot money going?

With ISA season upon us, Maria Merricks investigates where money is being allocated

The general feeling among providers is this year’s ISA season will be a strong one.

A lack of saving opportunities elsewhere is proving a tailwind, as returns on cash deposits remain at an all time low. 

Julian Webb, head of platform sales and DC business at Fidelity, says people have recognised cash investments are not going to achieve the income or growth levels they would expect, and are looking to the markets for better opportunities. 

An increase in the ISA allowance has also boosted inflows, says Simon Hillenbrand, head of UK sales at Henderson. 

Meanwhile, a swell in investor confidence is also contributing to a positive forecast for this season. IFAs are witnessing a general improvement in market optimism compared to previous years, according to Webb. 

This is illustrated by the fact investors appear to moving away from cash, he says.

“We are seeing a move back into asset classes other than cash, which was obviously quite a dominant theme in the market over the last 12 to 18 months. Last year, Fidelity saw a lot of inflows to its Cash Park but I think people are watching a market which is improving, and are now prepared to move back into it.”

Currently the top selling IMA sector on Cofunds is Cautious Managed. Michelle Woodburn, manager of fund group relations, says the sector was top last year as well.

The best selling Cautious Managed funds are Henderson Multi-Manager Income and Growth, Thames River Distribution and Jupiter Merlin Income.

Woodburn admits it is no surprise the sector is attracting significant inflows. In fact, these three funds together with the Invesco Perpetual Monthly Income Plus and Invesco Perpetual High Income funds make up the platform’s top five sellers.

UK Equity Income is the second ranking IMA sector for sales.

Income trend

A resounding theme among investors this year is the allocation towards income. Considering the current state of the economy, this is not surprising, Hillenbrand says.

“The situation in the market looks similar to the seventies, where we had rising inflation, low wage growth and higher oil prices. In this scenario, dividends become very important as a driver for overall returns.”

Launched as a re-brand of its Growth fund last year, Henderson’s Global Dividend fund is selling well, he says.

“It is a nice counter to bond income. While bonds are fixed, equities’ dividends can vary, so this is a sensible way of playing things at the moment. There is some very reasonable value around.”

Supporting this sentiment, M&G’s fifth best seller is its Global Dividend fund. Global head of sales, Jonathan Willcocks, says its popularity illustrates the need for a diversified income stream away from being too UK focused. 

The group’s Optimal Income fund is its top seller and ranked fourth in Skandia’s ISA fund sales table for January 2011.

Willcocks says: “Although income played a major factor last year, people mostly played it through fixed income markets. Now investors want to play income through equity markets,” he says.

Graham Bentley, investment expert at Skandia, agrees there is increased confidence around equity markets this year. 

The platform has seen a reduction in interest in lower risk fixed interest funds compared to last year, he says. Sales of Skandia’s UK Fixed Interest Funds sector have gone down 5.79% year to date to January 2011.

“The biggest climber has been overseas equity funds investing in emerging economies. It looks like people are beginning to recognise diversification has performance, as well as risk reduction, benefits for their ISA investments.”

For example, M&G’s Global Basics fund is the ninth best seller on the Skandia platform and one of Cofund’s top sellers in the Global Growth sector.